Rich Not to Blame for California’s Volatile Budget

[Gawkr] custom1243454255022barclays.jpg

My fellow Californians,

Get ready to hear lots and lots about volatility. That's the word used to describe tax revenues in this state. Such revenues are volatile -- they go up and down a lot, making wild swings. One big reason for that is the state has progressive tax rates. Another is that the richest Californians see big swings in their income. The result: big swings in revenues.

This is the argument you'll hear from centrist and conservative politicians who are skeptical about increases in tax rates. And it's an argument you'll hear a lot because two leading initiatives -- Gov. Brown's and Molly Munger's -- would raise tax rates temporarily, with people at the top of the scale paying more.

And on the left, you'll hear a lot of people saying that concerns about volatility are overblown. That's because liberals think the rich should pay more.

It's a fine argument -- but it misses another, more important point about volatility. California's revenues are volatile not just because of tax rates or the rich.

They are volatile because our tax system -- like the rest of our system -- is far too centralized.

As UC Berkeley's Alan Auerbach has pointed out, California over the past 30 years has limited the ability of local elected officials and communities to raise their own taxes. In particular, they've put limits on property taxes. And property and other local taxes are usually the most steady kinds of taxes.

But Prop 13 and other measures have limited these less volatile taxes--and centralized taxing authority at the state level. And state-level taxes are the most volatile -- especially income.

So when someone complains about volatility and suggests lowering tax rates on the rich, that shouldn't be the end of the conversation. it should be the beginning. If California is serious about limiting revenue volatility, it needs to restore power to local officials and communities to raise their own taxes -- which tend to be the most stable taxes.

In other words, a system that relied more on local communities to tax themselves and fund their own programs would be less volatile. It also would be other things -- more democratic and more accountable to citizens.

Send us your thoughts via Twitter @PropZero or add your comment to our Facebook page.

Contact Us