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Jerry Brown's tax proposals: Will they solve California's problems?

California Governor Jerry Brown Unveils State Pension Reform Program

Max Whittaker/Getty Images

SACRAMENTO, CA - OCTOBER 27: California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California. Gov. Brown proposed 12 major reforms for state and local pension systems that he claims would end abuses and reduce taypayer costs by billions of dollars. (Photo by Max Whittaker/Getty Images)

Yesterday, Gov. Jerry Brown laid out his tax proposals for California voters in an open letter at the governor's office website. Brown wants to go straight to the voters, via the ballot initiative process. The plan is fairly simple:

My proposal is straightforward and fair. It proposes a temporary tax increase on the wealthy, a modest and temporary increase in the sales tax, and guarantees that the new revenues be spent only on education. Here are the details: 

• Millionaires and high-income earners will pay up to 2% higher income taxes for five years. No family making less than $500,000 a year will see their income taxes rise. In fact, fewer than 2% of California taxpayers will be affected by this increase. 

• There will be a temporary ½ cent increase in the sales tax. Even with this temporary increase, sales taxes will still be lower than what they were less than six months ago.

• This initiative dedicates funding only to education and public safety—not on other programs that we simply cannot afford. 

Brown figures that the taxes will bring in $7 billion a year for five years. But that's against a projected budget deficit next year alone of $13 billion. The opposition fired back quickly today, with an unsurprising point of view. This is from the Santa Rosa PressDemocrat:

The California Taxpayers Association, Howard Jarvis Taxpayers Association and Small Business Action Committee said they filed a proposed ballot measure with the state attorney general's office that would limit spending after the state makes a full recovery from the recession.

"We need a mechanism to make sure that the drunken sailor DNA of our Legislature doesn't kick in, and that we put that money away and we use it for debt reduction," said John Coupal, president of the Howard Jarvis group.

Joel Fox, President of the Small Business Action Committee, took to the organization's blog to make the case:

With a deluge of initiative filings to raise taxes pouring down on taxpayers, an initiative will be filed today to give voters a chance at an alternative approach for state fiscal management—limit spending.

Provisions in the measure will limit annual state appropriations to the prior year’s level adjusted for cost of living and population growth, require surplus revenue to first be spent on debt service – what Governor Brown calls our “wall of debt” – that will hinder the state’s finances if not reduced, and strengthen the two-thirds vote requirement for legislative enactment of laws that authorize or raise new or higher taxes.

"Surplus revenue" implies that the state will at some point see deficits go away. But that could take a while, according to the Legislative Analyst's Office:

One year ago, the state faced ongoing budget imbalances of around $20 billion per year. Now, we forecast that the General Fund’s operating shortfalls will be between $8 billion and $9 billion per year in 2013-14 and 2014-15 and then decline gradually to about $5 billion in 2016-17.

It could be 2020 before a surplus materializes. At which point...it might be a pretty good idea to spend it on debt service because it's anyone's guess how much debt the state may need to take on between now and then to contend with its financing challenges. Let's say it's somewhere north of $265 billion now. It will almost certainly be higher by the time the Great Recession turns into the long-awaited vigorous (or not) expansion.

It's going to require political vision to merge these two generally opposing ideas: raise taxes and cut spending. By going the ballot-initiative route, Brown figures the Legislature isn't the place to find that vision. For the moment, he may find the voters he needs, given that his plan seems mostly aimed at the wealthy — although that 1/2 cent sales tax hike, like most sales taxes regardless of how small, will regressively affect the poor far more than the rich, because the poor have no way to escape spending all their money.

Can the wealthy afford a Brown tax increase? Well, let's consider the numbers. The Washington Post breaks it down:

If voters approve Brown’s plan, individuals earning $250,000 up to $300,000 would pay an additional 1 percent income tax, bringing their tax rate to 10.3 percent. Individuals earning more than $300,000 but not over $500,000 would be taxed an additional 1.5 percent, bringing their tax rate to 10.8 percent.

Even before Brown's proposal, these rates were the highest in the nation. Of course, most other states aren't anywhere as rich as California. If the state were a country, it would have the world's eight largest economy. And given the pace of spending cuts over the past few years, undertaken in response to the financial crisis, it's clear that we're getting through the muscle and into the bone. 

Brown focuses on education as the must-fund part of the budget. Apart from the K-12 component, there's already major concern that continued cuts, combined with rising costs, will saddle future college students in California with significant debt. Gene Block, the Chancellor of UCLA, wrote an op-ed for the LA Times about the issue earlier this year.

But when you consider that U.S. GDP growth may not move into 5-6 territory for a number of years — and that unemployment in California could remain higher then the national average for the rest of the decade — it's difficult to see how even higher taxes and spending cuts will get the job done. And we haven't even gotten into the underfunded state pension crisis yet (the Little Hoover Committee put it at $240 billion in 2010).

2012 will definitely see a good old-fashioned battle on this issue. The question is whether the natural politics of the matter, with camps falling back into time-honored positions, will lead to a failure of imagination as the state stares down bankruptcy. Do we really want to find out if the federal government thinks California is too big to fail?

Follow Matthew DeBord and the DeBord Report on Twitter.

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