Dan Walters

Dan Walters: Taxes on rich closed the state budget deficit

Dan Walters
Dan Walters

As Jerry Brown seeks his fourth term as governor this year, he’s crowing about balancing the state budget after years of deficits that piled up a “wall of debt.”

Certainly Brown deserves some of the credit.

He moderated the spending ambitions of his fellow Democrats and, more importantly, persuaded voters to enact temporary sales and income tax hikes, the latter only on the highest-income taxpayers.

Those boosts, when coupled with the state’s emergence from the worst recession since the Great Depression, sharply increased the state’s general fund revenue over the last few years, from about $86 billion when Brown was running in 2010 to over $106 billion during the current fiscal year.

But the tax increase accounts for perhaps a third of the revenue gain.

The rest stems from the improving economy and particularly the substantial increases in incomes of the state’s highest-income taxpayers – the chief targets of the 2012 tax increase.

While criticizing the widening gap between “one-percenters” and the rest of us is popular, the fiscal reality is that California’s budget probably would still be drowning in red ink were it not for taxes on income gains by those atop the economic food chain.

State income tax data for 2012, the latest available and the first year of the temporary income tax increase, illustrate that fact.

The state received 15.2 million personal income tax returns for 2012, of which 161,744 – 1.06 percent – came from those with adjusted gross incomes of $500,000 or more.

Those one-percenters accounted for $275.3 billion or 28.5 percent of all taxable income, but paid $30.8 billion or 51.4 percent of all income taxes that year. It’s now at least $36 billion, more than twice the $17.3 billion they paid in 2010.

With income taxes now two-thirds of general state revenue, it means one-percenters are financing over a third of the budget’s spending on schools, colleges, prisons and health and welfare programs for the other 99 percent.

Moreover, sales of capital assets – corporate stocks, primarily – accounted for nearly a third of one-percenters’ personal incomes, which makes the budget highly dependent on how well a few Californians are faring in the stock market.

Brown understands that and worries aloud about “volatility” in revenue due to ever-higher reliance on taxing incomes of the affluent – although, it should be noted, his tax hike increased that reliance.

His response is Proposition 2, which would create a new state rainy-day to squirrel away some revenue from capital gains taxes as a cushion for when the economy lags and tax receipts drop.

Whether Proposition 2 is a real safeguard or just a symbolic gesture is debatable, leading to another debate that lies ahead over whether the temporary taxes will expire, be extended or even be made permanent.