Is Newsom trying to be Robin Hood? What his budget means for wealth inequality in California
Gov. Gavin Newsom is proud of the prosperity of California’s upper class, which he says has never done better.
But he also wants to use some of their success to help lift up California’s working-class residents.
“We have the resources,” said Newsom, referring to his family who earned $1.7 million in 2019. “I’m proud of the fact that some of the dollars that I’m putting back into the California coffers, as a taxpayer, are going to help those single moms out there.”
California’s tax structure is known for its reliance on the gains of the wealthy. In 2018, the top 1% paid nearly half of the state’s personal income taxes. That reliance is especially notable this year, with wealth gains among high earners propelling California to a $76 billion surplus.
Newsom wants to direct some of the surplus to low- and middle-income Californians, from sending out $600 stimulus checks for those making under $75,000 to providing rent and utility assistance. Experts said his budget proposal could strengthen the social safety net for those at the very bottom.
Conservatives are questioning Newsom’s plan, calling for permanent tax cuts instead of more spending.
But others on the left want Newsom to go even further, urging him to consider new taxes on the wealthy. Newsom has shot down that idea time and again, but it continues to circulate in the Legislature.
“To think about the future and the health of our society, we need to be asking the rich to pay more,” said Assemblyman Alex Lee, D-San Jose.
California’s path to a $76 billion surplus
In January, Newsom’s office predicted a $15 billion surplus for the next fiscal year that starts July.
But the surplus projections kept growing as tax revenue rolled in ahead of expectations months after month.
California is getting nearly $38 billion more in personal income tax than what it had expected in January. Sales tax revenues went up by $4.5 billion. Corporation tax revenues went up by nearly $4.6 billion.
Chris Hoene, the California Budget & Policy Center executive director, noted it’s not just the wealthy paying more taxes. Federal and state investments have helped lower-income Californians pay for their day-to-day expenses, boosting sales tax revenue among others, he said.
Still, Hoene said high-wealth individuals have weathered the pandemic better than the rest. By the end of last year, the unemployment rate for those making over $150,000 was around 5%, compared to over 25% for those making less than $30,000.
The state’s budget also reflects the strong stock market, which mainly benefits the upper class. California expects its residents to make $210 billion in profit from selling their investments in 2021, up $25 billion from 2020.
“(Tax collections) went up a little bit because of the stability of the high-income earners and the big returns to capitals that led to people realizing more gains,” said UC Davis law professor Darien Shanske who researches taxation.
Newsom’s budget on wealth inequality
Shanske said California is limited in what it can do on its own to close the wealth gap.
“To the extent where there’s a long-term trend of income inequality caused by globalization, California’s state income tax is just one little tool,” Shanske said. “It’s asking too much to be able to turn the tide like that.”
Newsom’s budget has a mix of short-term stimulus for working-class households and long-term expansions of services like universal pre-kindergarten for 4-year-old children.
The budget puts $8 billion of the surplus for the $600 stimulus checks which, along with $4 billion the state has already given to low-income residents, represents a very significant transfer of the wealth, Shanske said. More than $7 billion is also proposed for rent and utility relief.
The budget also lays a foundation for addressing the inequality in a sustainable way, such as proposing to create 100,000 additional slots for childcare, Hoene said. “Those are the cases where we have gaps in the state’s system that has become blockades to people accessing economic opportunities.”
It remains to be seen whether the prosperity paying for the windfall will last, Hoene said. Anything less than a steady growth of California’s economy could leave the state with a sizable budget problem going forward, the Legislative Analyst’s Office said in a recent report.
“We don’t want to add 100,000 slots to the childcare system and have to remove those slots a couple years from now,” Hoene said.
Still, Hoene views the budget as a positive step.
“The budget proposal helps ensure that California’s wealth and income inequality, which has been widening for decades, don’t get worse because of the pandemic,” he said.
Conservatives push for tax cuts
Conservatives have been quick to criticize Newsom’s proposal, saying it shows Californians are too heavily taxed.
Former San Diego Mayor Kevin Faulconer, running as a recall candidate against Newsom, is pitching tax cuts for everyone earning less than $1 million a year.
“The hard-working men and women who are being priced out of our state need more than a one-time rebate, they need permanent financial relief that lasts,” Faulconer said at a press conference announcing the plan.
Some conservatives also said the stimulus violates the spirit of the Gann Limit, a spending rule that requires California to give tax rebates if the state’s revenue exceeds a certain level.
Newsom took an unexpected approach to the rule by creating a plan that directs the reabtes only to households earning less than $75,000 a year. Some argue that the Gann Limit requires California to give the refunds to every taxpayer, not just those making under a certain amount.
Progressives push for wealth tax
Despite the unprecedented $76 billion surplus, members of the Legislature’s progressive wing have pushed for laws to raise taxes on wealthy Californians. Their proposals are not moving forward in the Legislature, but a cluster of Democrats have vowed to fight for them in the years ahead.
They’ve argued that California can’t bank on the extra billions to carry low-income residents through future hard times and that public services need a stronger infusion of cash to properly serve marginalized communities.
Lee introduced a measure to change California’s tax code to allow for a 1% increase on Californians whose overall wealth is worth more than $50 million, or $25 million for a married resident filing separately. According to Lee’s office, the tax would generate about $22 billion annually in new revenue.
Lee also co-authored another proposal to impose an additional income tax rate of 1% to 3.5% for Californians making more than $1 million. That measure is tabled for the year after Assemblyman Miguel Santiago, D-Los Angeles, agreed to work with the Assembly Committee on Revenue and Taxation through 2022.
Lee shrugged off criticism of his tax increase proposals by fellow Democrats and Newsom himself. He instead doubled down on his idea that it’s the right time to demand more from wealthy Californians.
“We have two Californians. One, the rich get hideously richer, and two, the poor get hideously poorer,” Lee said. “The people who protect the billionaires will always say it’s not the time.”
This story was originally published May 25, 2021 at 5:00 AM.
