Governor Gavin Newsom is proud of the prosperity of California’s upper class, which he says has never been better.
But he also wants to use some of their success to help raise working-class people in California.
“We have the resources,” Newsom said, referring to his family who made $ 1.7 million in 2019. “I’m proud that some of the dollars I put back into the coffers of California, as a taxpayer, is gonna help those single moms out there. “
California’s tax structure is known for its dependence on the earnings of the rich. In 2018, the richest 1% paid almost half of the state’s personal income taxes. This dependence is particularly noticeable this year, with wealth gains among the top earners pushing California to a surplus of $ 76 billion.
Newsom wants to direct some of the surplus to low- and middle-income Californians, sending $ 600 stimulus checks to those earning less than $ 75,000 on rent assistance and utilities. Experts said his budget proposal could strengthen the social safety net for those at the bottom.
Conservatives are questioning Newsom’s plan, calling for permanent tax cuts instead of additional spending.
But others on the left want Newsm to go even further, urging him to consider new taxes on the rich. Newsom has repeatedly rejected this idea, but it continues to circulate in the Legislature.
“To think about the future and the health of our society, we need to ask the rich to pay more,” said MP Alex Lee, D-San Jose.
California’s road to a $ 76 billion surplus
In January, Newsom’s office predicted a surplus of $ 15 billion for the next fiscal year, which begins in July.
But surplus projections continued to rise, as tax revenues beat expectations month after month.
California is receiving nearly $ 38 billion more in personal income tax than it forecast in January. Sales tax revenues increased by $ 4.5 billion. Corporate tax revenues increased by almost $ 4.6 billion.
Chris Hoene, executive director of the California Budget & Policy Center, noted that the rich don’t just pay more taxes. Federal and state investments have helped low-income Californians pay for their daily expenses, including increasing sales tax revenue, he said.
Still, Hoene said very wealthy people have weathered the pandemic better than others. At the end of last year, the unemployment rate for those earning over $ 150,000 was about 5%, compared to over 25% for those earning less than $ 30,000.
The state budget also reflects the strength of the stock market, which mainly benefits the upper class. California expects its residents to make $ 210 billion in profits selling their investments in 2021, up $ 25 billion from 2020.
“(Tax collections) have increased slightly due to the stability of high incomes and big returns on capital which has led people to make more earnings,” said Darien Shanske, professor of law at UC Davis, who studies taxation.
Newsom’s budget on wealth inequalities
Shanske said California is limited in what it can do on its own to close the wealth gap.
“To the extent that there is a long-term trend of income inequality caused by globalization, California state income tax is just a small tool,” Shanske said. “It’s too much to ask to be able to turn the tide like this.”
Newsom’s budget includes a mix of short-term stimulus for working-class households and long-term expansion of services like universal preschool for 4-year-olds.
The budget spends $ 8 billion in surplus on $ 600 stimulus checks which, along with the $ 4 billion the state has already given to low-income residents, represents a very large transfer of wealth, Shanske said. Over $ 7 billion is also proposed for rent relief and utilities.
The budget also lays the foundations for tackling inequalities in a sustainable way, such as the proposal to create 100,000 additional places for childcare, Said Hoene. “These are the cases where we have loopholes in the state system that have become blockages for people to access economic opportunities.”
It remains to be seen whether the prosperity that will pay for the windfall will last, Hoene said. Nothing less than steady growth in the California economy could leave the state with a major budget problem in the future, the Office of the Legislative Analyst said in a recent report.
“We don’t want to add 100,000 locations to the child care system and need to remove those locations within a few years, ”Hoene said.
Still, Hoene sees the budget as a positive step.
“The budget proposal helps ensure that California’s decades-long wealth and income inequality does not worsen as a result of the pandemic,” he said.
Conservatives call for tax cuts
Conservatives were quick to criticize Newsom’s proposal, saying it showed Californians being taxed too heavily.
Former San Diego Mayor Kevin Faulconer, a recall candidate against Newsom, is proposing tax cuts for anyone who earns less than a million dollars a year.
“The hard-working men and women who are excluded from our state need more than a one-time discount, they need permanent financial relief that lasts,” Faulconer said at a press conference announcing the plan.
Some Tories have also said the stimulus violates the spirit of the Gann Limit, a spending rule that requires California to give tax cuts if state revenues exceed a certain level.
Newsom took an unexpected approach to the rule by creating a plan that directs income only to households earning less than $ 75,000 per year. Some argue that the Gann limit requires California to reimburse all taxpayers, not just those who make less than a certain amount.
Progressives push for wealth tax
Despite the unprecedented $ 76 billion surplus, members of the progressive wing of the Legislature have pushed for laws to raise taxes for wealthy Californians. Their proposals do not advance in the Legislature, but a group of Democrats have vowed to fight for them in the years to come.
They argued that California cannot count on the extra billions to transport low-income residents through future hard times and that utilities need a bigger injection of cash to properly serve marginalized communities.
Lee introduced a measure to change the California tax code to allow a 1% increase for Californians whose aggregate wealth is worth more than $ 50 million, or $ 25 million for a married resident who files separately. According to Lee’s office, the tax would generate around $ 22 billion a year in new revenue.
Lee also co-wrote another proposal to impose an additional 1% to 3.5% tax rate on Californians earning more than $ 1 million. This measure is tabled for the year after assembly Miguel Santiago, D-Los Angeles, agreed to work with the Assembly’s Committee on Income and Taxation until 2022.
Lee has ignored criticism of his tax hike proposals by fellow Democrats and Newsom himself. Instead, he doubled down on his idea that now was the right time to demand more from wealthy Californians.
“We have two Californians. First, the rich are getting dreadfully richer, and second, the poor are getting dreadfully poorer, ”Lee said. “The people who protect billionaires will always say now is not the time.”