Last updated: November 9, 2012 10:09 pm

California leads the way on raising taxes

In a state known for its occasional tremors Californians this week delivered an earthquake of the political variety, one that could eventually rumble across the rest of the US, challenging accepted orthodoxy about how to address soaring deficits and protect public services.

As Barack Obama and the Republican-controlled House of Representatives prepare for January’s fiscal cliff, when spending cuts and expired tax breaks threaten to pull the US economy back into recession, Californians have taken matters into their own hands and voted for higher taxes on the wealthy.

California this week passed Proposition 30, a sales tax increase and a staggered tax rise on individuals and families earning more than $250,000, $500,000 and $1m a year. The move will raise $6bn, balance the state’s budget and plug a funding gap in its ailing education system.

Prop 30 is a big victory for Jerry Brown, California’s governor, who staked his tenure on its success after implementing deep cuts to pensions, public sector pay and services for the elderly and the disabled. “There are probably 30,000 fewer teachers in the state now,” he says, in an interview with the Financial Times. “That reality seeps into the public consciousness of a majority of Californians.”

Mr Brown served two terms as governor of California from 1975. During the 1970s, the richest 1 per cent in the state earned 10 per cent of personal income – then about $135bn. Their share has since increased to 22 per cent, while personal income has soared to $1.8tn. “The middle class has seen their share stagnate,” says Mr Brown. “There’s a perception that the people at the top have dodged the bullet.”

The vote for higher taxes in America’s most populous state sends a clear message to other hard-up states considering cuts to services to save money. “If this can happen in California it can happen elsewhere,” says Dean Vogel, president of the California Teachers Association, which mobilised its 320,000 members to campaign for Prop 30. “If you are sick and tired of the ‘no new taxes’ rhetoric there is a way around it: go to the voters. Politics is personal and the best strategy is to get in front of people and talk to them.”

California’s public education system used to be a source of pride. In the 1960s its schools were in the top five of US states for per-pupil funding but over the years it has fallen behind. It is now 47th of the 50 US states in funding per student.

This has had a direct impact on the experience of children and teachers in the classroom.

When Brannin Dorsey began teaching kindergarten and elementary students 12 years ago there were 20 children for every teacher in a class: her classes now have 30 to 35 students in them. “What I see as a teacher is kids being lost and slipping through the cracks,” says Ms Dorsey, who is president of the Teachers’ Association at the Fremont Unified School District in the San Francisco Bay Area.

Prop 30 was well backed by minority groups – 23 per cent of the voters at the polls in the state on Tuesday were Latino – and young people: almost 70 per cent of voters aged 18-24 voted for it, according to exit polls. “This is a vote that helps the progressive agenda,” says Mr Vogel.

But there is also broad consensus that Prop 30 succeeded because there was a very explicit connection between the new money and where it would be spent.

“Californians have generally been very supportive of these types of measures at the local level,” says Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. “When they know the money will be spent on their own children’s school, police officers and services for their own community, they are much more likely to be supportive than when the money disappears into the state capital.”

Although Mr Brown hailed the success of Prop 30 as a “lesson for Washington”, he is not getting carried away, says Mr Schnur. “He seems to understand that voters have not written him a blank cheque and that his greatest challenge will be to rein in the enthusiasm of his allies.”

For Mr Brown, a former Jesuit seminarian who once worked with Mother Teresa, Prop 30 restores balance to a state shocked by spending cuts. Prop 30 avoids the need for more cuts and will maintain current levels of education spending but he is not planning a spending splurge, he says.

Instead, he says voters have to realise that services they take for granted have to be paid for. “This is not a question of the progressive agenda. There’s an illusion that you can have a house, a car, a government that’s a superpower – and you can do it on the cheap. Well, you can’t . . . We have to pay for stuff.”

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