Quit taxing the rich to fund your pet projects

PROPOSITION 82, which would tax “the rich” to finance universal preschool for 4-year-olds, is deceptively appealing. But don’t be fooled. It is bad for California. It is bad spending policy, bad governance and bad tax policy, and it would seriously damage the state’s economy.

Proposition 82 is the latest in a string of terrible initiatives that seek to micromanage the state by creating unnecessary, inefficient, multibillion-dollar programs financed by ever-higher tax rates. Two years ago, it was Proposition 63, which slapped a 1% tax increase on those who make more than $1 million a year to pay for expanding mental health services. The list of what people would like if someone else were forced to pay for it is endless. These kinds of initiatives, if passed, could lay waste to the Golden State, turning it into a stagnant economy and a sick society.

California already has the highest sales and incomes taxes in the country. Now, Proposition 82 would raise the state’s top personal tax rate to more than twice that of “Taxachusetts.”

Why is this such a bad idea? Because in today’s economy, more and more people and more and more businesses enjoy a wide range of options as to where they will locate, so it is important to keep tax rates not only at a reasonable absolute level but also in line with California’s major competitors for business and jobs.

California’s tax system already makes it economically uncompetitive in many areas, and Proposition 82 would considerably worsen the problem.

If the new 1.7% tax rate were only going to affect individuals earning more than $400,000 and married couples earning more than $800,000, that would be bad enough. But most of California’s small businesses are sole proprietorships, partnerships and S-corporations, which pay taxes on the same 540 schedules you and I use. Thus, the proposed Proposition 82 tax hike would hit them as well, depriving them of income they could use to hire workers, raise pay, provide benefits and invest in their future.

These are the small businesses that are so important for job growth in California. If anything, the state should be moving in the opposite direction, toward a broader-based, lower-rate, flatter, fairer and simpler income tax.

Initiatives such as Proposition 82 promote bad governance. Proponents of the initiative say the new tax would raise about $2.6 billion each year once it is fully in place. But such revenue projections are highly debatable. State tax revenues have surged recently, largely led by higher revenues at the top end of the income spectrum. Small businesses and “the rich” are paying more taxes because of the booming economy and stock market. A sizable chunk of the tax windfall has come from Google workers exercising stock options and investors generally cashing in capital gains.

But we know this is not sustainable. Relying on an unstable revenue source from a narrow segment of the population (the top 10% of taxpayers already pay 70% of income taxes) is only asking for boom-bust funding cycles such as the state experienced from 1999 to 2002. Then, revenues soared, the governor and the Legislature approved programs that spent the higher revenue and more, and radical action had to be taken. The governor was recalled and a fiscal rescue plan was adopted to prevent the state from sliding into fiscal chaos as its bond rating fell below that of Puerto Rico’s.

Responsible social programs must be carefully designed, preferably by the regular legislative process, to target high-risk, needy people. They achieve their goals with little correlative damage. That’s true for mental health, preschool or anything else. Ballot initiatives should set broad goals, such as establishing overall levels of taxes and spending. They should not aim to micromanage every program and tax, eventually rendering the governor and Legislature moot.

Nothing is more ill-conceived than creating a new government bureaucracy to hand out subsidies to middle-income and rich people to pay for services they already are getting -- and financing the whole scheme with huge tax increases on small businesses and successful entrepreneurs. It is as if the 20th century never happened or democratic market economies did not succeed in the battle of ideas with state bureaucracy and central planning. The high-tax, public-sector-run East Coast cities and the high-tax, welfare-state Western European economies offer one version of the future: economic stagnation, double-digit unemployment and socioeconomic ossification. Unfortunately, that could happen in California too, if initiatives such as Proposition 82 are passed by voters.