Governor Jerry Brown is hoping that the tax-the-rich fever sweeping the nation will propel his ballot measure to victory this November. But a closer look at his plan reveals that it doesn't just target the One Percent. It raises taxes on the 99 Percent, and will impact low-income residents the hardest. The reason? The governor's plan, unlike a competing tax-the-rich ballot measure known as the Millionaire's Tax, includes an increase in the state sales tax. And sales taxes, according to many economists, affect middle- and low-income earners more than they do the wealthy.
According to the nonpartisan Institute on Taxation and Economic Policy, low-income families typically spend three-quarters of their income on things subject to sales tax. For middle-income families, it's about half of their income. But the richest families only spend a sixth of their income on sales-taxable items. It's why many economists view the sales tax as one of the most regressive forms of taxes we have.
Sales taxes also mean that low- and middle-income earners are taxed at higher rates overall than the wealthy in California. According to a 2009 analysis by the institute, the effective tax rate for the lowest 20 percent of wage earners, when including all taxes, was 10.2 percent statewide. For middle-income earners, it ranged from 8.1 to 8.7 percent. But for the wealthiest 1 percent in California, the effective tax rate was just 7.4 percent. "The sales tax violates the basic fairness principle of taxing according to one's ability to pay," the institute stated in a report on taxes last year. "Low-income families are actually made to pay a larger share of their incomes in tax than their wealthier neighbors."
Sales taxes are also unpopular. Indeed, if Brown proposed a sales tax increase on its own, it likely would lose in a landslide. According to a recent poll by the Public Policy Institute of California, 69 percent of Californians oppose raising the sales tax. Opposition is also nonpartisan: 54 percent of Democrats oppose a higher sales tax, while 71 percent of independents and 74 percent of Republicans do as well.
By contrast, taxing the wealthy is a popular idea with nearly everyone: 85 percent of Democrats support doing it, as do 71 percent of independents and 52 percent of Republicans. "The challenge the governor faces with his tax initiative is that one generally popular tax increase — raising personal income taxes on the wealthy — is paired with one generally unpopular one — raising the state sales tax," Mark Baldassare, president and CEO of the Public Policy Institute of California, said in a statement.
Another major problem for sales taxes is that they're highly volatile; they rise and fall with the economy, and thus can make a downturn even worse. During a recession, sales tax revenues plummet, forcing the state to cut back on spending, which then deepens the economic downturn as the economy shrinks overall.
Along with raising the state sales tax by one-half percent, Brown's plan calls for increasing income taxes by 1 percent on residents who make at least $250,000 annually, 1.5 percent for those who earn $300,000 to $500,000 a year, and 2 percent on incomes above $500,000. By contrast, the Millionaire's Tax, which is sponsored by the California Federation of Teachers, raises taxes by 3 percent on incomes above $1 million and by 5 percent on those above $3 million. Based on poll results, the Millionaire's Tax at this point is much more popular.
So why is Brown pushing a less popular plan that would disproportionately impact the 99 Percent and make the economy worse should the recovery sputter? The governor has said he thinks voters will ultimately support his plan because it spreads the tax burden to everyone.
But recent public records indicate that there could be another reason: Large corporations and special interests representing the One Percent appear to like the idea of raising sales taxes. As of Monday, Brown's ballot measure committee had pulled in more than $2.3 million in campaign donations in just a few weeks; many of the contributions came from large corporations, such as Occidental Petroleum ($250,000), and from wealthy special interests, including $500,000 from California hospital owners. It's hard to imagine those same interests donating to a tax proposal that only targets the One Percent.
Rick Jacobs of the Millionaire's Tax group declined to speculate on the governor's motives or those of big donors who are flocking to Brown's plan. "I think it would be wonderful if Occidental Petroleum would donate to the Millionaire's Tax," he said, noting that Occidental Chairman Ray Irani is worth millions. "What's a 5-percent tax on him versus a half-cent sales tax on those who are just getting by?"
Although Jacobs didn't want to criticize the governor and his donors in an interview for this story, he made clear his feelings about the sales tax and its apparent support from large corporations and wealthy interests in an email to supporters last week: "The 1% doesn't want to pay their fair share, so they're going to make 100% of Californians pay it for them."
Recall in the Red
Opponents of Mayor Jean Quan have questioned her budgeting and financial acumen, but one of the recall campaigns against her is already running a large deficit. The Committee to Recall Mayor Quan Now, which is headed up by former mayoral candidate Greg Harland, reported last week that it has raised only $1,600 through December 31, but had piled up $15,156.35 in outstanding debts.
Harland's committee is one of three campaigns that are circulating recall petitions against Quan. The other two — one run by Gene Hazzard of the Oakland Post newspaper and the other led by former city council candidate Charlie Pine — did not report having received donations or making expenditures in excess of $1,000. Those two groups are depending on volunteers to gather the 20,000 signatures needed to trigger a recall election.
Harland's group, by contrast, was expected to rely on paid signature gatherers, and had said publicly that it would raise $30,000 for the effort. However, the group's fund-raising appears to be off to a very slow start. According to campaign finance documents filed last week with the Oakland City's Clerk's Office, Harland's group had only one contribution — $1,600 — from its treasurer, Len Raphael, a longtime Quan opponent.
In an interview, Raphael said his group did not begin to fund-raise in earnest until after the city clerk finally certified its recall petition two weeks ago. Like the Hazzard and Pine petition, the Harland and Raphael petition was rejected originally by the city clerk's office because of various errors. Raphael declined to reveal how much money his group had received in recent weeks or the identities of the donors, saying it wasn't "relevant."
Meanwhile, the city clerk has turned down a challenge that Harland and Raphael's group made against the Hazzard-Pine petition. The city clerk, along with the city attorney, concluded that if the Harland-Raphael group wants to disqualify the Hazzard-Pine petition on the basis that it's defective, it will have to go to court to do it. Raphael, however, indicated that such a move was unlikely. His group has already racked up $16,656.53 in legal bills.