By Jeremy Pilaar
Earlier this month, officials revealed the devastating toll COVID-19 has taken on the economy: California faces a $54 billion deficit just this year.
State leaders greeted the news with talking points recycled from past recessions. They reminded the public that tough times lie ahead and that “difficult choices” will need to be made to balance the budget.
As always, this means cuts to public services already strained by decades of disinvestment, most of which will impact the poor and the middle class. Governor Newsom’s proposed budget relies on about $22 billion in cuts to education, health care, environmental programs, and social services. More than half of these cuts will take effect if the federal government does not aid states in the coming weeks, which looks increasingly likely.
Absent from the proposal is any serious attempt to raise revenue to counter the shortfall. The governor did suggest levying a tax on vaping products and closing a handful of business tax loopholes. Altogether, however, increased revenue makes up just 8 percent of his plan. And while the legislature has criticized the proposed cuts, it too has failed to put forward meaningful tax reform.
This is an abdication of leadership. At a time when unemployment has reached 16 percent, millions are going hungry, and millions more have no safety net, gutting the health, education, and social programs that hold the key to broad-based prosperity goes against everything Democrats should stand for. The scale of the crisis means that some cuts are unavoidable. However, this is also a chance to redress record inequality by taxing the elites and corporations that have accumulated most of the economic gains over the past four decades.
Since the 1970s, poor and middle-class Californians suffering slowed mobility and stagnant wages have been forced to shoulder the brunt of public service cuts during recessions. It is time that lawmakers go where the money is and make the rich pay their fair share.
Policymakers have plenty of options. This week, advocates qualified a measure for the November ballot that will take on one of the white whales of California politics: Proposition 13’s unfair and regressive tax break for commercial and industrial property owners, which since 1978 has allowed corporations to avoid being taxed on the market value of their holdings. Proposition 13 has long sapped budgets for schools and other services. The state’s fiscal analyst estimates that reforming it would bring in $7 billion to $11 billion in added revenue per year. Governor Newsom and legislative leaders should throw their full support behind the initiative.
Given that California is home to around 150 billionaires, whose combined assets total over $600 billion, the state should also impose a tax on their wealth. Those who made their fortunes in Silicon Valley owe a debt to the culture of innovation fostered by state investments in public colleges, infrastructure, and workforce development. Taxing these individuals’ wealth at even a low rate could produce billions of dollars in new annual revenue.
Furthermore, California could join states like Alaska and tax oil extraction. Such a levy could generate over $1 billion a year and smooth the transition away from fossil fuels.
Unlike new income, payroll, or sales taxes—which would hit poor and middle-class households the hardest, dampening demand just as the state tries to restart its economic engine—the foregoing policies would have few distorting effects. For years, billionaires and corporations have been sitting on more wealth than they can efficiently allocate. That money would be better spent giving millions of families the purchasing power to get the economy going again, and investing in the health, education, and other social infrastructure needed to promote inclusive growth long-term.
The above reforms would have the added benefit of stabilizing California’s boom-and-bust revenue cycles, which are driven by an over-reliance on capital gains taxation. This would allow the state to more effectively weather recessions. As I and others have written elsewhere, there are also many additional changes the state could undertake once the economy recovers, such as eliminating the need for a two-thirds majority in the legislature to raise taxes.
Past leaders understood that periods of crisis and social renewal demand a bold fiscal agenda. To finance California’s Master Plan for higher education and dramatic infrastructure upgrades in the 1950s and 1960s, Governor Pat Brown spearheaded income tax increases, levies on bank and corporate profits, and taxes on natural resource extraction. Fifty years later, his son Jerry helped the state overcome the worst economic downturn since the Great Depression by championing a millionaire’s tax. These reforms did not cause the sky to fall. To the contrary: the first turned California into a global powerhouse and the latter led to unprecedented budget surpluses.
Today’s leaders need to recapture that spirit. Cutting essential services for low-income people is not a “difficult choice” but a cowardly one. The hard but necessary act is finding the courage to pursue fiscal justice.
Jeremy Pilaar is an attorney and the author of “Starving the Statehouse: The Hidden Tax Policies Behind States’ Long-Run Fiscal Crises.” He was previously a fellow at Yale Law School and a member of then-Lt. Governor Newsom’s Commission for the Future of Higher Education.