As Californians head to the polls, taxes will be the biggest issue on the state ballot—again.

Gov. Jerry Brown is sponsoring Proposition 30, which would raise income taxes on people earning $250,000 or more and increase the sales tax by a quarter-cent on the dollar.
Lawyer and social activist Molly Munger, meanwhile, is backing Proposition 38, which would increase income taxes on nearly everyone, with the wealthy paying more than lower income people.

Munger’s proposal would raise more money than Brown’s – about $10 billion to his $6 billion — and dedicate most of it to public education. Brown says his measure is about helping the schools, too, but the money it raises would actually go into the state’s general fund and be available for any purpose deemed a priority by Brown and the Legislature.
Still, since schools get the biggest share of the budget, it is fair to say that they will be the biggest beneficiary if either proposition passes, and the biggest losers if both measures are defeated.

Opponents of both measures say Californians are already taxed too much. They say the better way to solve the state’s budget problems is to cut spending.

So how are voters supposed to sort it all out?

Many will simply vote their pocketbooks. Polls show that a plurality of Californians believe the state needs a combination of higher taxes and spending cuts to work through our problems. But they are generally willing to vote only for taxes that fall on someone else, not themselves.

Voters who are open to looking beyond their own financial situation face a series of tough questions before deciding how to vote.

First, does California need more revenue?

The state is facing an $8.5 billion shortfall in the current year, even after making deep cuts to health and social services. The state has cut welfare grants and placed stricter limits on how long people can stay on public assistance, reduced care for the aged and disabled in their homes, cut benefits in the Medi-Cal health program for the poor and reduced subsidized child care slots for low-income families. College students and their parents have been asked to pay higher tuition.

While the state’s perpetual deficits give the impression that spending is out of control, as a share of the economy California’s state government spending has been stable, if not actually declining, for many years. Last year the state spent $5.14 from its general fund for every $100 in personal income generated in the economy – the lowest since 1973.
Is the bureaucracy bloated? In 2011, California had the fifth lowest number of state employees per capita in the nation, according to economist Steve Levy at the Center for the Continuing Study of the California Economy. The number of state employees as a share of the population peaked at 9.9 per 1,000 people in 1978 and has fluctuated just below that level ever since, according to state figures. This year it’s down to about 9.1 employees for every 1,000 people in the state.

But California does pay its employees more than any other state, partly because we have such a high cost of living. And that payroll, and the benefits that go along with it, are one reason California is a relatively high-tax state.

California’s income tax, with a top rate of 10.3 percent, is second only to Hawaii. The statewide sales tax rate of 7.25 percent is the highest in the nation. The corporate tax rate of 8.84 percent is the ninth highest in the country, and the highest in the west.

Overall, California ranked 11th in 2010-11 in revenue raised as percentage of personal income, but that included some temporary taxes that have since expired. Counting state and local taxes, California was 13th in the nation in 2008-09, according to the California Budget Project, a non-profit group that tracks state fiscal policy.

If, for the sake of argument, you accept the idea that the state needs more money, the next question would be: Where best to raise it? And that question probably has different answers depending on whether you ponder it as a policy matter or also take politics into consideration.

Policy experts are nearly unanimous in agreeing that California already relies too heavily on the income tax, and its income tax relies heavily on the state’s wealthiest citizens.

Twenty years ago, the sales tax and the income tax brought in roughly equal amounts of revenue. But the sales tax has since declined as a percentage of the budget, and the income tax has soared. Last year the income tax represented 57 percent of the state’s general fund revenue, while the sales tax was just 20 percent.

That dependence on the income tax makes the state vulnerable to a revenue rollercoaster. The income tax is highly progressive – a family of four with income below $50,000 typically doesn’t pay anything at all, while the top 1 percent pay half of all the income tax. Those high earners, who get much of their money from investments, see wild swings in their income, and their tax liability, as the economy grows and shrinks.

In good times their payments give the state a surge in revenues, and it has been the Legislature’s custom to spend that money, building it into ongoing commitments to the schools, health and social services. But when the economy slumps, the wealthy usually take a hit, and their tax payments drop. The result: big deficits.

So to make budgeting more predictable, California would be better off not depending so heavily on the wealthy.

But the state keeps moving in that direction anyway. Since the wealthy are a tiny minority, it’s easier for those who want to raise taxes to target them at the ballot box. In the Legislature, meanwhile, Republicans have been able to reduce the effective corporate tax rate by demanding rate cuts or tax breaks in exchange for their votes on the budget, or at least they did so until voters gave the Democrats the ability to pass a budget on a simple majority vote.

What California needs is tax reform that would simplify the system, broaden the tax base and lower the rates while bringing in more revenue, if not in the short term then over time, as the economy grows. If that sort of reform is not possible, then the state ought to have a rainy day fund that forces legislators to set aside money in boom years to cushion the blow when the economy slows.

But neither of those options is on the ballot this year. So if you believe the state needs more revenue, the only currently viable option is to tax the rich. And while that might help balance the budget this year, it might mean more problems down the road, after the next economic boom and bust.

As Abraham Maslow said, if your only tool is a hammer, every problem looks like a nail.

California’s hammer is taxing the rich. The governor is urging us to commence pounding.

Daniel Weintraub has covered California public policy for 25 years. He is editor of the California Health Report at www.calhealthreport.org