Close to Home: California needs higher taxes on wealth

In his State of the Union address, President Joe Biden proposed to reverse the 2017 Trump tax cuts for the wealthiest Americans by raising the corporate tax rate, denying tax breaks for corporations whose CEOs earn more than $1 million in annual compensation and requiring billionaires to pay at least 25% of their income in taxes. "No billionaire should pay a lower tax rate than a teacher, a sanitation worker, or a nurse," he said. But none of these proposals for more equitable taxation are possible unless Biden is reelected and Democrats take back control of Congress.

However, state and local governments in solid blue California can do much to further tax fairness ­— and government action is urgent. The nonpartisan Legislative Analyst’s Office estimates that the state faces a staggering $73 billion budget deficit this year, making cuts to education, affordable housing, climate change initiatives and the safety net likely without a revenue boost.

According to the California Budget and Policy Center, a research group, income distribution is more unequal than at any time since the Great Depression of the 1930s. Between 1987 and 2021, average adjusted gross incomes for the bottom two-fifths declined by 20%, while incomes for the top 1% skyrocketed by 252%.

Moreover, a 2023 United Ways of California study found that more than one-third of Californian households are working poor. Despite at least one person working, these households do not earn sufficient income to cover their basic expenses such as housing, child care, food, transportation, medical and taxes.

The budget and policy center recognizes that the state’s personal income tax is progressive yet calculates that the California tax system is regressive overall. The 40% of tax filers with the lowest incomes pay the largest share of family income in aggregate state and local taxes (including sales, excise, property and personal income) compared to most other income groups.

What can state and local governments do to ensure that the ultrawealthy and large corporations pay their fair share?

First, the Legislature can end tax breaks that primarily benefit large corporations and high-income households, resulting in an estimated revenue loss of $70 billion annually. For instance, multinational companies can exclude profits made in foreign countries from reportable earnings, and wealthy Californians can deduct mortgage interest for second homes.

Second, state Sen. Nancy Skinner, D-Oakland, has proposed a 2% increase in the corporate tax rate on California’s 2,500 largest national companies, yielding $6 billion to fund education and public services that benefit all Californians.

According to the budget and policy center, California corporate profits in 2021 were a record-breaking $368 billion. However, today, due to tax breaks and a reduction in the corporate tax rate, corporations contribute only half as much of their earnings to state taxes as they did in the early 1980s.

Third, the state can tax excessive CEO pay. A 2020 bill that stalled in the Legislature would apply graduated corporate tax rate increases for large companies based on the CEO-to-median worker pay ratio. Companies with more than a 300-to-1 earnings ratio would pay the most.

Local jurisdictions can also implement taxes on bloated CEO compensation. In 2020, San Francisco voters approved a surtax on large companies whose total executive pay ratio (including wages, bonuses, and stock options) exceeds 100-to-1 ratio.

Finally, in seven states including California, legislators have proposed a tax on extreme wealth. In California, the legislation would impose a 1% wealth tax on households with a net worth of more than $50 million. The tax could generate an estimated $22 billion, half of which would come from California’s 186 billionaires (the highest number of any state).

Gov. Gavin Newsom opposes a wealth tax, but public pressure is building. A 2021 poll by David Binder and Associates found that more than two-thirds of California voters support imposing a wealth tax on the richest people in the state. A 2023 Target Smart poll indicates that 76% of California voters support taxing billionaires and expect state legislators to act.

Martin J. Bennett is instructor emeritus at Santa Rosa Junior College and a consultant for UNITE HERE Local 2.

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