When The Sacramento Bee asked Gov. Jerry Brown Friday whether, if re-elected, he would continue his pledge to only raise taxes approved by voters, he appeared to duck the question. He said he was focusing on passing Propositions 1 (water bond) and 2 (rainy day budget fund). As Brown hinted in his response, any question about future tax policy is tied to the fate of the rainy day fund measure.
Proposition 30’s temporary taxes are due to expire in 2018. Already, some elected officials are calling to extend the tax. If Democrats secure a two-thirds majority in both the Assembly and Senate on Nov. 4, the tax extension can be accomplished by a legislative vote and a gubernatorial signature.
Keeping Proposition 30 taxes would keep a fiscal system mounted on a rickety foundation – and Brown knows that. More than once, he has observed that the state treasury relies too heavily on high-income Californians. The top 1 percent of taxpayers supplies approximately one-third of the state’s $110 billion general fund budget. When the economy sours, high-end earners pay a heavy price as the value of their stocks and other capital gains takes a tumble. That produces a drop in tax revenue that reverberates throughout the state budget.
Proposition 2 is designed to ease some of the budget pain when the economy dips, as well as reduce long-term budget obligations. The proposal would set aside 1.5 percent of general fund revenues, plus an amount equal to revenues from capital gains taxes when they exceed 8 percent of general fund revenues. It also requires that some of that revenue be used to reduce state debt, which will produce some long-term savings.
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In truth, if Proposition 2 passes, it mirrors a plan attempted at the end of the Schwarzenegger administration that tied the rainy day fund to temporary tax increases. In the 2009 special election, I was on the “yes” side of Proposition 1A, which would have created a rainy day fund while imposing a two-year temporary tax. It was defeated. In 2012, I opposed Proposition 30 precisely because no spending reforms were tied to the measure.
With Proposition 30, we got an even longer-term temporary tax increase than Proposition 1A would have authorized. It’s now time to put the reserve fund in place to balance the tax increase with a measure of reform. Proposition 2 is designed as a Dramamine pill for California’s roller-coaster budget ride – surpluses in good times, deficits in bad economies. It should ease the nausea caused by the ups and downs.
However, a more permanent fix would be to overhaul the state’s tax system.
Past administrations have looked at the problem. Gov. Gray Davis empowered the California Commission on Tax Policy in the New Economy. Its report came out a month after Davis’ successor, Arnold Schwarzenegger, took office following the extraordinary recall election. The report was ignored, but Schwarzenegger eventually came to the same conclusion that the state’s tax system needs an overhaul. His Commission on the 21st Century Economy issued its report in September 2009. But it also went nowhere. Likewise, outside groups such as the Think Long Committee have spent time working on more substantial tax reform.
While Brown understands reform of the tax system is necessary, he also knows it will be politically difficult. The rainy day fund measure becomes an insurance policy until there is political will to take on bigger reforms.