To borrow the old bromide, when the stock market sneezes, California’s state government comes down with pneumonia.
It’s more than a normal cold when The state dipped billions of buckets in red ink.
Wall Street has demonstrated strong health recently, But Sacramento is still suffering from the market collapse of two years ago.
This happens when the state becomes too dependent on rich people for tax revenue. The rich play the stock market and when it pays off, Sacramento benefited greatly. When markets decline, the state budget also deteriorates as capital gains income is reduced.
The market fell in 2022. So California stock players had less income to report in 2023 — and significantly less in taxes to pay.
“Judgment day is coming, baby,” said former state senator Bob Hertzberg (D-Van Nuys) when I called him with the new tax numbers. Hertzberg, who is also a former Assembly speaker, is one of the few politicians who had the courage to try to fix California’s flawed tax system.
“I hated the subject with every bone in my body,” he recalls, “but I did it to stop what is happening today.”
This is what we are talking about:
Based on the 2021 tax year, California’s top 1% of earners paid nearly half – 49.9% – of the state’s individual income taxes. But while the shares fell in 2022, the top 1% spent only 38.7% of the income tax collected in 2023, according to new data released by the state Franchise Tax Board.
This is a dramatic decline and is mainly why the state’s politicians currently have to face Budget deficit of nearly $40 billion, If you accept Gov. Gavin Newsom’s latest figures from January. But the gap could be as large as $73 billion, According to the nonpartisan Legislative Analyst’s Office.
Either way, it’s a gaping hole in the proposed $292 billion state spending plan that Newsom sent to the Legislature in January. As he does every year, the Governor will revise the budget proposal in mid-May.
The bottom line: Certainly, there is excessive spending. But California’s fiscal headache is largely the result of an unsustainable state tax system that leans too heavily on the rich. And the politicians are too cowardly to fix it.
After all, “taxing the rich” is a popular issue. This is an easy sell to most voters who are not rich.
But this is an irresponsible policy that creates chaos in budget planning and drives some affluent taxpayers out of the state.
Well, the unreliable tax system makes it tough for Sacramento budget crafters. So what?
So, there is a big problem. Cuts must be made to programs that politicians approved two years ago when there was an unprecedented $100 billion budget surplus. There are many worthwhile public services.
Los Angeles Times reporter Mackenzie Mace listed last week several pilot programs Now on the chopping block. These include new ways to support struggling foster children, help oil workers transition to cleaner industries, prevent more people from becoming homeless, and finance low-income housing.
If Newsom and the Legislature do their job properly, many of the cuts will pass before the June 15 deadline to pass a new state budget. Schools, parks and healthcare services could be targets.
However, based on their past record, they will “balance” the budget by a lot. temporary band-aid gimmick Instead of cutting actual spending. Gimmicks like advancing the state payroll date by one day in the new financial year.
It’s one thing to spend generously. California’s state government is run by liberals and their political campaigns are ultimately driven by liberal interests. But it is irresponsible not to adequately finance generous spending with a credible tax system.
Here’s another example of how the state relies heavily on the earnings of the wealthy: For the 2021 tax year, the top tenth of 1% — just 17,900 taxpayers — supplied 29.1% of income taxes. The following year it dropped sharply to 19.4%.
Income tax supplies two-thirds of the state’s general fund. In 1950, when our tax system was stable, it was only 10%. Then, sales tax was the main revenue source. But we have become less a retail economy and more a service economy. And we are one of the few states that does not tax services.
Our tax system became even more unstable 12 years ago when, at the urging of Governor Jerry Brown, voters raised the top income tax rate by three percentage points to 13.3%. Now it doesn’t even take a recession to blow a hole in the state budget, like we just saw.
The solution should be to flatten the tax system and reduce volatility. Lower the highest income tax rates and extend the sales tax to services. No haircuts, mowing the lawn, and babysitting. But so are lawyers, accountants and architectural fees – things the rich pay for – and Dodgers and Lakers tickets.
“It’s the perfect solution, but I don’t think it’s possible,” Hertzberg says.
Hertzberg tried to promote taxing only the services that businesses pay for – and cut their income taxes. “If you can write it off, it will be taxable,” he says.
“But politics is very difficult.”
People get nervous when they hear the name of imposing tax on something which is not already taxed.
Former state Comptroller Betty Yee, who is running to replace Newsom in 2027, advocated for tax reform for years but ultimately backed down.
“I don’t think there’s any appetite for it,” she says. “With any kind of change, you have winners and losers.”
The so-called losers beat him up.
California will continue to mess with a flawed tax system that hurts people when stocks inevitably decline – whether they play the market or not.
