San Francisco Chronicle - (Sunday)
A vulnerable revenue system
In boom times, no state is better designed to rake in tax money than California. The results mean more for schools, health care and an ample social safety net embodied in a $222 billion budget.
But when the economy staggers, the revenue flow dries up, and Sacramento is about to find out just how quickly. California lives or dies by a skewed tax system built on populist, taxtherich fundamentals. Nearly half of the state’s personal income tax collections come from the top 1%, who face steep levies when they sell stock or investments.
But when Wall Street or business operations tank, and the rich aren’t reaping as much, the state’s in trouble, as it found out in the recession over a decade ago. California swung from a modest surplus in 2007 to billions in shortfalls that lingered for years.
Now a coronaviruscaused economic pullback is hitting home. It’s an entirely different source of trouble, but it yields the same bottom line. A stock market plummet and shuttered businesses will mean less state revenue. In just over two weeks, a million people filed for jobless benefits. The state’s enormous retirement pools for teachers and government workers have dropped by tens of billions due to stock losses, putting pressure on Sacramento to add in more.
The state is nervously acknowledging the growing peril. There is a rainyday fund and other reserves created by new rules and the recent economic good times. The total comes to $21 billion, which can be gradually tapped to tide the state over. But the depth of a business recession and the cry for more crisislevel spending isn’t factored in, making it hard to size up the future financial hole.
As with everything else connected with the coronavirus outbreak, the impact will be both dire and unpredictable.
Thanks to the reserve funds, Newsom believes, “We’ve never been in a better position to weather a recession. Period. Full stop.” Other state officials in the Department of Finance and Legislative Analyst’s Office aren’t as confident, claiming the damage is unknown and needs constant watching.
With the Legislature due to return to work on April 13 and a June 30 deadline to approve a budget, there will be time to recalculate spending contained in the governor’s firstblush budget blueprint that is released in January.
Lawmakers should dig deep to fix an underlying cause that will take political capital, time and negotiating skill, all in short supply right now. The signs are flashing red that what’s needed is a broadbased budget that doesn’t lean on the fickle incomes of the superwealthy.
The tax system is outdated in other ways, leaving out evergrowing personal services such as legal advice, consulting and even personal trainers. A shifting business world isn’t fully measured by state levies.
Decades ago, the state got by on a mix of taxes on sales and individual earnings that drew in a wider range of payers. But the state headed in new direction, swinging the tax burden to incomes paid by top earners. It’s easy to see why: The wealthy were an easy target since they could pay more. The damage was partly eased in the short term when Gov. Jerry Brown pushed for voter approval of a rainyday fund, but his plan also made the system even more top weighted — and vulnerable to the type of downturn we’re now experiencing.
Now the state is about to find out if the same peril will repeat itself. As pandemic victims fill hospitals and businesses collapse, the fiscal damage will run beyond the toll taken by wildfires, earthquakes or drought.
That dismal future should make lawmakers confront the inescapable need to look at the volatile tax system that feeds the budget. It’s not an easy lift. The reality of what reform might look like — taxes levied on more, not fewer, people — has killed off political debate in the past.
The idea of tax shift in the middle of health emergency is probably a nonstarter. But the governor and the Legislature are about to experience the shock and difficult decisions that result from years of avoiding restructuring a tax system that amplifies the ups and downs of the California economy.