A proposed ballot initiative to increase millionaires' income taxes by 3 to 5 percent would raise more money but could make California even more susceptible to the seesawing booms and busts in revenue that have recently bedeviled California budgets.
Most people earn roughly the same pay, year after year. But millionaires consistently see their incomes shift dramatically from one year to the next, mostly due to fluctuations in the stock market.
This arcane fact takes on importance when looking at the possible impact the proposed tax increase on millionaires.
When the stock (or real estate) market is humming, California would likely see dramatic increases in revenue, since the rich often earn most of their money through investments. Under the proposed initiative, most new money would go to schools, greatly increasing their funding.
But when the market goes bad, the state and schools would likely find themselves in a deep hole as revenues from millionaires fall rapidly.
This chart illustrates the trend. It shows the year-to-year fluctuation in tax liability of Californians earning $1 million or more, along with everyone else. Taxes paid by the wealthy consistently rose or fell by 30 percent or more during the last two decades.
Even absent the proposed tax increase on the wealthy, the state's personal income tax system is progressive and relies heavily on the rich. As Bee columnist Dan Walters points out, much of the state's ongoing budget woes can be traced to the falling fortunes of the wealthy.
The quickest way to deal with this implicit risk and still raise taxes on high-earners is for the state and others benefiting from the tax increase to save money during good years. That way, they will have enough to spend during inevitable bad times, without having to employ drastic cuts or budget gimmickry.
The state's leaders haven't done much saving in the past.
Source: Franchise Tax Board and Department of Finance
Notes: Most of the state's general fund revenue comes from personal income tax receipts. Less wealthy California residents often pay more in sales taxes than in income taxes.
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