California is the Golden State. And Florida, from this angle, is a hot mess of guns, gators, Zika, drug lords, hurricanes and sea level rise.
That said, Florida’s climate-change-denying Gov. Rick Scott isn’t entirely all wet when he takes aim at the way California does business, as he has done this week. It’s unstable to depend, as California does, on the top 1 percent of tax filers for nearly half of all income taxes, and to rely on income taxes so much more heavily than on other revenue sources. Last month, a Moody’s Investors Service stress test found that of most populous states – the others were New York, Pennsylvania, Florida and Texas – California is least-prepared for the next recession. (Texas won the recession-proof derby.)
The critique underscored long-standing vulnerabilities in California’s funding: Because of Proposition 13 and subsequent initiatives, it’s extremely hard to raise taxes, though, with the proposed extension of Proposition 30, some are trying.
The state’s sales tax applies to retail goods but not services, such as Web design or attorneys’ fees, even though California largely has moved from manufacturing to a service economy. Meanwhile, on the spending side, the bulk of state dollars are automatically spoken for even before they’re collected; more than half of the state budget, for example, goes to education.
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So California pays its bills by taxing capital gains as ordinary income – thus relying on the affluent, who enjoy most capital gains, to support education, public safety, health, welfare and other important programs. About two-thirds of the general fund comes from income tax.
It’s unstable to depend, as California does, on the top 1 percent of filers for nearly half of income taxes, and to rely on income taxes so much more heavily than on other revenue sources.
But capital gains rise and fall with the stock market. As a result, revenue spikes and plummets with each economic cycle. A tax overhaul is needed; the rainy-day fund initiated in 2014 by Gov. Jerry Brown helps, but more is needed.
Scott, who came to California this week amid radio ads claiming capitalists get a raw deal here, is hardly the first governor who has sought to poach this state’s job creators. High taxes, red tape, yadda yadda, as the retired New Yorkers say in Miami. The pitches all sound alike, though Scott has thrown in California’s recent passage of a $15 minimum wage.
Brown is right to put Scott in his place. There’s only one L.A., after all, only one Silicon Valley, only one golden dream as iconic as this one. But that doesn’t mean our tax system isn’t its own kind of hot mess.