The volatile incomes of the wealthy, mostly derived from capital gains, are causing ongoing problems for California to develop successful budgets.
The independent State Budget Crisis Tax Force has released its analysis of California's finances and found that rather than being a whopping $28 billion in debt, as Gov. Jerry Brown alleged with he came to office, the state is actually a nearly unfathomable $335 billion debt. Brown called it a "wall," as the New York Times noted. But it's really more like a dozen walls. All stacked on top of each other to make a mega-wall that blocks out the Sun.
This is not an exaggeration. Californian's total level of debt, on and off the books, is pushing a fifth of the total annual economic output of the state, which is about $2 trillion.
Some of the usual suspects are responsible for this: overspending and undertaxing during boom times, colossal pension liabilities, taking on too much debt. But the report zeroed in on an important area that I've written about before: a California tax system that relies far too much on the incomes of the wealthy, and in particular on income derived from capital gains, or the sale of stocks, bonds, and other assets (see the chart above, which I grabbed from the report).
This is from the report:
As for the tax structure, more work needs to be done to match the tax base with the California economy. Governor Brown’s 2012-13 budget includes an estimated net $5.6 billion benefit to the general fund resulting from additional new temporary taxes that he believes will plug a gap over the next seven years. The pitfall in this approach is that this measure is temporary, like solutions enacted in the last decade that were used to plug budget gaps. Since most of the temporary taxes fall on higher income individuals it is likely to increase the volatility of the income tax....
Those new taxes will be approved or disapproved by California voters in November, via the ballot process. But the underlying problem of a tax structure that's exposed to boom-and-bust asset markets, from which the wealthy derive most of their income, remains. Temporary changes might close a $16-billion state budget deficit, but it will only briefly prevent a 12-story wall from become a 13-story, then 14-story, then 15-story wall.
There is no easy way to change this, except to build an economy in California where a stable middle class can contribute more substantially to the tax coffers and have enough earnings to spend at a level that can enable sales taxes to address imbalances.