As our California readers no doubt know, the contortions that have elected representatives in Sacramento all knotted up right now justifiably invite the “sausage factory” comparisons frequently used to describe state level budget fights. (Wasn’t it Otto von Bismark that said “laws are like sausages, it is better not to see them being made” ?)
Joe Matthews writes in today’s Wall Street Journal that there are some laws being considered in California right now that would , in the very recent past, be considered dead on arrival regardless of party sponsorship. One of those sacred beliefs currently under reconsideration is the progressive nature of the state tax code:
Karen Bass is an unlikely tax cutter. She’s the Democratic speaker of the California State Assembly, a fierce defender of the labor movement, and an advocate for repealing a constitutional provision that requires that tax increases pass the state legislature with a two-thirds majority.
But as California faces a budget crisis that defies efforts to resolve it, there is a woman-bites-dog story developing with Ms. Bass at its center. By the end of the month, a commission she pushed to create is expected to recommend that the state adopt a flat (or at least flatter) personal income tax and cut or repeal corporate and sales taxes.
…now many Democrats, including the speaker, are realizing that what they need is a tax base that will provide steady funding for their programs. In other words, they need a tax base that doesn’t count on a large slice of revenue from taxes on a relatively small number of wealthy residents who can flee the state or who are themselves vulnerable to losing a substantial portion of income in a recession.
New York City Mayor Michael Bloomberg got his head around this problem earlier this year:
“One percent of the households that file in this city pay something like 50 percent of the taxes. In the city, that’s something like 40,000 people. If a handful left, any raise [tax increase] would make it revenue neutral,” the billionaire mayor said on his weekly radio show.
“The question is what’s fair. If 1 percent are paying 50 percent of the taxes, you want to make it even more? Anybody below that 1 percent, no taxes?”
The lesson here is that, at least on the state and local level, tax payers will engage in tax avoidance at the highest marginal rates. State politicians are learning this the hard way; they see the gravy train is leaving the station and may not return. At the federal level politicians know that many taxpayers will never leave the country. Congress also knows that it can print money and borrow until some lender says no, a consequence that they have no plan for but still blithely ignore. Reform, as it always does, is beginning at the state and local level where accountability is higher.
Adam Smith’s invisible hand is witholding that which commands the undivided attention of any politician: tax revenue. Ever in need of the fix that only tax receipts can supply, politicians are now apparently considering remedies that would have been scoffed at during the fat years.
