Gov. Jerry Brown's tax proposal is terrible public policy. Plain and simple. But it offers the only plausible path to rescuing California schools from more painful budget slashing.
So it's not so simple.
Politics is the art of the possible, to quote the 19th century German politician Otto Von Bismarck. Brown's Proposition 30 is a political work of art crafted to meet the voters' approval Nov. 6.
"This is the politics of the practical, the doable," says the ballot measure's chief campaign strategist, Ace Smith. "It's not Plato's Republic — not like the perfect government system that we'd draw from the textbooks." That is undeniable. Proposition 30 is lousy policy because it moves in the opposite direction of badly needed tax reform in Sacramento. It would make the state's roller-coaster tax system even more volatile and unstable.
The nonpartisan legislative analyst points this out in his explanation of the measure in the Official Voter Information Guide mailed to Californians: "Due to swings in the income of upper-income taxpayers, potential state revenue fluctuations could complicate state budgeting in some years."
Just what Sacramento needs: More budget complications, driving school boards and city councils nuts and leading to yet-lower credit ratings.
Under Brown's soak-the-rich plan, California would become even more dependent on the wealthy and their capital gains. He would raise state income tax rates by one percentage point for single-filers earning more than $250,000, by two points for those making more than $300,000 and by three points on earnings exceeding $500,000. Double those income thresholds for joint filers. The current top rate is 10.3 percent.
Actually, California already is too dependent on the personal income tax, period.
Currently, the tax provides roughly two-thirds of the state's revenue. Three decades ago, it amounted to only around one-third.
Here's the volatility problem: The top 1 percent earn 21 percent of the state's personal income but pay 41 percent of the tax, according to the latest figures, from 2010. So when there are ups and downs in the economy — and fluctuations in the earnings of the rich — they are exaggerated into peaks and valleys in Sacramento, resulting in an unreliable revenue stream.
"Proposition 30 has no tax reform and makes it worse," complains Gerald Parsky, an investor, former University of California regent and chairman of two tax reform commissions whose recommendations were ignored in Sacramento. "People say, &‘Prop. 30 is not reform, but look at what happens if it fails.' My answer is that maybe Sacramento then will have to adopt real reform quickly. More revenue is needed, but only if there's real reform."
Reform, Parsky and many contend, includes extending the sales tax to services.
Here's another reason Proposition 30 is bad policy: It especially socks small businesses, which tend to pay the personal income tax rather than the corporate tax.
"Our members are at wits' end," says John Kabateck, who heads the California office of the National Federation of Independent Businesses. "They're mom and pops and don't have much of anything left in the till" after the recession. "Many have reached the edge and feel that Proposition 30 is going to push them over."
But what makes Proposition 30 politically plausible is that the vast majority of voters would not pay the higher income tax rates. They can say, "The governor won't be taxing me, he'll be taxing that rich guy behind the tree," to paraphrase the late Louisiana Sen. Russell B. Long.