Sunday, January 07, 2007

Dan Walters: A few big fish rule tax pool

Dan Walters, one of the few honest people left at the Sacramento Bee (Ess), tells the truth about who is paying the taxes in California:

When California's personal income tax revenues took a sudden jump last year, those who chart the state's fiscal affairs wondered why -- and it turned out to be mostly due to a payment by one very high-income taxpayer.

State tax officials, citing tax confidentiality laws, are very reluctant to provide any information about the person who sent in about $200 million in unpaid taxes, even the taxpayer's profession or business. It could be a Silicon Valley tycoon, a Hollywood entertainer, an athlete -- or someone else entirely.

The payment was in response to a state amnesty program aimed at settling outstanding tax disputes, but its sheer immensity implies that the income involved must have been about $2 billion. It indicates that amnesty has been a success, but more than anything, it underscores a tax system that makes it increasingly difficult for the state to balance its books because of its utter dependence on a relative handful of high-income taxpayers.

The Left claims that it wants a "progressive" tax system. Well, for income taxes, California has that in spades.

State and local governments, including schools, rely on three major taxes to finance their operations: property taxes, sales taxes and personal income taxes. But the three-legged stool of public finance has become unstable.

Property taxes are limited by Proposition 13, which voters passed in 1978, while taxable retail sales have flattened out due to demographic changes -- especially the aging of the state's economically dominant white population.

Over the last quarter-century, and especially in the last decade, personal income taxes have become, by far, the most important revenue source, and because California has a steeply progressive income tax system, the bulk of those revenues come from a relative handful of high-income taxpayers.

Roughly half of personal income taxes are collected from those reporting incomes of $200,000 a year or more, while they file just 3 percent of state tax returns. The roughly 3,000 (out of 14 million) California tax returns with incomes over $5 million a year pay a whopping 10 percent of all personal income taxes.

So the next time you hear one of the Caliphony Commiecrats tell you that s/he will only raise taxes on "the super rich", don't you believe it. There aren't enough of them to go around, and they can always pack up and leave, leaving you with the bills.

Remember the fable about the goose who laid the golden egg? If California politicians and the voters who support them think they can just keep on taxing the very high income taxpayer geese and not kill them off (or drive them out of state), they are sadly deluded.

From a populist standpoint, that's all to the good, but there's a downside that should bother everyone: Wealthy taxpayers tend to receive much of their income from capital gains, business profits and other non-salary sources.

Simply put, California's fiscal health -- its ability to pay for schools, colleges, medical care and other programs -- is very dependent on how well a few people do with their personal investments, and that's bothersome for several reasons.

First, the wealthy are mobile. Many could simply relocate their residences, at least for tax purposes, to Nevada or some other income tax-free venue. Second, they have at least some flexibility in the timing and other aspects of their income streams. Finally, their incomes are in large measure dependent on how well the stock market is doing.

It is, in practical effect, a triple whammy. Increasingly, revenues depend on a narrow base of taxpayers whose incomes are increasingly volatile while at the same time, the spending side of the public ledger is increasingly rigid, thanks to decrees by voters and politicians, and unable to adjust to the system's inevitable peaks and valleys.

So even if we keep taxes reasonable and don't choose to punish the high income in California, the volatile nature of their earnings means we should be VERY careful before undertaking any grandiose projects, even ones that will improve the state's infrastructure, although because of their long-term economic benefits, those are certainly must justifiable than any entitlements.

Thanks for going on a bond orgy, Ah-nold...

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