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It's All One Guy!

posted by Buce

I'm a little shaky on just how the issue of income inequality comes to fall into the brief of this weblog, but the precedent seems to be established, so perhaps readers will be amused by this just in from Dan Walters at the Sacramento Bee (link--and thanks again, Joel, who gets up earlier than I do):

When California's personal income tax revenues took a sudden jump last year, those who chart the state's fiscal affairs wondered why -- and it turned out to be mostly due to a payment by one very high-income taxpayer.

State tax officials, citing tax confidentiality laws, are very reluctant to provide any information about the person who sent in about $200 million in unpaid taxes, even the taxpayer's profession or business. It could be a Silicon Valley tycoon, a Hollywood entertainer, an athlete -- or someone else entirely.

The payment was in response to a state amnesty program aimed at settling outstanding tax disputes, but its sheer immensity implies that the income involved must have been about $2 billion. It indicates that amnesty has been a success, but more than anything, it underscores a tax system that makes it increasingly difficult for the state to balance its books because of its utter dependence on a relative handful of high-income taxpayers.

State and local governments, including schools, rely on three major taxes to finance their operations: property taxes, sales taxes and personal income taxes. But the three-legged stool of public finance has become unstable.

Property taxes are limited by Proposition 13, which voters passed in 1978, while taxable retail sales have flattened out due to demographic changes -- especially the aging of the state's economically dominant white population.

Over the last quarter-century, and especially in the last decade, personal income taxes have become, by far, the most important revenue source, and because California has a steeply progressive income tax system, the bulk of those revenues come from a relative handful of high-income taxpayers.

Roughly half of personal income taxes are collected from those reporting incomes of $200,000 a year or more, while they file just 3 percent of state tax returns. The roughly 3,000 (out of 14 million) California tax returns with incomes over $5 million a year pay a whopping 10 percent of all personal income taxes.

From a populist standpoint, that's all to the good, but there's a downside that should bother everyone: Wealthy taxpayers tend to receive much of their income from capital gains, business profits and other non-salary sources.

Simply put, California's fiscal health -- its ability to pay for schools, colleges, medical care and other programs -- is very dependent on how well a few people do with their personal investments, and that's bothersome for several reasons.

First, the wealthy are mobile. Many could simply relocate their residences, at least for tax purposes, to Nevada or some other income tax-free venue. Second, they have at least some flexibility in the timing and other aspects of their income streams. Finally, their incomes are in large measure dependent on how well the stock market is doing.

It is, in practical effect, a triple whammy. Increasingly, revenues depend on a narrow base of taxpayers whose incomes are increasingly volatile while at the same time, the spending side of the public ledger is increasingly rigid, thanks to decrees by voters and politicians, and unable to adjust to the system's inevitable peaks and valleys.

That's why we developed a state budget deficit in the first place seven years ago and why, fiscal forecasters believe, it will continue as a chronic headache even if the economy continues to expand -- which is not at all certain.

Gov. Arnold Schwarzenegger and lawmakers have voiced all sorts of grandiose schemes they want to pursue this year. Their first priority, however, should be to address the state's dangerous fiscal predicament, whatever that may take. And it will take much more than getting a few rich scofflaws to cough up.



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