Not to state the obvious, but that's where the money is. Specifically, tax money. California households making more than $200,000 a year contributed almost two-thirds of the state's total tax bill in 2008 (the last year data is available). Because the tax system is so progressive, low- and even middle-income households pay little or no state income tax. In other words, without rich people state government would be effectively wiped out. This is why Sacramento has been so excited about the positive effect that Facebook's IPO will have on state coffers. But there's an obvious flaw in the system: When the economy goes south, high-end personal income taxes plummet and the coffers quickly thin out. I write about California's reliance on the wealthy in the February issue of Los Angeles magazine. Excerpts.:
L.A., of course, is among the nation's most affluent locales. Roughly 41,000 households in the county reported more than $400,000 in adjusted gross income in 2009, according to the Franchise Tax Board. Perhaps more astounding is that postrecession, 20,000 households have a net worth of at least $10 million. This represents the 1 percent--serious money, Beverly Hills-Brentwood-Malibu kind of money. Yet it's considerably less money than before. Financial managers and others I spoke to say that as a rule, portfolios at the highest end shrank anywhere from 10 percent to 20 percent. Ballparking, that translates into losses of $40 billion to $80 billion (though some of that money has been made back).
Revenue from Californians in the $200,000-plus category totaled $25.1 billion in 2000--right before the dot-com downturn--and then fell to $13.8 billion in 2002. By 2007, at the height of the economic bubble, it soared to $33 billion. The next year it collapsed. The state could have controlled such unpredictability by putting aside enough money during the flush years to cover expenditures during the lean ones--commonly referred to as a "rainy day fund." Former governor Arnold Schwarzenegger tried to expand the fund as the economy grew worse, but he had only limited success. The budget deficit, in turn, got bigger and bigger, and state officials were stuck having to make drastic cuts. The long-term solution, overhauling the tax system so that most everyone has a little skin in the game, is impossible because of the fractured political system.
Brown is focusing on interim steps, such as a November ballot measure that would boost the income taxes of wealthy households over the next five years. In other words, he wants to bankroll the economy by depending largely on the 1 percent--the very system that helped get us into this mess.