New Geography reports the danger of relying on progressive taxation for state budgets:
California goes through these repeating cycles like a bad dream. Asset prices increase. California’s revenues increase. Sacramento spends that windfall as if asset prices will continue to rise forever. Worse, legislators commit to future spending as if the boom will continue forever.
Of course, booms don’t go on forever. Inevitably, prices fall. The gains that drive California’s revenue turn into losses, and California faces yet another budget crisis. Sacramento responds by raising taxes on the wealthy, and increasing the state’s reliance on the few wealthy. This pretty much guarantees that the problem will be even worse in the next cycle.
It’s a self-reinforcing boom and bust cycle of ever increasing revenue volatility.
It’s amazing to me that California’s leadership continues to do this, and that Californians allow it. It can only be possible because so few Californians understand the state’s finances. The people who responded to me are relatively well informed; far better informed than most Californians. Yet, even they don’t know how California’s revenues work.
It appears that California’s susceptibility to asset volatility is California’s best kept secret. That needs to change.
There's more:
A decline in asset prices would have a detrimental impact on California’s budget because California’s tax system is extraordinarily progressive, with the result that a few really wealthy people pay a huge proportion of California’s taxes. California’s Legislative Analyst’s Office has estimated that the top one percent of California’s population paid half of the state’s income taxes in 2012. Income taxes are California’s major revenue source, comprising about 65 percent of the state’s income.
An article well worth your time.
