The $20.5 Billion Rich-People’s Tax-Cut Windfall

Posted on 31 December 2010

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By Peter Schrag
According the best numbers available, the Obama-GOP tax deal that Congress approved earlier this month will save the wealthiest 148,000 Californians – those in the top one percent in income, who make an average of $1,775,000 a year – an average of $95,000 each.

The numbers come from new data compiled by the liberal Washington-based Citizens for Tax Justice and the 2008 tax statistics of the California Franchise Tax Board, the most recent available. Combined, they show that California’s richest taxpayers will be saving about $14 billion annually.

The next wealthiest 4 percent, with an average income of $310,000, will save another $6.5 billion. All told, about 740,000 California taxpayers fall into those two rarefied regions.

Together, that amounts to some 75 percent of California’s projected budget deficit for this year and next.  As Sacramento scrabbles to get out of its budget deficits, those are numbers worth considering.

That’s not so suggest that the state should try to capture every dollar of that windfall, which was extracted by a congressional minority from a weak-kneed White House at the expense of an already overstressed federal budget.

But should yet another political minority, this one in the California legislature, now exercise a similar veto at the expense of the state’s financially devastated  schools, universities, health care and public safety? Even half from the richest among us-- $10 billion – would make a big difference. 

In every recession there are loud claims that California’s taxes are killing business and driving jobs out of state. We had one just the other from the California Republican Party. No doubt that even an attempt by the legislature and governor to go after a fraction of the Obama-GOP windfall will lead to yet another set of warnings from groups like the Business Roundtable and the Howard Jarvis Taxpayers Association about an impending stampede to Arizona, Texas and Nevada.

But the more likely damper on economic development and the creation of new jobs would be still further declines in state support for education, higher and lower, still further erosion in police and fire protection, still more under-maintained roads and bridges, already rated among the worst in the country, still greater deterioration in the state’s parks and recreational facilities. .

It was those resources, when they ere generously supported  – plus the climate, plus the state’s generally progressive policies -- that brought the research, the high tech innovation, the entrepreneurs in the decades after World War II.
In the past decade, California slipped in the rankings of economic progressivity from second to seventh among U.S. states on the New Economy Index of the Kauffman Foundation and the Information Technology and Innovation Foundation. But it still ranks fourth in initial public offerings, third in patents and second in venture capital. Those rankings are all based on the total number or volume per capita.

What’s certain is that we’re not being beaten out by low tax states. The leaders on the 2010 rankings are Massachusetts, Washington, Maryland, New Jersey and Connecticut. Mississippi brings up the rear, as it has ever since the rankings were first compiled, followed by West Virginia, Arkansas, Alabama and Wyoming. It’s what almost anyone would have guessed. Texas is 18th on the list, Arizona is 20th, Nevada is 30th.

So now the first, obvious, question is, do we want to compete with the low tax, cheap labor states? Whether by intent or sheer ignorance, that’s clearly where we’ve been headed in the last decade or so. If there have been any big winners in those years, it’s been those in the highest four or five percent of the nation’s income groups.

And the next question is: Have we accepted the inevitability of a process that will keep making those at the top ever richer?  The Bush tax cuts of a decade ago didn’t just turn the surpluses of the Clinton years into a growing federal deficit; they also enlarged the gap between the rich and the middle class.

The extension of the Bush tax cuts – theoretically only for a couple of years, but very likely for much longer -- will make it even more difficult for the federal government to help the states, many of which are suffering  fiscal problems as great as California’s, and in a few cases greater.

So should California meekly accept all that as somehow fated – or as an inevitable consequence of a weak economy – or as fitting punishment for wasteful bureaucrats?

There is no way that California can dig its way out of its deficit,  and the predicted deficits yet to come, without more revenue -- not without further truncating the school year and cutting yet more programs and courses, not without further cuts in university classes and higher tuition, not without still further damaging California’s economy and quality of life .

All that so that the richest among us can keep their big tax-cut windfall? All that in our mindless worship of the bitch-goddess “no new taxes”?


Peter Schrag, whose exclusive weekly column appears every Monday in the California Progress Report, is the former editorial page editor and columnist of the Sacramento Bee. He is the author of Paradise Lost: California’s Experience, America’s Future and California: America’s High Stakes Experiment. His new book, Not Fit for Our Society: Nativism, Eugenics, Immigration is now on sale.

It was those resources, when they were generously supported – plus the climate, plus the state’s generally progressive policies -- that brought the research, the high tech innovation, the entrepreneurs in the decades after World War II .

Probably it was the climate. So raise taxes. There are plenty of people with money who enjoy California's climate.

I agree with your analysis. The super tax cuts for the rich given in the recent Obama-Republican compromise should be taxed by the state to reduce the budget crisis.
We can not cut our way out of this crisis. Just look at Ireland, Greece, and Spain. It won't work. It is an major error for the media to repeat the mantra that the only way to respond to the economic crisis is bit budget cuts.
Such assumptions are destructive and they are wrong.

Instead of trying to "soak" the rich, the state must cut back on spending. There is much "fat" in the budget. When Arnold was elected he commissioned a study: "CPR" (CA Performance Review). It showed that about $50 billion could be saved by eliminating useless boards and commissions (e.g county boards of education--they spend over $4 billion annually); waste and fraud. Unfortunately Arnold could not get the legislature to go along.Maybe Jerry will be more successful.

It is not about 'soaking' the rich; it is about the rich and the biggest corporations paying a fair share of the tax burden. I agree with the report. Arnold also mischaracterized 'waste'--in whose eyes? The situation of the poor and elderly is a disgrace. You don't get something for nothing--unfortunately. We all like the benefits and hate the taxes. But you can't have both--doesn't work that way.