Advancing a Free Society

Deep in the Heart of (California) Taxes

Monday, March 19, 2012

The good news: California’s initiative load for this fall is lighter by one, now that Gov. Jerry Brown and the California Federation of Teachers cut a deal have agreed to merge their respective tax-hike measures.

The bad news: Californians will still have to endure a hard sell on higher taxes, its state leaders the while failing to address larger problems having to do with government spending and unreliable revenue streams.

First, some background on what’s going on at the ballot box.

Earlier this month, Californians were looking at the prospect of not one but three tax initiatives this fall. Brown’s plan was a half-cent increase of the state tax for four years, beginning in January, plus a higher income tax for five years on those Californians earning over $250,000 annually.

The governor’s pitch: it’s temporary; it’s shared pain. However, voters weren’t all that enthused.

The second option, courtesy of CFT (the lesser of California’s two big teachers’ unions): permanently raise taxes on California’s millionaire earners.

CFT’s pitch: soak the 1% -- voters liking the sound of that, more so than Brown’s initiative.

The third tax option, courtesy of Pasadena attorney Molly Munger (her billionaire father is Warren Buffett’s partner at Berkshire Hathaway; her half-brother quarterbacked California’s redistricting reform movement): raise everyone’s income tax by 1% (assuming you make more than $7,316 a year), with the entire $10 billion in annual revenue dedicated exclusively to K-12 and early childhood education programs.

Munger’s pitch: with California now $2,580 below the national average in per-student spending, it’s time to give Golden State schools a serious cash infusion.

The problem is, Munger’s initiative is box-office poison – only 45% support in last month’s Field Poll (as a rule of thumb, an initiative that starts at 60% or better is destined to fail). Moreover, the combined weight of all three measures, coming at recession-weary voters all at once, threatened to doom to defeat this November.

Thus Brown’s move to merge his initiative with the teachers’ union (details here) – and hope that Munger has a change of heart, even though she kicked in another $1.5 million to her campaign the deal after the governor announced his deal.

All of which tells of three things about California’s current state of affairs.

  1. Can Jerry Close? If you want to watch a movie to better understand the inner workings of a California governor, start with Glengarry Glen Ross – specifically, the part having to with “always be closing”. Last year, Jerry Brown tried to cut a tax deal with legislative Republicans. They didn’t buy it – in part, because of rigid ideology; in part, because he couldn’t close. This year, it’s safe to assume he tried (however he could) to get Molly Munger to abandon her initiative. Though the governor did reach a settlement with the teachers, Munger was another matter. Those dealings were behind closed doors. This fall, assuming his new measure qualifies (courtesy of some expensive signature-gathering), Brown has to close in a new venue – the court of public opinion – and the toughest jury of all: the persnickety California voter.
  2. The Power of Checkbook Democracy. Last year, billionaire hedge fund manager Tom Steyer floated the idea of raising taxes on California businesses, in part to fund clean-energy. This year, it’s Munger and her obsession with classroom. What they and a longer list of Californians have in common: (a) a desire to do good; (b) the personal resources to make good on that desire; (3) the threat of making a further mess of California’s already jumbled finances by reallocating money in a way that sounds humane but isn’t fiscally sound. Should Munger not only go through with her initiative but get it passed, let’s see if she also sparks talk of reforming California’s initiative process so as to build a firewall between naïve voters and mischief-making millionaires.
  3. Everyone Talks About the Weather Reliable Revenue, No One Does Anything About It. Getting back to the Brown-CFT measure: if it passes, does it solve the long-term problems with California’s financial structure? Not even close. It’s a Band-Aid, plain and simple. I defer to my Hoover colleagues, Michael Boskin and John Cogan, and what they describe as “California’s Greek Tragedy” – an underperforming economy; a spending bill that’s come due. They know of what they speak: the two economists were members of the state’s Commission on the 21st Century Economy, which back in September 2009 offered this blueprint for revenue stability and long-term economic growth and competitiveness.

That plan was considered too bold for California and never moved forward.

Here’s a thought: why not put it on the ballot, rather than a pair of flawed tax increases?

(photo credit: tornatore)