To borrow an old bromide, when the stock market sneezes, the California government gets pneumonia.
It's more than just a cold that causes states to spit out billions in buckets of red ink.
Although Wall Street has shown solid health recently, Sacramento is still suffering from the market decline of two years ago.
This is what happens when a country relies too much on the wealthy for tax revenue. Wealthy people participate in the stock market, and when it pays off, Sacramento makes a lot of money. When the market collapses, the national budget also collapses because capital gains income declines.
The market crashed in 2022. As a result, California stock investors have less income to report in 2023 and much less tax to pay.
“Judgment day is coming, baby,” former state Sen. Bob Hertzberg (D-Van Nuys) said when I called him with my new tax number. Mr. Hertzberg, a former Assembly Speaker, is one of the few politicians with the courage to try to fix California's flawed tax system.
“I hated this whole thing,” he recalls. “But we did it to prevent what's happening today.”
This is what we're talking about:
Based on the 2021 tax year, the top 1% of California earners paid effectively half (49.9%) of the state's personal income taxes. But when stock prices fell in 2022, the top 1% collected just 38.7% of the income taxes collected in 2023, according to new numbers just released by the state Franchise Tax Board.
That's a dramatic decline, and if you accept Gov. Gavin Newsom's latest numbers from January, it's the main reason state politicians are currently facing a budget deficit of about $40 billion. . But the nonpartisan Legislative Analysis Service says the difference could be as much as $73 billion.
Either way, this leaves a gaping hole in the $292 billion state spending plan that Newsom submitted to Congress in January. As he does every year, the governor plans to revise his budget in mid-May.
Conclusion: Yes, there is waste. However, the main cause of California's fiscal problems is an unstable state tax system that is overly dependent on the wealthy. And politicians are too cowardly to fix it.
After all, “taxing the rich” has a popular ring to it. For most voters who aren't wealthy, this is an easy sell.
But this is an irresponsible policy that will disrupt budget planning and drive some wealthy taxpayers out of the state.
Indeed, an unreliable tax system makes things even tougher for Sacramento budget makers. so what?
So there's a bigger problem. Programs that politicians approved two years ago, when there was an unprecedented $100 billion budget surplus, must be cut. Many are valuable public services.
Last week, Los Angeles Times reporter Mackenzie Mays listed several pilot programs currently being planned. That includes supporting struggling foster children, helping oil workers transition to cleaner industries, preventing more people from becoming homeless, and funding low-income housing. Contains new methods for
If Newsom and the Legislature do their job properly, there will be even more cuts before they pass a new state budget by the June 15 deadline. Schools, parks, and medical facilities could be targeted.
But based on past performance, they will likely “balance” the budget with a number of temporary band-aid gimmicks rather than actual spending cuts. Other measures include moving the state's payroll date forward by one day in the new fiscal year.
It's one thing to be generous. After all, California's government is run by liberals, and their political campaigns are funded by liberal interests. But it would be irresponsible to not adequately fund liberal spending with a reliable tax system.
This is another example of how the state relies heavily on the income of the wealthy. In the 2021 tax year, the top 10th of 1%, or just 17,900 taxpayers, paid his 29.1% of income taxes. The following year, it dropped significantly to 19.4%.
Income taxes provide two-thirds of the state's general fund. In 1950, when he had a stable tax system, it was only 10%. The main source of revenue was consumption tax. But we have become a service economy, not a retail economy. And we're one of the few states that doesn't tax services.
Twelve years ago, our tax system became even more unstable when voters, at the urging of Gov. Jerry Brown, raised the top income tax rate by three points to 13.3%. As we saw earlier, a recession doesn't even need to blow a hole in the national budget these days.
The solution is to flatten the tax system and make it less volatile. Lower the highest income tax rates and extend sales tax to services. It's not haircuts, lawn mowing, or babysitting. But lawyers, accountants, construction costs (paid by the wealthy), and Dodgers and Lakers tickets.
“It's just the right solution,” Herzberg says. “But I don't think that's possible.”
Herzberg sought to promote taxation of only services paid by businesses, which could be deducted from income taxes. “If we could write it off, it would be taxable,” he says.
“But the politics are really tough.”
People get grumpy when you say you're going to tax something that hasn't already been taxed.
Former Secretary of State Betty Yee, who is running to replace Mr. Newsom in 2027, has long advocated for tax reform but ultimately backed away from it.
“I just don't think there's any interest in that,” she says. “As with any change, there are winners and losers.”
She was beaten up by people who considered her a loser.
California will continue to be a mess with a flawed tax system that will hurt people when stock market declines are inevitable, regardless of whether they participate in the market or not.
