Proposition 30’s reliance on the rich could make the state budget long-term problems worse because it adds more volatility to state taxes. While the Legislative Analyst pointed that out in the Prop 30 analysis –“due to swings in the income of upper-income taxpayers, potential state revenue fluctuations under this measure could complicate state budgeting in some years” –who knew a demonstration of that point would play out so quickly.
California budget watchers were hoping for a big deposit into the state treasury from the nouveau riche created by the Facebook IPO. Yet, at the end of last week we were told that Facebook founder, Mark Zuckerberg’s stock lost $9-billion of value since the IPO. Yes, billion with a B.
We won’t feel too bad for Mark since his stock is still worth about $10-billion. But we should feel bad for California hoping to reap its share of the billions Zuckerberg and some of his colleagues expected to make when they cashed in part of their gains.
California’s roller coaster budget problems have clearly relied too much on high-end income taxpayers. The top 1% of income taxpayers in the state pay 40% of the income taxes. If Proposition 30 passes, the top 1% would carry an even heavier burden. The personal income tax is the major revenue source for California’s General Fund.
We know what happens when an economic cycle turns down. Much of top end earners’ revenue is tied up in capitol gains. In poor economic times, the capitol gains take a hit. Therefore, the state takes a hit.
Apparently, some legislators are becoming aware of this problem. Democratic Assemblyman Mike Gatto tweeted on the news of Facebook’s stock decline: “As I read the projections on how #Facebook share price slide will hurt #CABudget, I ask again: Is CA’s dependence on capital gains healthy?”
Dependence on capital gains and putting more responsibility on the high-end taxpayers will not solve the state’s budget problem. It will lead to greater difficulties down the road and could even hurt in the short term, putting a crimp on a California economic recovery.
Yet, that’s the formula Proposition 30 proposes. Tell all your friends on Facebook about this danger.