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California Vote Won’t Be a Quick Tax Fix

California Ballot Offers False Promises of a Quick Tax Fix
Illustration by Bloomberg View

Oct. 31 (Bloomberg) -- On Nov. 6, Californians will vote on two ballot measures to raise sales and income taxes in their strapped state. They should instead be working to amend Proposition 13, the notorious 1978 measure that put stringent limits on property tax.

Proposition 30, the new measure backed by Governor Jerry Brown, would raise the sales tax and income taxes on couples earning more than $500,000 to help close the state’s $8 billion annual structural deficit. Proposition 38 would raise income taxes more broadly, with the increase principally on high earners; the proceeds would be dedicated to schools.

The state needs higher revenue to deal with its persistent shortfalls and to reverse a dangerous trend of underfunding public education. Unfortunately, these proposals would raise revenue the wrong way, increasing California’s excessive reliance on progressive, statewide taxes. Neither ballot initiative resolves the fundamental problems that have plagued state and local budgets for decades.

For more than three decades, Proposition 13 has caused a damaging fiscal shift, depriving municipalities of needed revenue. With property taxes off the table, the state sharply raised income taxes to assist local governments. California’s income tax increased from 2.1 percent of personal income in 1978 to 3.5 percent in 2008. Personal income taxes amount to 30 percent of all state and local taxes collected in California, compared with an average of 23 percent nationally.

Greater Drag

Income taxes appear to be a greater drag on the economy, per dollar raised, than sales or property taxes. And in California, such taxes are levied exclusively by the state government, so greater reliance on income tax means centralizing more power in the capital, Sacramento.

Because income taxes are highly volatile, they lead to revenue booms and busts, encouraging the state to make ambitious spending commitments in boom times that it is unable to keep when the economy sours. California already has one of the country’s most progressive state income tax systems; both propositions would make it even more progressive. In fact, Proposition 30 would give California the nation’s highest top income tax rate at 13.3 percent. This is too much of a good thing.

Instead of raising income taxes, California should address the root of the problem: Proposition 13. It’s possible to cap property taxes in a way that doesn’t undermine state and local government. Massachusetts, which capped property taxes in 1980 and still maintains the best K-12 schools in the country, provides a good road map.

Proposition 13 should be reformed to empower local voters to raise their property rates by referendum. In addition, any cap should apply to a municipality’s total property tax collections, not to any individual tax bill. The state should also consider making it easier for municipalities to collect their own non-property taxes instead of forcing them to appeal to Sacramento for aid.

Reforming Proposition 13 won’t solve all of California’s myriad fiscal problems. The state also faces excessive pension liabilities. (This year’s pension reform was a step in the right direction, but it did not go nearly far enough.) And the legislature is bound by many unwise ballot initiatives that force it to spend money on specific programs. But 30 years of experience show that another statewide income-tax increase is the wrong approach.

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Today’s highlights: the editors on why you shouldn’t read too much into the jobs report; Clive Crook on why Obama is the least bad choice for the U.S.; Peter Orszag on a tax refund that could solve the fiscal-cliff impasse; Part three of A. Gary Shilling’s series on who loses when the Fed keeps interest rates low; Part one of Virginia Postrel’s series on missteps by breast-cancer charities; Tim Judah on the rise of the far-right party Svoboda in Ukraine.

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