Global Insight

May 29, 2012 5:24 pm

Competing tax plans try California voters

A proposed increase aims to prop up state school system
Jerry Brown©AFP

They do things differently in California. While other governments agonise over using taxes to balance the books, in the Golden State it’s the people who decide.

California’s new budget takes an axe to spending on healthcare and services for the unemployed, vulnerable and elderly. But Jerry Brown, the state’s governor, has also staked his term on convincing the state’s electorate to back an increased sales tax and a staggered, seven-year tax increase on those earning more than $250,000 a year and families earning $1m to plug a projected $15.7bn deficit.

Mr Brown, a three-time Democratic presidential candidate and a former paramour of Linda Rondstadt, the singer, will need all of the charm he has amassed over a 35-year political career to persuade voters to support his plan. Yet a competing tax proposal may stymie his efforts at the polls.

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Enter Molly Munger, a formidable civil rights lawyer and fierce advocate for public education. Ms Munger is pushing for a tax increase that would be weighted on the wealthy and hit most other taxpayers, barring those earning less than $50,000 a year.

Her proposal, which has the backing of the California State Parent Teacher Association, has gathered enough signatures to qualify for November’s ballot. Shortage of campaign funds is clearly not a problem. Ms Munger is the daughter of Berkshire Hathaway billionaire Charlie Munger and is financing the campaign from her own wealth.

But can she succeed? Such things are possible in California, where direct democracy reigns supreme. Anyone can propose a law change and put it to a public vote – provided they can show the measure has popular support by producing the 400,000 or so signatures that are equivalent to 8 per cent of the votes cast in the most recent gubernatorial election.

Californian direct democracy is in part to blame for the state’s bloated constitution – only India and, inexplicably, the state of Alabama have longer ones – while the constant addition of new voter-backed spending obligations makes economic management almost impossible. But Ms Munger’s colleagues say their proposal is different because the new funds raised – they estimate the tax increase will raise $10bn over a decade – will go to one place: the state’s ailing school system.

“Schools in California have been declining for the last 30 years. The state is now 47th out of 50 US states in per-pupil funding for education,” says Nathan Ballard, a strategist with Ms Munger’s Our Children, Our Future group. Revenues for education are dwindling, he adds, while 40,000 teachers and other staff have been laid off over the past four years. “There’s very little that can be done with existing tax revenues.”

Unlike Mr Brown’s tax plan, the Munger proposal does not address the state’s vast deficit. But it is conceivable both of the tax proposals may end up on the California ballot, a scenario Mr Brown and his supporters will want to avoid. Persuading voters to accept one tax rise will be hard enough; two proposals are likely to split the votes and both may fail.

“Direct democracy can be problematic,” says Ross DeVol, chief research officer at the non-partisan Milken Institute, a Los Angeles-based think-tank. “The big issue is that voters in California are still prone to tax the guy behind the tree – especially if he’s a millionaire.”

California has the highest marginal tax rates in the US – a fact not lost on Republicans in and out of the state, who have assailed Mr Brown for not tackling the state’s vast public sector pension liabilities.

But Mr DeVol warns an additional squeeze on the rich could send California’s wealthy fleeing elsewhere. “I fear that high net-worth individuals might move their primary residences to other locations, whether it’s Lake Tahoe, Phoenix or Nevada.”

Summers in the desert heat of Nevada might be a little uncomfortable for dotcom billionaires or well-heeled Hollywood executives more used to the cool breeze of the Pacific. Yet it is clear something has to give in California’s tax fight and if Ms Munger stays the course Mr Brown will find his campaign under pressure from liberals on the left and Republican foes on the right.

It is not likely to be particularly comfortable for the California governor, a committed Catholic who once worked with Mother Teresa in India. Divine intervention may be his best hope.

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