Tuesday, November 22, 2011

California’s 1% Goes On The Offensive

We've Saved the Schools! (Image from Flickr, Mike Licht, NotionsCapital.com)
Three of California’s billionaires have committed over $20 million of their own money to launch and win a ballot initiative that would help close California’s perennial budget hole, according to the Los Angeles Times. However, their plan would only increase tax revenue by $10 billion, not even enough to close next year’s budget gap, which is already projected to exceed $13 billion. It will do nothing to restore the $21 billion that has been slashed from K-12 education over the past three years, or the billions cut from higher education and services for the poor, elderly and disabled. But worst of all, it relies on regressive sales tax hikes and a restructuring of the income tax code that leave the 1% unscathed, placing the burden of closing the budget gap on the rest of us.

The Think Long Committee is headed by investor Nicolas Berggruen, philanthropist Eli Broad and Google Chairman Eric Schmidt. The group also includes former governors Gray Davis and Arnold Schwarzenegger, according to the Times.

On the surface, their plan seems like a well-intentioned attempt to help bolster California’s crumbling infrastructure. After all, it promises to increase K-12 funding by $5 billion per year plus add several billion more for higher education. In reality it is an attempt to take the wind out of the Occupy Wall Street movement, which has been criticizing the skyrocketing cost of higher education and the defunding of both K-12 and higher education. The Think Long millionaires and billionaires are hoping the promise of increased education funding will convince the protestors to go home and give up their desire to make “the rich pay.”

This is unlikely, as their plan calls for a regressive 2% sales tax hike that disproportionately impacts lower income peoples, and an income tax restructuring that places the burden of closing the budget gap on middle income people.

The new tax code would leave those making less than $45,000 without any income tax liability, while those in the $45,000-95,000 range would be taxed a modest 2%. However, there would only be one more bracket, $95,000 and above, which would be taxed at 7%. This means that lower middle class families would be taxed at the exact same rate as millionaires and billionaires. In reality, though, those making millions would be paying a much smaller percentage of their income in taxes, since they tend to have more deductions and exemptions and bring in the bulk of their wealth through capital gains, which would be unaffected by their plan.

The California Teachers Association plans to float a countermeasure that would increase taxes on the state’s wealthiest residents. However, even their plan doesn’t go far enough, aiming only to close the state’s existing deficit and doing little to repay schools for the huge cuts they’ve suffered over the past few years, let alone raise revenue to a level that might bring California back among the top five states in per pupil spending.

What the state needs is a revenue increase in the $50-100 billion range, something that it is fully capable of achieving if income taxes on the wealthiest residents are sufficiently increased, along with business taxes and capital gains taxes. If we go back to the pre-Reagan era, the highest tax bracket paid from 50-90% in federal income tax on all income above a certain threshold. There is no reason the state of California can’t do likewise, for example, raising tax rates on all income over $500,000 to 20% or even 50%.

If we consider just the state’s 80 billionaires, this could bring in more than $10 billion. However, if we include each of the state’s roughly 600,000 millionaires, such a tax ought to create a budget surplus.

Of course this is exactly the kind of scenario the Think Long group is trying to avoid with their preemptive strike.

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