California Democrats’ tax foolishness

In Washington, Democrats want to end tax cuts for the rich. In Sacramento, they want to create some.

The preferences of the national Democrats are much better known than those of their California counterparts. With the Bush tax cuts expiring at the end of the year, the Obama administration and Democratic leaders in both houses of Congress want to extend those cuts for all but the wealthiest Americans — those making more than $250,000 a year.

The American people have warmed to the idea. A CNN poll last week showed that the Democrats’ proposal to raise taxes on the rich commands majority support nationally and in every region save the South. In the Western states, it commands 53% support, and we can only infer that support for this policy in California is higher than that, because the rest of the West is generally more conservative.

But in Sacramento, lawmakers haven’t gotten the message. There, Democrats confront a different problem than Washington’s. They have to come up with a more-or-less balanced budget, even as their state ranks third in percentage of workers unemployed. And yet they still seem determined to cut the rich a break.

Gov. Arnold Schwarzenegger, to be sure, has proposed even worse solutions to the budget mess, including major cuts to home healthcare for the aged, blind and disabled and to child care for low-income families. He also opposes any tax hikes, including the establishment of an oil severance tax — a tax that all the other oil-rich states, including Texas and Louisiana, routinely levy.

Democrats have staunchly opposed Schwarzenegger’s cuts. Balancing the budget, Senate President Pro Tem Darrell Steinberg (D-Sacramento) recently declared, “will not be done with the kind of cuts he is calling for. Period.”

All well and good. But Steinberg’s own proposal for raising revenues, which has also been backed by Assembly Speaker John Perez (D-Los Angeles), is more than a little bewildering itself. What the Democrats are putting forth is a tax swap that certainly sounds progressive. In return for some increases to the state income tax and the vehicle license fee, the state’s sales tax would be significantly reduced, and the state’s budget gap would be closed to the tune of roughly $2 billion a year. The swap would clearly reduce the tax burden on the poorest 20% of Californians, which is a genuine achievement. Higher up the income ladder, though, the results are distinctly less stellar.

According to the California Budget Project, a liberal, Sacramento-based think tank, the proposal would raise taxes on the middle fifth and the fourth fifth — in normal English, the middle class — of Californians. For the wealthiest Californians, however, the richest 1%, the proposal would scarcely raise taxes at all; indeed, it might actually reduce them.

Why the solicitude for California’s wealthiest? From 1993 through 2008, according to the Budget Project’s analysis of figures from the state’s Franchise Tax Board, the incomes of the middle fifth of Californians declined by 3.4%, while those of the fourth fifth rose by an infinitesimal 0.1%. The incomes of the wealthiest 1%, however, rose by a tidy 77.8%. The case for more progressive taxation has never been stronger — as Democrats in Congress, if not in the state Legislature, clearly recognize.

Why the difference? Democrats in Washington face different pressures than those in Sacramento. In Washington, the Democrats are staring down the barrel of electoral debacle, and exposing the Republicans as fiscal hypocrites and coddlers of the rich is one of the few things the Democrats can do to aid their prospects in November. In Sacramento, virtually no Democratic legislator faces a real contest this November — the separation of population by ideology is so pervasive in California that almost every district is a safe one. That grants its legislators a kind of immunity from the consequences of what should be unpopular policies. No such immunity, of course, is granted to Democrats running statewide.

Precisely because of their own unassailability, however, the challenge looming before Democratic state senators and Assemblymen is legislative, not political: how to craft a budget and, if possible, avoid offending some of their largest donors. Their latest solution, unfortunately, not only flunks the test of helping the Democrats’ statewide candidates but also of crafting sustainable, equitable economic policy. The truly rich, as Washington’s Democrats have realized, can afford to pay more, and they should.

Harold Meyerson is editor at large of the American Prospect and a columnist for the Washington Post. He is doing a six-week guest columnist stint on our Tuesday Op-Ed page.