A couple of interesting front page feature pieces in the Sacramento Bee on California’s budget mess:
“Going Broke: State’s a wreck – can it be fixed?”, The Sacramento Bee, September 20, A1
The most interesting piece from this article was how the state has become dependent on income taxes from the top 1% of earners and how cyclical those earnings are. In 2006, according to the Franchise Tax Board, Californians making more than $500,000 a year filed just 1% of all state income tax returns and paid 47.2% of the taxes. With income taxes accounting for about half of the state revenues, income taxes from the top 1% of earnings account for 25% of the state’s revenues!
There was also some interesting history in the piece. California adopted a sales tax in July 1933 which was set at 2.5% and resentfully referred to as “a penny for Jimmy”, referring to then Governor James “Sunny Jim” Rolph. Two years later, legislators passed an income tax with rates ranging from 1% to 15%.
For the first 50 years, the state relied primarily on the sales tax. But as the economy shifted from manufacturing to service, the income tax became increasingly important. In 1984, revenues from personal income taxes passed those from the sales tax as the state’s top revenue generator.
“Going Broke: State officials spread loot like Santa, expert says”, The Sacramento Bee, September 21, A1
Today’s piece focuses on the legislature’s out of control spending. “It’s not the tax system that is causing the problem. The tax structure has been pretty consistent in providing income. It’s spending. They (elected officials) just can’t say no,” says David Doerr, senior tax consultant at the California Taxpayers Association and who has written a book on the history of California’s tax system (California’s Tax Machine: A History Of Taxing And Spending In The Golden State, 2nd Edition (California Tax Payers Assocation, August 11, 2008)).
The interesting part about this article was how things really got off track after the passage of Proposition 13 in 1978. Prop 13 capped property tax increases and made it difficult to raise other taxes. That should have sent a loud and clear message to the legislature to cut spending.
Instead, they continued to increase spending at the same rate – except that the revenues now weren’t there to support it. “The state got off track in general after Prop. 13 in terms of balancing spending with revenues and once they did, it wasn’t long before they were way off track,” says Doerr. As a result, California has been subject to wrenching budget crises and rising debt over the last 30 years.