Why California Must Tax the Wealthy

by: Robert Cruickshank

Sun Apr 05, 2009 at 14:25:37 PM PDT

This crisis is shocking to many of us, since unless you are over 75 years old, you have never seen this before. Unfortunately this kind of economic collapse is nothing new to us who are familiar with US history. As more and more economic historians are starting to argue, the true parallel for this crisis isn't 1929 but 1873, when a massive financial panic brought about a Long Depression that lasted, with a few short-lived booms and some nasty busts, until about 1896. This was the Gilded Age, an era of massive corruption and fraud in business and in government. Wealth was concentrated in the hands of a few, and most working people - whether in farms or factories - struggled to scrape by.

Our present crisis is not that different. Massive concentration of wealth is at the core of the problem. Wealth demanded less regulation so as to bring ever-greater returns, a logic that led to risky and reckless behavior. Meanwhile the wages of the middle class stagnated and the wages of the working class shrank. They were told that massive amounts of debt would make up the difference between their stagnant wages and the soaring cost of living. Ultimately, predictably, this was unsustainable. A massive crash is unfolding, and those who are not wealthy are being made to pay the price.

One of the aspects of the political economy of last 30 years has been tax cuts for the wealthy. This ensured that government was starved of revenue in the bad times, and unable to catch up, not to mention get ahead by providing adequate services and saving for a rainy day in the good times.

California has been the poster child for this. Since 1978 we have steadily excluded wealth from taxation. Since 1993 we have given $12 billion in tax cuts and tax breaks. Corporate taxes were around 9% in 1981 and are now below 5%, yet corporations have provided neither wage growth nor stable jobs to the state, and our core services are underfunded.

In the early 1990s both the United States and California raised taxes to deal with budget deficits - and that did nothing to prevent the return of economic growth in 1993. After 1993 we began cutting taxes again, but government still needed to be funded. Prop 13 ensured real estate wealth gains would not be accurately captured by government, and starved government of operating revenue. That led to a new emphasis on income taxes and especially on sales taxes to make up the gap.

As a result the poorest among us now bear the largest share of the tax burden. The lowest 20% income brackets pay 11.7% of their income in state and local taxes, whereas the top 4% pay only 7.1% of their income. The result is that lower income Californians have a higher tax burden - but get less in return for those taxes. Our income tax is also flawed in that there is only one bracket for people making between $47,500 and $999,999.

Sales taxes are more regressive than income and property taxes, but they are progressive as compared to spending cuts, a fact that not enough folks recognize. I also believe that it is not realistic to ask that only the wealthy pay more in taxes - everyone will have to pay more, including the middle class. But who pays what is the key issue, and we cannot avoid it any longer.

It is time to restore progressivity to California's tax code and rebalancing our economy on a sustainable, stable footing. That means taxing wealth.

Progressive Democrats in two states with very similar economic profiles to our own - New York and Washington - are organizing to demand that higher income taxes on the wealthy be a core part of not just our budget solution, but our economic policy. Below the flip I give an overview of these efforts, what they can teach California, and why it is imperative that we follow their lead.

The new plan, which would expire after three years, would represent the largest state income tax increase in recent history, significantly larger than the surcharges imposed from 2003 to 2005, when the state last faced a major recession.

The plan would raise $4 billion a year by creating two new tax brackets, the highest one affecting those who earn $500,000 or more. If approved by rank-and-file lawmakers in the Assembly and State Senate, the tax increases would be a major victory for unions and liberal advocacy groups and a signal of the new balance of power in Albany, where Democrats won control of both houses of the Legislature and the governor's office in last year's election.

Progressive persistence and framing played a key role in getting this done. The Working Families Party offered a set of resources to activists to ensure that progressive taxation would be part of the New York state solution.

Closer to home, Washington State is grappling with a massive $10 billion budget hole, and proposing destructive cuts to education, the environment, and mass transit programs. Democrats control the state legislature, and Senate Majority Leader Lisa Brown, from Spokane (not traditionally a progressive hotbed), called on her colleagues to support an income tax on those making over $300,000, designed primarily to hit the wealthiest Washingtonians.

This is especially interesting given that Washington is one of four states without an income tax. In the 1930s a progressive Legislature created an income tax, but a conservative state Supreme Court composed of 1920s holdovers ruled it unconstitutional. Several efforts to create an income tax at the ballot box failed, but the most recent attempt was in 1974.

In a meeting with reporters and bloggers, State Sen. Brown laid out her rationale:

"People understand that this system isn't fair. If a millionaire in my district lived just over the border in Idaho they would pay 7.8 percent of their income, if they lived in Oregon they would pay 9 percent. In Washington state they don't pay to enjoy the benefits of the state."

Brown went on to say low and middle income people - "the people who are most affected by the deep budget cuts" - pay a greater share of their income than affluent people to receive the services of the state.

And Brown also tied her strategy explicitly to Barack Obama's tax increases on those making more than $250,000.

Unfortunately Democratic governor Christine Gregoire - here in California today for the health care forum - is not supportive of the concept. Back in October she rashly promised to not raise taxes, something she felt she had to say to defeat her Republican opponent in what looked like a close election. Gregoire won by around 8 points, but has insisted on keeping this pledge even in the face of the worst budget crisis in state history. Still, Washington progressives are beginning to organize around income taxes on the wealthy as a solution to the budget mess, as well as a way to make the state's tax system less regressive.

This is the same conclusion, by the way, that William H. Gates - Bill Gates' wealthy Seattle lawyer father - came to in 2002, when he chaired a commission the Legislature created to investigate the state's tax system.

Here in California we already have one of the highest income tax rates on the upper brackets in the country, although it is lower than the brackets Republicans like Ronald Reagan and Pete Wilson enacted. Some groups, like the California Budget Project, have argued that our state budget is too dependent on personal income tax revenue.

That may well be true. An income tax hike on the wealthy isn't alone a long-term solution, but is a part of that solution as well as a necessary immediate answer to budget deficit and economic crisis. We need a modernized sales tax, a higher corporate tax rate, a split roll that excludes commercial property from Prop 13 protections, and ultimately, a residential property tax system that protects working families but makes wealthy individuals pay their fair share.

As I argued at the outset, everyone in California will have to pay more to provide economic security and sustainability by providing their government with the revenue it needs to meet our crises. There's no way to make just the wealthy and just the corporations do it. But the overall structure must be progressive. The wealthy must pay a higher rate than the rest of us. And that's just not the case right now.

No matter what happens on May 19, on May 20 we need to be ready to push income taxes on the wealthy as part of the solution to our budget crisis. The stakes are too high for us to not do so.