50% of California’s Income Tax Revenue Comes From 1% of Residents

California-budget-crisis-bear-flagIt’s politically popular to rail on the One Percent and demand top earners pay their “fair share.” But they actually already pay a large share, fair or not, which analysts predict could be disastrous to California in the event of an economic downturn.

Actually, nearly half of the state’s personal income tax revenue comes from the top 1 percent of earners — 150,000 individual tax returns. And personal income tax revenue is 65 percent of total revenue, which means the One Percent provides 33 percent of the state’s total revenue.

Besides volatility of the revenue stream — the One Percent’s personal income comes largely from capital gains, which are generally tied to the stock market — what happens if a Mark Zuckerberg or a Larry Ellison — #6 and #7 on Forbes’ list of wealthiest people in the world — leaves the state?

In New Jersey, another top-heavy state, one billionaire relocated to Florida, leaving as much a $140 million hole in the budget.

Few in California dispute the over-reliance on top earners is an issue. It’s in Gov. Jerry Brown’s budget summary and even the credit rating agencies Moody’s and Standard & Poor’s have warned against it. However, there is conflicting opinions of what needs to be done.

There could be tax reform, but is that a flattening of the tax code? Or a shift to sales tax on services? Higher property taxes? Would the solution be revenue neutral, meaning tax increases in one area are offset with decreases elsewhere? And what are the new consequences that might come with new tax dependencies?

What requires a frank discussion has so far drawn only whispers. Many on the left feel that while this is a problem, the state is on a good path, with reduced debt, a growing reserve fund, increased education spending and moves to address the state’s unfunded liabilities.

Republicans, on the other hand, lose sleep over the more than $400 billion in debt (including unfunded liabilities), the warnings from credit agencies and outside groups saying the state will falter in an economic downturn and a proposed 12-year extension of a “temporary” tax imposed on the wealthiest of residents that they see as only perpetuating the problem.

“I’m very concerned about where we’re at today,” said Assembly Republican Leader Chad Mayes of Yucca Valley. “You’ve got a very few people paying a vast majority of the revenue collected by the state. That doesn’t put us in a very good spot.”

A downturn is coming likely sooner than later

It’s a question of when, not if, an economic downturn will occur. In Gov. Jerry Brown’s budget introduction released earlier this year, it warned that California is in “its seventh year of expansion, already two years longer than the average recovery.”

“While the timing is uncertain, the next recession is getting closer, and the state must begin to plan for it,” the introduction continued. “If new ongoing commitments are made now, then the severity of cuts will be far greater — even devastating — when the recession begins.”

Tax reform

As a starting point, both sides agree some kind of tax-code overhaul is necessary. However, that’s about where the agreement ends.

Senate Budget Chairman Mark Leno told CalWatchdog the state is “to a certain degree overly dependent on the highest wage earners,” and suggested increasing the vehicle licensing fee (the “car tax”) because it’s more stable, although he conceded the toxicity of the issue makes it difficult. For example, Congressman Ted Lieu, when he was in the state Senate in 2012, pitched the idea of increasing the car tax, but relented only five days later after backlash from hundreds of constituents, including his wife.

Another idea Leno, the San Francisco Democrat, pitched was extending sales tax to services, to reflect a shift in the state’s economy away from manufacturing, which he again agreed was “a difficult conversation to have.” He lauded the efforts of Sen. Robert Hertzberg, D-Van Nuys, who is sponsoring legislation to do just that.

David Wolfe, legislative director for the right-leaning Howard Jarvis Taxpayers Association, suggested a simplified tax code — not quite a flat tax rate, but close. Wolfe said with the proper analysis sales tax on services is an idea “worth considering,” but it would require cuts elsewhere for their support.

“Of course, the overall sales tax rate would need to be lowered in order to make it revenue neutral because the base is being broadened,” Wolfe said.

Additional burdens

There are a few programs that limit the state’s flexibility, even though the individual programs may be beneficial:

  • Prop. 13 capped the rate property taxes could increase annually at two percent.
  • Prop. 98 requires that a large percentage of the state’s general fund be spent on education.
  • Prop. 2, also known as the Rainy Day Fund, sets aside a certain amount of money annually to buffer the budgetary effects of an economic downturn. However, even if fully funded it would only reserve 10 percent of the general fund tax revenues.

“While a full Rainy Day Fund might not eliminate the need for some spending reductions in case of a recession, saving now would allow the state to spend from its Rainy Day Fund later to soften the magnitude and length of any necessary cuts,” according to Brown’s budget explanation.

Prop. 30 extension

It’s likely that voters will consider a 12-year extension to Prop. 30, which is a “temporary” tax on top earners and a quarter-cent sales tax increase.

It was approved during the last downturn primarily to avoid deep cuts in education. It is set to expire in two years, but proponents saw this campaign cycle as more favorable.

The Prop. 30 extension only perpetuates the state’s over-reliance on personal income tax, said Carson Bruno, a research fellow at Stanford University’s Hoover Institution.

“Prop. 30 doubles down on this problem by making the income taxes even more reliant on the highest earners,” Bruno said.

Bruno agreed Prop. 30 expiring would leave a hole in the budget, but said legislators should have been preparing for this, as it was “temporary.”

“If they haven’t been doing that then that’s kind of irresponsible,” Bruno said.

This piece was originally published by CalWatchdog.com

CA GOP strategy already looking past 2016 election

Chad Mayes2Facing a presidential election that’s guaranteed to overshadow them and numbering so few that passing even a simple resolution requires an act of God, Assembly Republicans are hoping to simply hold their 28 seats in 2016 while building the foundation for a resurgence beginning after the November election.

While critics say they lack a definitive agenda, Assembly Republican Leader Chad Mayes, who was elected in 2014 and chosen as leader just 10 months later, has been working behind the scenes to unite his caucus and build relationships on the other side of the aisle to fortify for the future.

There’s little room for error. They can only lose one seat and remain above super minority status — the difference between having the power to block tax increases on their own or not. Their troubles are compounded by the fact that voter turnout in presidential years typically leans Democrat. And presidential campaigns have a way of framing the narrative and stealing attention away from down-ticket races like state Legislature.

It’s not an easy spot for Chad Mayes, the Assembly Republican leader from Yucca Valley.

“We’re at the point now we’re thinking a lot more of that messaging is going to have to take place probably after November, to be able to tell folks what our agenda is and to begin rebuilding the brand,” Mayes told CalWatchdog on Thursday. “2016 is tough.”

It’s not that Mayes and his colleagues won’t be selling their ideas to the public — they’re going to have to if they expect to win elections. Instead, Mayes believes that most voters will chose based on the “strength of the candidates” as opposed to an automatic party preference, meaning they’ll rely on individual campaigns and not the Republican brand.

“Our work outside the building is to continue to advance our principles, to be able to tell the folks that live here in California that our ideas are the ideas that are going to move California forward,” Mayes said. Mayes is confident Republicans will hold their seats, but was iffy about picking up many seats.

Mayes often speaks of the need to address poverty. The son of a preacher, having grown up in a Yucca Valley community of modest means, he points to exorbitant housing costs, gas prices and the fact that 40 percent of Californians live near or below the poverty line as a need for a new direction.

“Obviously, we’re not doing something correctly,” Mayes said of the overall direction of state policies.

While Mayes has generally spoken in broad strokes about poverty, a few members of his caucus (including him) have introduced specific proposals. One provides additional funding for homeless youth centers, one expands the child tax credit and another funds grants to help underprivileged children do “normal” activities like buy prom dresses, attend summer camp and receive test preparation. And last year, the caucus introduced an entire education package.

But is it enough?

The bunkered approach to 2016 and the behind-the-scenes maneuvering for 2017 leaves the strategy open to criticism.

“If the Assembly Republicans have a distinct agenda, they have been quiet about it,” said John J. Pitney, Jr., a professor of American politics at Claremont McKenna College.

Pitney noted the difficulties Republicans face in the Legislature dominated by Democrats, being handicapped by less resources than the majority party. Even if they labored over an exhaustive agenda, it’s possible no one would notice, said Pitney — a reflection of his own struggles in the mid 1980s as a House Republican staffer.

Pitney likened Mayes to Jack Kemp, the former New York Republican congressman and vice presidential candidate, known for inclusivity and “bleeding-heart conservatism.”

“But as Kemp learned, it is very hard to make political headway with a conservative war on poverty,” Pitney added. “Many rank-and-file Republicans just are not interested.”

On the other side of the rotunda

Life is no less difficult for Republicans in the Senate, who have even less of a margin of error in 2016, with no room to lose any seats. The Senate unveiled a package of bills earlier this week aimed at making life in California more affordable, with Leader Jean Fuller of Bakersfield making a similar pitch to Mayes.

On Tuesday, Fuller cited damning stats: CNBC ranked California the 5th most expensive state to live in the country in 2015, average monthly rent is 50 percent higher here than in the rest of the country40 percent of Californians are living at or near the poverty line and Californians have one of the highest tax burdens in the country.

Legislating

According to Bill Whalen, a research fellow at the Hoover Institution at Stanford University, Republicans in the Legislature face three legislative options. The first is to have an idea embraced by Democrats, which carries the bill to the governor’s desk. The other two are that the bill is dead on arrival or gets a hearing and then fizzles out.

“There’s three outcomes, two of which are negative,” said Whalen, who served as chief speechwriter and director of public affairs for former Republican Gov. Pete Wilson.

Whalen pointed to a constitutional amendment in 2010 that reduced the two-thirds majority approval of a budget to just simple majority, stripping Republicans of an annual leverage point.

“For a few weeks anyway, Republicans had a lot of relevance in the process,” Whalen said.

Whalen suggested Republicans focus on greater ethics rules as a way to engage in a value debate with Democrats, adding that Republicans should be holding press conferences pressuring Roger Hernández to take a leave of absence at least while under a court order to stay away from the West Covina Democrat’s wife amid domestic violence allegations, similar to the approach used by former Republican Congressman Newt Gingrich in the early 1090s.

Gingrich used both the policy-driven Contract with America and a focus on ethics issues — like Jim Wright’s book deal, the House banking scandal and the Barney Frank/male prostitute scandal — to make the argument that Democrats had become corrupted during decades of power and engineered the first Republican majority in 40 years. However, Whalen added, the numbers for Republicans in the Legislature are much further from a majority than what Gingrich had.

“They made it a value debate against Republicans and Democrats,” Whalen said. “And I think Republicans need to introduce that conversation into Sacramento.”

Whalen also suggested luring undecided voters with a greater focus on the University of California system — where one chancellor is mired in salary and spending troubles while a recent audit showed preferential treatment to out-of state admissions in an effort to bring in higher tuitions — including audits, hearings where chancellors explain their budgets and “completely turn the UC upside down.”

Mayes told CalWatchdog that individual Assembly Republicans had already adopted the UC issue, and added that it was Democrats’ responsibility to hold their members, like Hernández accountable.

Politics

In general, the governor and the legislative caucuses are the main messaging arm of the state parties, making the Legislature that much more important when not occupying the Governor’s Mansion. But California Republican Party and legislative leaders shy away from a top down approach.

“Messaging in campaigns is important, but that messaging has to be delivered by the candidate or the elected officials of that party,” said Jim Brulte, chairman of the California Republican Party. “And that’s because voters vote for candidates not political parties. Political parties can be helpful with technical and financial support.”

Modern campaigns, particularly in a large, diverse state like California, need to be tailored to the district — voters in Torrance have different needs from voters in south Orange County.

“One-size-fits-all messaging may have worked 30 or 40 years ago, but with the technology advances in the ability to micro target, this approach is stale and outdated,” Brulte said.

Brulte added that the Contract with America was pushed from members of Congress and not the Republican National Committee. Brulte said timing was crucial, noting it was unveiled merely six weeks before the midterm elections, when voters were paying the most attention to Congress.

“Other than specific messaging by individuals in the district they represent, a global messaging strategy during a hotly contested presidential election between the five remaining candidates is bound to get lost,” Brulte said.

Legislative Report Card: Who Passes; Who Fails On Taxes?

Photo courtesy Franco Folini, flickr

Photo courtesy Franco Folini, flickr

Like inattentive students who dread having their parents see their unsatisfactory grades, most members of the California Legislature would just as soon not have their constituents see the Howard Jarvis Taxpayers Association Legislative Report Card documenting their votes on issues important to taxpayers.

Of the 120 members of the Legislature, 73 received a grade of “F” while only 36 earned an “A” grade.

The Report Card is a non-partisan tool for citizen taxpayers to hold legislators accountable based on actual legislative votes. It was Will Rogers who said, “If you ever injected truth into politics you have no politics.” While a satirist is allowed to paint with a broad brush, there is still more than a grain of truth here. Many in the political class dishonestly attempt to present themselves as standing for the interests of average folks. They pay lip service to low and moderate income Californians, while voting to make getting to work more expensive by increasing the already tops in the nation gasoline tax. They claim to be supporters of homeownership, but support measures that would increase the tax burden on property owners.

In the legislative session that ended last month, Governor Brown signed 808 bills. These bills create thousands of pages of new laws, spanning across dozens of code sections. The HJTA Legislative Report Card pulls the curtain back and identifies for taxpayers legislation that harms their interests, bills that otherwise do not receive much public attention. A prime example is Senate Bill 705 (Hill) a bill that was completely amended in the last month of session that allows for San Mateo and Monterey counties to pursue increased sales taxes beyond those authorized in current law.

The Report Card also rewards lawmakers who supported legislation that helps taxpayers like Assembly Bill 809 (Obernolte), an HJTA sponsored proposal that places additional information regarding tax increases in the ballot for all voters to see.

Votes on sixteen bills were used to score legislators. These reflect a range of policy issues including new tax and regulatory burdens, and attacks on the initiative process that would make it more difficult for taxpayers to have their voices heard.

With over a quarter of the members of the Legislature new to Sacramento politics, the HJTA Report Card provides an early indication as to who will be faithful to the interests of taxpayers. While grades have improved slightly over last year, it is clear that this new legislative class has started off by falling well short of taxpayer expectations.

Eight lawmakers deserve credit for a perfect score. Members of the Assembly receiving 100 percent are Frank Bigelow, Brian Jones, Beth Gaines, Tom Lackey, Chad Mayes, Jay Obernolte, and Jim Patterson. Senator Mike Morrell also received a perfect score.

To view the 2015 Legislative Report Card, and find which representatives are proud of their grades and which ones hope no one notices, please go to www.hjta.org where it can be found under “Hot Topics.” And remember, a functioning democracy depends on an informed electorate.

Jon Coupal is president of the Howard Jarvis  Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Chad Mayes Selected as Next Assembly Republican Leader

Come January, Assembly Republicans will have a new leader.

On Tuesday, the 28 Republican members of the lower house selected Assemblyman Chad Mayes of Yucca Valley as their next leader. The caucus did not release the specific tally for the caucus vote nor indicate any other candidates for the leadership post.

“I am fortunate to inherit a Caucus that is united in its commitment to fiscal responsibility and meeting the needs of a 21st Century economy,” Mayes said in a press release following the announcement. “For California to thrive, legislative leaders must provide solutions that offer a pathway to prosperity. Too often politicians take actions that limit opportunity in the very communities they claim to serve.”

He added, “I look forward to working with our Caucus to make California a better place to call home.”

Mayes, who was elected to the state Assembly in 2014, will take over for current GOP leader Kristin Olsen when the Legislature reconvenes on January 4, 2016.

Second consecutive GOP leader to reject anti-tax pledge

Mayes said that he intends to carry on Olsen’s philosophy and approach to the post.

Dollar Puzzle 02

“I am humbled by my colleagues’ confidence in my ability to lead the Caucus,” Mayes said. “I plan to build upon Kristin’s vision of bringing the Caucus and its supporting operations into the 21st Century. She has worked tirelessly to position our Caucus and its members for maximum success.”

Since taking over as minority leader, Olsen has embraced a more moderate approach and rejected the anti-tax rhetoric that is considered orthodoxy to traditional conservative Republicans. In 2012, Olsen publicly criticized the Taxpayer Protection Pledge, a promise by elected officials to oppose higher taxes.

“The problem with the no-tax pledge is that entrenched special interests interpret what is or is not a violation of the pledge in order to serve their own agendas – and sometimes their interpretations defy logic,” Olsen wrote in a Sacramento Bee opinion piece before taking over as leader. “To grow the Republican Party, we have to get away from relying solely on ‘No’ messages. We are better than that, and Californians deserve and desire solution-focused leadership that will help bring legislative Democrats over to our side on the need for lower taxes and substantive reforms.”

As a candidate for state Assembly, Mayes similarly rejected the anti-tax pledge. Mayes told the Desert Sun last year that “he’s not the kind of Republican who is out to blow up government … and said he declined to sign the taxpayer protection pledge.”

Mayes brings experience from more than a decade serving at the local government level. He was first elected to the Yucca Valley Town Council in 2002 and was twice re-elected. During his time on the town council, Mayes served as president of the Desert Mountain Division of the League of California Cities.

He also worked as a political staff member at the county-level, serving as chief of staff to San Bernardino County Supervisor Janice Rutherford.

Olsen’s tenure as leader

Olsen earned praise from her colleagues for her tenure as leader.

“Kristin may have been a transitional leader in terms of time, but she has been transformative in her impact on Caucus operations,” said Assembly Republican Caucus Chair Scott Wilk of Santa Clarita. “Her changes set a pathway to Republican relevancy and she worked to lay the foundation for a Republican majority in the near future. Thanks to Kristin, our Caucus is united, focused, and motivated.”

Olsen, who is termed out of the state Assembly next year, welcomed the leadership transition and said she’s proud of her accomplishments, which included a major staff shake-up as part of an effort of “modernizing caucus operations.”

Kristin_Olsen_Picture“My goal as Assembly Republican leader has been to unite our caucus and advance core principles that resonate with Californians and will revitalize our state: good jobs, great schools, and a more transparent, effective, and citizen-driven government,” Olsen said. “I am pleased that we have been able to accomplish this while modernizing our Caucus operations, hiring top-notch staff, and becoming pro-active and solution-focused.”

Mayes will have company learning the ropes as a new Republican leader. Last week, the Senate Republican Caucus announced that Sen. Jean Fuller of Bakersfield had unseated Sen. Bob Huff as Republican Senate leader.

Huff is running for an open seat on the Los Angeles County Board of Supervisors to replace longtime Supervisor Mike Antonovich. Other candidates for that seat include gang prosecutor Elan Carr, Glendale City Councilman Ara Najarian, Los Angeles City Councilman Mitchell Englander and Kathryn Barger, Antonovich’s chief of staff.

Originally published by CalWatchdog.com

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