Monday, January 2, 2012

2012 Tax Initiatives Chapter 4:     Spinmaster Moonbeam's Enticing, "Cagily Worded" Tax Proposal

Since Governor Jerry "Moonbeam" Brown (Moonbeam is a nickname he says he likes) is raising large amounts of money for the campaign on his initiative proposal (along with money for his reelection in 2014), I'll start my review of "tax-the-rich" proposals with his initiative measure.

Conveniently it has almost all the flaws, accompanied by spin untruths, that one could possibly expect from a seasoned California politician - none of which the mainstream press acknowledges while they give him favorable fluffy story after story.

In passing I will note that the term "cagily worded" in the title of this post comes from an analysis on the Silicon Valley Education Foundation's web site, one of several such independent reviews that began worrying last month over the details in Brown's proposal.

My analysis below has the advantage of having enough time to consider the details in what I call The Moonbeam Complex Free Up General Fund Money and Fix Nothing Tax Increase Initiative now at the Attorney General's Office for review.

The Temporary Measure Problem. The first troubling fact is that the measure will expire on December 1, 2017. I don't really understand how this is going to work.

California's economy is going to continue be in The Great California Slump between now and then. Here are examples of where The Great California Slump stands at the beginning of 2012:
  • Housing values continue to drop, which affects personal wealth and consumer confidence.
  • We need to find 1 million jobs for Californians, not including the jobs needed for those new to our expanding workforce, an accomplishment that would be impossible unprecedented for a five year period.
  • At some point Congress is going to quit funding extended unemployment benefits leaving many households with severely reduced income.
  • At some point employers in California are going to be required to repay the federal government for the $10+ billion we've borrowed to pay basic unemployment benefits - a potential job creation killer.
  • In terms of high income earners, one of primary sources of taxable personal income has been IPO's issued by California companies in the tech sector which appear to be iffy right at the moment with the obvious exception of Facebook in 2012 (Google's IPO in 2004 did result in a relatively few tax returns providing a nine-figure revenue shot into the General Fund which the Legislature instantly spent).
Is Brown going to calculate what 2017-18 revenues will be and then in some fashion limit spending to that number for the five years in between so that we won't need to vote on a new version of this measure?

Or is he going to allow the Legislature to spend at the increased revenue level forcing another fight over cuts or new taxes in 2017?

This is partly why I call this in part a Fix Nothing Tax Increase Initiative. It does not fix our revenue structure, its passage would just make Moonbeam's life less stressful for the next few years assuming he doesn't decide to base spending on a stable economy.

Taxing the Poor and the Rich Problem. Unlike the other measures I will discuss in my next posts, Moonbeam's measure is a combination of a sales tax increase and an income tax increase.

In his letter explaining his proposal, of the sales tax element he says:
There will be a temporary ½ cent increase in the sales tax. Even with this temporary increase, sales taxes will still be lower than what they were less than six months ago.
Brown is either very stupid, invested in right wing economics, or cynical. I have accepted that he's cynical and simply wants to get reelected.

Using a combination of a sales tax increase plus an income tax increase on those with the highest income, he can generate additional tax revenue while creating the least impact on those whose earnings place them in the "middle middle-class" and "upper middle-class." This is where you find the "likely voters" he will need in 2012 to get the measure passed and in 2014 to get reelected.

The following reflects the percentage increase in income and sales/excise taxes paid at various taxable income levels:

Determining the incidence of a General Sales Tax increase is problematic using statistical averages. But what I do know is that the sales tax is very regressive and will impact more heavily on the lowest paid portion of the working class as reflected in this chart.

With regard to the income tax, I know that "taxable" income is only marginally reflective of real income which is protected from taxes by many exemptions and tax breaks, but usually people with annual taxable incomes over $500,000 can be called "the rich."

With all of those reservations offered, almost any honest system of calculation of the impacts of Moonbeam's proposal will result in this reality:
  • Tax returns showing taxable earnings under $65,000 (likely to be 69%± of the returns filed for the 2011 year) will see an increase in sales and income taxes paid of around 5%±1%.
  • Tax returns showing taxable earnings in the range of $65,000 - $250,000 (likely to be 29%± of the returns filed for the 2011 year)will see an increase in sales and income taxes paid of around 3%±1%.
  • Couples filing tax returns showing taxable earnings over $250,000  (likely to be 2%± of the returns filed for the 2011 year) will see an increase in sales and income taxes paid of around 9%±4%.
The cynicism Brown shows is found in just how sure he is that people will ignore the facts and accept his spin, which the press will repeat over-and-over without comment. It's already begun with these two sentences in his  letter:
  • "No family making less than $500,000 a year will see their income taxes rise."
  • "Even with this temporary increase, sales taxes will still be lower than what they were less than six months ago."
These two sentences are literally correct. His income tax increase affects only high income Californian's. Of course, his sales tax increase represents a 10% increase in the State's General Sales Tax, which impacts most heavily on people with annual taxable incomes of  less than $50,000 a year.

But yes, his sales tax increase proposal does represent half of the expired temporary sales tax increase that supplemented revenues that past three years. That was the temporary increase that we only needed temporarily - the one approved by the Republican Governor and a few Republicans in the Legislature.

The Not Enough Money Problem. Over the life of this temporary measure, the income tax increase could generate anywhere from $3± billion to $6 billion a year depending on the general well-being of our richest citizens. The sales tax increase will generate $3± billion a year. That's $6± billion to $9 billion a year. The State General Fund is facing a deficit of about $14 billion ± $3 billion on July 1, 2012 (yeah, the range of what we don't know is that significant). So this proposal which in his letter Moonbeam says "would generate nearly $7 billion" doesn't fix the problem in the best of circumstances.

The Money for What Use Problem. Then there's the the major spin in Brown's letter what explains his measure "would generate nearly $7 billion in dedicated funding to protect education and public safety."

Most of the revenue is not targeted in the sense that the gain in cash in to the state's coffers will supplement existing spending in education and public safety. Instead it is "cagily worded" in a way voters would not understand, but which I'm sure will be called out by the mainstream press before the election if the key staff in the key newspapers complete a reading for comprehension course.

For instance, Moonbeam's initiative states:
(8) Revenues, less refunds, derived pursuant to subdivision (f) for deposit in the Education Protection Account pursuant to this section shall be deemed "General Fund revenues," "General Fund proceeds of taxes" and "moneys to be applied by the State for the support of school districts and community college districts" for purposes of Section 8 of Article XVI.
Now I know that many people, particularly those key newspaper staff, regularly pick up Section 8 of Article XVI of the State Constitution for some light reading. But in case you don't do that, basically that Section sets a minimum amount of money to be paid to K-12 schools from the General Fund.

Moonbeam's wording simply says that if this tax increase covers part or all of the required spending on schools, General Fund monies previously used for schools could be spent on raises for the Legislature.

But that's not the only wording that we need to be concerned about. The measure also says:
(1) Except as provided in (d), commencing in fiscal year 2011-2012 and continuing thereafter, the following amounts sh.all be deposited into the Local Revenue Fund 2011, as established by Section 30025 of the Government Code, as follows:

(A) All revenues, less refunds, derived from the taxes described in Sections 6051.15 and 6201.15 of the Revenue and Taxation Code, as those sections read on July 1, 2011.

(B) All revenues, less refunds, derived from the vehicle license fees described in Section 11005 of the Revenue and Taxation Code, as that section read on July 1, 2011.

(2) On and after July 1, 2011, the revenues deposited pursuant to paragraph (1) shall not be considered General Fund revenues or proceeds of taxes for purposes of Section 8 of Article XVI of the California Constitution.
Again, if Section 8 of Article XVI of the State Constitution isn't in your material for light reading, basically that Section sets a minimum amount of money to be paid to schools from the General Fund.

What this provision does is lower the amount guaranteed to schools.

Taken together, these two provisions which normally nobody but education funding experts would understand allow Brown in his measure to say that it will be:
...helping balance the budget and preventing further devastating cuts to services for seniors, middle-class, working families, children and small businesses
Fortunately, Moonbeam's measure which he has titled "The Schools and Local Public Safety Protection Act of 2012" will prevent "devastating cuts to services for seniors, middle-class, working families, children and small businesses." This is simply illogical if the title is accurate. The title just could be ... misleading.

By increasing the taxes paid by
  • high income families about 9%,
  • lower income working families about 5%, and
  • middle-class families somewhere around 2%,
...Moonbeam's measure will
  • protect our schools and local public safety, plus
  • prevent devastating cuts to services for seniors, middle-class, working families, children and small businesses,
...all by generating enough funds to cover about half the expected General Fund deficit. 

I'm surprised he didn't assert that his measure will daily provide a piece of fat-free apple pie to every Californian.

Voters may have other options to "tax the rich."  I'll explore them in my next post.

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