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California

Ben Boychuk
Guns and Roses
Jerry Brown’s high-stakes tax proposal faces a political challenge—from the Left.
5 April 2012

Jerry Brown wants Californians to believe that the state, facing a current budget deficit of $9 billion, has a revenue problem. In fact, what the 30 million residents of the Golden State have is an entitlement problem. From health care to state and local public-employee retirement benefits, Californians face as much as $500 billion in unfunded liabilities for pensions alone. The state’s unfunded health-care liabilities top $62 billion. Brown’s new budget actually proposes a 7 percent increase in spending, though it offers to cut some services. All of the governor’s plans assume that substantial, voter-approved tax hikes will provide billions in new revenue, helping to pay for the extra spending and shrinking the deficit. “I’m promising wine and roses,” he told reporters after a speech last month, “but not in 2012.”

In fact, what Brown is promising for 2012 and beyond is pain. Pain for upper-income earners. Pain for low-income earners. Pain for business owners. Pain for just about everyone, except perhaps the Service Employees International Union, the California Teachers Association, and their confederates. Shortly after Brown took office last year, a reporter asked what might happen if his plan for a tax extension failed to reach the ballot or if voters ultimately rejected the proposal. His reply: “Some people might say I am putting a gun to their head.” This year, voters shouldn’t doubt which way the governor’s gun is pointed.

What the governor and his allies want more than anything is for voters to approve a constitutional amendment in November that would raise sales taxes by one quarter of a penny and hike income-tax rates on “millionaire” Californians—those earning more than $250,000 a year—by up to three percentage points, taking the top marginal rate from 10.3 percent to 13.3 percent. The increases would be “temporary”—the sales-tax increase would expire after five years, and the income-tax rate increase would sunset after seven. “There’s a lot of money sloshing around California, and there are a lot of people who are getting a share of it,” Brown said at a Wall Street Journal business forum last month. “I want to make sure all the different conditions work well, to the extent I can.”

Standing in strong opposition to the governor and his public-employee union allies are not Republicans—though they certainly dislike Brown’s tax-and-spend scheme—but rather a surprising coterie of liberal Democratic interests led by Molly Munger, a prominent Los Angeles activist and civil rights attorney. Munger, daughter of Berkshire Hathaway vice chairman Charles Munger, has put $3.4 million of her own money into qualifying a competing ballot measure that would raise the income tax across the board by one percentage point. New revenues would be earmarked almost exclusively for education under Munger’s plan. She estimates her initiative would bring in $10 billion.

Neither measure has qualified yet for the November ballot. Both campaigns need to turn in their signatures by April 20 to give counties time to verify the petitions by a June 28 deadline. Brown’s constitutional amendment needs 807,615 valid voter signatures. Munger’s initiative statute needs 504,760 signatures—and her campaign is offering new cars to its top signature gatherers to get the job done. Brown would prefer that Munger step aside to give voters one clear choice, just as the California Federation of Teachers last month agreed to forge a compromise with the governor that resulted in the tax plan he’s currently promoting. But Munger refuses to back down. “You sort of hope that the Democrats are the party that stand up for investment in children and in education,” she told the Associated Press. “Those are two bedrock principles of the Democratic Party.” The disagreement between the two camps boils down to whether the competing proposals to raise taxes in this heavily taxed state are “progressive” enough. Sales taxes like Brown’s are often considered regressive because they tend to affect lower-income people more than the rich. Soaking the rich, on the other hand, is arguably a third bedrock principle of the Democratic Party.

At the moment, voters seem to favor Brown’s plan. A Los Angeles Times/USC poll published March 25 found that 64 percent of registered voters—including three-quarters of independents—say they support the governor’s tax proposal. But the poll includes a crucial caveat: “Californian voters favor raising sales taxes and taxes on wealthier citizens if they’re told the money goes to public schools, community colleges and public safety.” The governor cocked the hammer on his gun by threatening to cut as much as $5 billion from education if voters don’t approve the tax hikes. Munger’s proposal, by contrast, enjoys just 32 percent of registered voters’ support.

Truth is, Californians have no great appetite for more tax increases. Never mind what the polls say right now; most voters aren’t paying attention. (Also, polls of registered voters are much less reliable than polls of likely voters.) Recent history shows that tax-hike measures—temporary or not—simply aren’t winning propositions on Election Day. It was no accident that Californians rejected a similar “temporary” measure in 2009 by a nearly two-to-one margin.

Voters would do well to be suspicious this time, too. The promised new revenues are largely speculative, and the governor’s plans for the money are fuzzy. The state’s nonpartisan Legislative Analyst’s Office reports that Brown’s measure would generate considerably less revenue than the governor estimates—closer to $6.9 billion, not the $9.2 billion he’s touting. And while Brown insists that most of the money would go to “education,” he’s cagey on the specifics and neglects to mention that the California State Teachers’ Retirement System is seeking an additional $4.5 billion annually from the state to help pay down its $60 billion unfunded liability.

One thing is certain: both of these schemes would exacerbate the state’s revenue volatility problem, relying on fewer taxpayers to collect more money. As Legislative Analyst Mac Taylor notes in his typically subdued style: “Given this volatility, estimates of the revenues to be raised by [Brown’s] initiative will change between now and the November 2012 election, as well as in subsequent years.” It’s a fair bet that some upper-income earners, especially retirees, will simply flee the state rather than pay more. And “rich” is an unusually elastic concept in the Golden State. In 2008, 43,000 Californians reported adjusted gross incomes of $1 million or more. In 2009, just 34,000 did—a 20 percent drop. Relying on such a small group is no way to finance a state. Everyone in Sacramento knows this, and Brown most of all. As he told a conference of California police chiefs recently, the state’s overreliance on personal income tax from fewer people has resulted in “a more or less constant state” of deficits.

Not long afterward, though, Brown was saying something completely different: “The tax goes to schools. That’s what it does. We’re dedicating the money to schools, it goes into a special account, and we’re going to do everything we can to protect our universities, protect our schools, but also balance the budget.” One wonders what the governor will say next week or the week after that to cajole voters into supporting his tax hike. Meantime, his pension reform plan languishes, the state’s unfunded liabilities grow larger, and the days of wine and roses seem to recede ever further into the future.

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