l****z
发帖数: 29846 | 1 As Brad Williams walked the halls of the California state capitol in
Sacramento on a recent afternoon, he spotted a small crowd of protesters
battling state spending cuts. They wore shiny white buttons that said "We
Love Jobs!" and argued that looming budget reductions will hurt the Golden
State's working class.
Mr. Williams shook his head. "They're missing the real problem," he said.
The working class may be taking a beating from spending cuts used to close a
cavernous deficit, Mr. Williams said, but the root of California's woes is
its reliance on taxing the wealthy.
Nearly half of California's income taxes before the recession came from the
top 1% of earners: households that took in more than $490,000 a year. High
earners, it turns out, have especially volatile incomes—their earnings fell
by more than twice as much as the rest of the population's during the
recession. When they crashed, they took California's finances down with them.
Mr. Williams, a former economic forecaster for the state, spent more than a
decade warning state leaders about California's over-dependence on the rich.
"We created a revenue cliff," he said. "We built a large part of our
government on the state's most unstable income group."
New York, New Jersey, Connecticut and Illinois—states that are the most
heavily reliant on the taxes of the wealthy—are now among those with the
biggest budget holes. A large population of rich residents was a blessing
during the boom, showering states with billions in tax revenue. But it
became a curse as their incomes collapsed with financial markets.
Arriving at a time of greatly increased public spending, this reversal
highlights the dependence of the states on the outsize incomes of the
wealthy. The result for state finances and budgets has been extreme
volatility.
Falling Fortunes
Many states are drawing in less money, partly due to lower incomes among
high earners. Compare income tax receipts state by state and see the change
from 2007 to 2009.
In New York before the recession, the top 1% of earners, who made more than
$580,000 a year, paid 41% of the state's income taxes in 2007, up from 25%
in 1994, according to state tax data. The top 1% of taxpayers paid 40% or
more of state income taxes in New Jersey and Connecticut. In Illinois, which
has a flat income-tax rate of 5%, the top 15% paid more than half the state
's income taxes.
This growing dependence on wealthy taxpayers is being driven by soaring
salaries at the top of the income ladder and by the nation's progressive
income taxes, which levy the highest rates on the highest taxable incomes.
The top federal income-tax rate has fallen dramatically over the past
century, from more than 90% during World War II to 35% today. But the top
tax rate—which applies to joint filers reporting $379,000 in taxable income
—is still twice as high as the rate for joint filers reporting income of $
69,000 or less.
The future of federal income taxes on the wealthy remains in flux. The top
tax rate is 35%, following the Congressional tax battle last year. But in
2013, the rate is scheduled to go back to 39.6% unless Congress takes
further action.
State income taxes are generally less progressive than federal income taxes,
and more than a half-dozen states have no income tax. Yet a number of
states have recently hiked taxes on the top earners to raise revenue during
the recession. New York, for instance, imposed a "millionaire's tax" in 2009
on those earning $500,000 or more, although the tax is expected to expire
at the end of 2011. Connecticut's top income-tax rate has crept up to 6.5%
from 4.5% in 2002, while Oregon raised the top tax rate to 11% from 9% for
filers with income of more than $500,000.
As they've grown, the incomes of the wealthy have become more unstable.
Between 2007 and 2008, the incomes of the top-earning 1% fell 16%, compared
to a decline of 4% for U.S. earners as a whole, according to the IRS.
Because today's highest salaries are usually linked to financial markets—
through stock-based pay or investments—they are more prone to sudden shocks.
The income swings have created more extreme booms and busts for state
governments. In New York, the top 1% of taxpayers contribute more to the
state's year-to-year tax swings than all the other taxpayers combined,
according to a study by the Rockefeller Institute of Government. In its
January report downgrading New Jersey's credit rating, Standard & Poor's
stated that New Jersey's wealth "translates into a high ability to pay taxes
but might also contribute to potential revenue volatility."
State budget shortfalls have other causes, of course, from high unemployment
and weak retail sales to falling real-estate values and the rising costs of
health-care and pensions. State spending has expanded rapidly over the past
decade. California's total spending grew from $99.2 billion in 2000-01 to a
projected $136 billion in 2010-11, not including federal funds, according
to the state Department of Finance. Though California's spending slipped by
15% during the recession, it has since returned to near prerecession levels.
Some states may get a lifeline this year from the financial markets.
Starting late last year, California, New Jersey and others began seeing
higher-than-expected income-tax revenues and capital-gains revenues,
suggesting the start of the next boom cycle. Still, because many states
based their spending plans on the assumption that the windfalls from the
wealthy would return every year, they are now grappling with multibillion-
dollar shortfalls.
A recent study by the Pew Center on the States and the Rockefeller Institute
found that in 2009, states overestimated their revenues by more than $50
billion, due largely to the unexpected fall-off in personal-income taxes.
Sales and corporate taxes have also fallen, but they account for a much
smaller share of tax revenue in many states.
Tax experts say the problems at the state level could spread to Washington,
as the highest earners gain a larger share of both national income and the
tax burden. The top 1% paid 38% of federal income taxes in 2008, up from 25%
in 1991, and they earned 20% of all national income in 2008, up from 13% in
1991, according to the Tax Foundation.
"These revenues have a narcotic effect on legislatures," said Greg Torres,
president of MassINC, a nonpartisan think tank. "They become numb to the
trend and think the revenue picture is improving, but they don't realize the
money is ephemeral."
Kicking the addiction has proven difficult, since it's so fraught with
partisan politics. Republicans advocate lowering taxes on the wealthy to
broaden state tax bases and reduce volatility. Democrats oppose the move,
saying a less progressive tax system would only add to growing income
inequality.
In a blog post called "The Volatility Monster," California Democratic State
Sen. Noreen Evans wrote that "the true response to solving the volatility
problem is to make sure Californians are fully employed and decently paid.
Preserving the state's progressive tax system is fundamental to combating
the rising riches at the top and rising poverty at the bottom. Flattening
our tax system would simply increase this already historic income inequality
," she wrote.
U.S. Rep. Tom McClintock (R., Calif.) has for years advocated a flat tax in
California to reduce volatility and keep high-earners from leaving the state
. "California has one of the most steeply disproportionate income taxes in
the nation," he said. "A flatter, broader tax rate would help stabilize the
most volatile of California's revenues."
Rainy-day funds, which can help bail out governments during recessions, have
also run into political opposition or proven too small to save state
budgets. A study by the Center on Budget and Policy Priorities found that
effective rainy day funds should be 15% of state operating expenditures—
more than three times the state average before the crisis. Massachusetts,
which saw a 75% drop in capital-gains collections during the recession, won
plaudits from ratings firms and economists for creating a rainy-day fund in
2010 using future capital-gains revenues.
Economists and state budget chiefs say the best hedge is better planning.
Budget staffers in New York, for instance, now spend more time studying Wall
Street pay and bonuses to more accurately predict state revenues. The state
's budget director avoids overly optimistic forecasts based on a previous
year's strong growth.
"We're glad we have the revenue from the wealthy, and we want to encourage
these people to stay and prosper," said Robert L. Megna, budget director for
New York state. "But we have to recognize that because you have them, you'
ll have this big volatility."
The story of Mr. Williams, the former chief economist and forecaster for the
California Legislative Analyst's Office, shows just how vulnerable states
have become to the income shocks among the rich, and why reform has proven
difficult.
In the mid-1990s, shortly after taking the job, Mr. Williams discovered he
had a problem. Part of his job was to help state politicians plan their
budgets and tax projections.
A lanky, 6-foot-4-inch 58-year-old, with piercing blue eyes and a fondness
for cycling, Mr. Williams prided himself on his deep data dives. The Wall
Street Journal named him California's most accurate forecaster in 1998 for
his work the prior decade. He and his team placed a special focus on
employment and age data and developed their own econometric models to make
improvements.
Historically, California's tax revenues tracked the broader state economy.
Yet in the mid-1990s, Mr. Williams noticed that they had started to diverge.
Employment was barely growing while income-tax revenue was soaring.
"It was like we suddenly had two different economies," Mr. Williams said. "
There was the California economy and then there were personal income taxes."
In all his years of forecasting, he had rarely encountered such a puzzle. He
did some economic sleuthing and discovered that most of the growth was
coming from a small group of high earners. The average incomes of the top 20
% of Californian earners (households making $95,000 in 1998) jumped by an
inflation-adjusted 75% between 1980 and 1998, while incomes for the rest of
the state grew by less than 3% over the same period. Capital-gains
realizations—largely stock sales—quadrupled between 1994 and 1999, to
nearly $80 billion.
Mr. Williams reported his findings in early 2000, in a report called "
California's Changing Income Distribution," which was widely circulated in
the state capital. He wrote that state tax collections would be "subject to
more volatility than in the past."
Mr. Williams wasn't the only one noticing the state's dependence on the
wealthy. Economists and governors had for years lamented the state's high
tax rates on the rich, and in 2009 a bipartisan commission set up by then
Gov. Arnold Schwarzenegger recommended an across-the-board reduction in
income-tax rates and a broader sales tax to reduce the state's dependence on
the wealthy. The income-tax rate on Californians making more than $1
million a year is 10.3%, compared to less than 6% for those making under $26
,600. Combined with the rising share of income going to the top, the state's
progressive rates amplify the impact of the income gains or losses of the
wealthy.
California's dependence on income taxes has also grown because of its
shifting economy. Income taxes now account for more than half of its general
revenue, up from about a third in 1981. Because the state's sales and use
tax applies mainly to goods, rather than faster-growing services, it has
declined in importance. The state's corporate tax has also shrunk relative
to income taxes because of tax credits and other changes.
By the late 1990s, Mr. Williams realized that his job had changed.
California's future was no longer tied to the broader economy, but to a
small group of ultra-earners. To predict the state's revenue, he had to
start forecasting the fortunes of the rich. That meant forecasting the
performance of stocks—specifically, a handful of high-tech stocks.
He pored over SEC filings for Apple, Oracle and other California tech giants
. He met with the financial advisers to the rich, asking them about the
investment plans of their clients. He watched daily stock movements and
stock sales reported by the state's tax collectors.
Working with the state's tax collectors, he did a geographic breakdown of
capital gains. The vast majority were in Silicon Valley.
"We knew there was a bubble," he said, "We just didn't know when it would
fall, or by how much."
After the dot-com bust, the state's revenues from capital gains fell by more
than two-thirds, to $5 billion in 2003 from $17 billion in 2001, while
personal-income taxes fell 15% over the same period. The recession created a
mirror image of the boom, with the wealthy leading the crash and dragging
tax revenues down with them. By 2002, California had a budget shortfall of
more than $20 billion.
The deficit lingered for years, but its lessons seemed to be quickly
forgotten in the state capital. By 2005, California was enjoying another
surge in spending fed by the incomes of the wealthy.
Mr. Williams started warning of another government crisis. In 2005, he
released a report stating that the state's tax revenues could vary by as
much as $6 billion in a single year, and that such swings were "more likely
than not." He recommended several potential reforms, including flatter
income-tax rates, "income averaging," which allows the wealthy to spread
their tax payments for unusual windfalls over a longer period of time, and a
rainy-day fund.
His proposals failed to gain any traction with the legislature. Many
Democrats refused to consider tax hikes on the middle class and lower rates
for the rich. In 2009, voters rejected a proposed spending cap, which among
other things, would have helped to create a rainy-day fund.
One of the leading advocates for such a fund is Roger Niello, a former
Republican assemblyman who has long been among the top 1% of state earners.
He and his family own a chain of luxury car dealerships, and during the
recession, his income fell by more than half because of the decline of auto
sales. Though he's still "fine financially," he said, his personal
experience taught him that "people in this income group have the most
variable incomes."
Darrell Steinberg, the Democratic leader of the state senate, agrees that
the dependence on the wealthy is "one of our most fundamental problems." Yet
he concedes that his own spending priorities—including a large expansion
of mental-health programs funded by a millionaire's tax—have added to the
current mismatch between revenues and spending.
"I have no regrets given the number of people we've helped," he said. "But I
guess you could say I did my part with spending."
As time went by, Mr. Williams became increasingly frustrated. To do his job
properly, he had to predict the stock market. "And that's impossible," he
said. He also felt that all of his research and warnings fell on deaf ears.
In 2007, he decided to retire, and he now he works for a consulting firm.
"I was a broken record," he said. "I just kept saying the same thing over
and over. And with my job, there was no real pleasure in being right."
—Vauhini Vara contributed to this article. |
|
