Murphy: An education autopsy for Steinberg’s tax swap

The tax swap proposed by Senate President Pro Tem Darrell Steinberg may be dead, but it can still help educate legislators in their quest to fix the budget, currently about $20 billion in the red, and restore prosperity in California.

Steinberg advanced a plan to cut the sales tax rate while hiking income tax rates. Proponents claimed the plan would reduce the total tax burden for everyone while providing a more stable flow of revenue. The true result would likely be far different.

He wanted an increase of 1 percentage point in the personal income tax rate of every bracket except the top bracket. Also, the plan would extend the 0.25 percent surcharge scheduled to expire in 2011. The net result is an income tax rate hike for everyone, but a shallower hike for those in the top bracket.

For example, people who currently expect a 4 percent rate in 2011 would instead owe 5.25 percent under Steinberg’s proposal.

Yet, people in the top bracket, who currently expect a rate of 9.3 percent in 2011, would instead pay 9.55 percent under the new plan. To offset the hikes, the Steinberg plan would reduce the state sales tax rate twice during the next two years so that in fiscal year 2011-12, the California sales tax rate would fall to 3 percent.

According to the plan’s sponsors, the state would forfeit about $8.4 billion in sales tax revenue, but proponents argue that this would be offset by a comparable increase in income tax receipts. In fact, they claim that California taxpayers would gain, because they can deduct the higher state income taxes when filing their federal taxes.

As an added bonus, the plan’s sponsors claimed these changes would reduce the volatility in personal income tax receipts by flattening the income tax code. These claims omit important considerations.

More than 12 percent of California workers are unemployed and not earning any income, and the number could go up if the economy falls back into recession. This is one reason the tax swap could lead to a reduction in total revenue. Increasing income taxes to penalize work effort is always a bad idea, especially amid a recession.

Also, it’s easier for many individuals to alter the timing of their income than it is to alter their overall spending on goods and services. For example, if a homebuilder knows that income tax rates are going to rise in 2011, they can try to rearrange projects in order to officially receive payment on as many as possible in 2010. But, it would be impractical for the same homebuilder to rearrange their purchases of clothes, restaurant meals and other items subject to the sales tax.

Analysts often underestimate the impact of these considerations. It’s likely that Steinberg’s proposal would have raised less from new income tax receipts than it loses in sales tax revenue, thereby increasing the deficit. Worse, the Steinberg plan could make total revenue even more volatile.

California’s current income tax code, under which higher-income earners pay higher rates, tends to exacerbate underlying trends in the economy. When times are good, revenue surges because people are both earning more income and are pushed into higher tax brackets. In recession, however, tax revenue crashes more than the economy because people are earning less and being taxed at a lower rate.

Steinberg wanted to mitigate this problem not by lowering the top rates, but by raising the bottom and middle rates. Thus, California’s tax revenue will become more dependent on income tax receipts overall, which are more volatile than sales tax receipts. Even though the variation in income tax receipts itself may be dampened slightly, the variation in total tax receipts — sales plus income — would likely go up.

Steinberg’s plan claimed to solidify California’s tax revenue while raising everyone’s after-tax income, but these projections are likely mistaken. In reality, the plan would likely lead to lower and more-volatile revenue because it violates the principles of pro-growth tax reform.

Legislators should not lament or try to replicate the Steinberg swap. Instead, they should cut spending and taxes in general. That’s the best way to solve the Golden State’s budget crisis.

Robert P. Murphy earned a doctorate in economics from New York University and is a senior fellow in business and economic studies at the California-based Pacific Research Institute. He’s co-author, with Jason Clemens, of “Taxifornia,” available on the institute’s website. Contact him at

Op Edsop-edOpinion

If you find our journalism valuable and relevant, please consider joining our Examiner membership program.
Find out more at

Just Posted

Governor Gavin Newsom speaks at a news conference about a $12 billion package bolstering the state’s response to the homelessness crisis at the Kearney Vista Apartments on May 11, 2021 in San Diego, California. (K.C. Alfred/The San Diego Union-Tribune/TNS)
Newsom promises sweeping change in California’s $267-billion budget

John Myers Los Angeles Times California would embark on the most ambitious… Continue reading

San Francisco Police Chief Bill Scott leaves the scene of an officer-involved shooting at Brannan Street and Jack London Alley in the South Park area on Friday, May 7, 2021. (Kevin N. Hume/S.F. Examiner)
Chief Scott issues rare apology to man shot by SF police

Officer says he ‘did not intend for his firearm to go off’

Despite the pandemic, San Francisco has ended the fiscal year with a budget surplus. (Kevin N. Hume/S.F. Examiner)
Better than expected tax revenues leave city with $157.3M surplus for this year

As the fiscal year nears an end and Mayor London Breed prepares… Continue reading

Passengers board a BART train bound for the San Francisco Airport at Powell Street station. (Kevin N. Hume/S.F. Examiner)
BART bumps up service restoration to August 30, offers fare discounts

Rail agency breaks pandemic ridership records, prepares to welcome more passengers

Ashley and Michelle Monterrosa hold a photo of their brother Sean Monterrosa, who was killed by a Vallejo police officer early Tuesday morning, as they are comforted at a memorial rally at the 24th Street Mission BART plaza on Friday, June 5, 2020. (Kevin N. Hume/S.F. Examiner)
State Department of Justice to investigate Sean Monterrosa shooting by Vallejo police

Attorney General Rob Bonta steps in after Solano County DA declines case

Most Read