Close to Home: California needs higher taxes on wealth

In his State of the Union address, President Biden proposed to reverse the 2017 Trump tax cuts for the wealthiest Americans by raising the corporate tax rate, denying tax breaks for corporations whose CEOs earn more than $1 million in annual compensation, and requiring billionaires to pay at least 25 percent of their income in taxes. "No billionaire should pay a lower tax rate than a teacher, a sanitation worker, or a nurse," he said. But none of these proposals for more equitable taxation are possible unless Biden is re-elected and Democrats take back control of Congress. 

However, state and local governments in solid blue California can do much to further tax fairness­–and government action is urgent. The California Legislative Analyst’s Office estimates that the state faces a staggering $73 billion budget deficit this year, making cuts to education, affordable housing, climate change initiatives, and the public safety net likely without a revenue boost.

According to the California Budget and Policy Project (CBPP), income distribution is more unequal than at any time since the Great Depression of the 1930s. Between 1987 and 2021, average adjusted gross incomes for the bottom two-fifths declined by 20 percent, while incomes for the top 1 percent skyrocketed by 252 percent.

Moreover, a 2023 United Ways of California study found that more than one-third of Californian households are working poor. Despite at least one person working, these households do not earn sufficient income to cover their basic expenses such as housing, childcare, food, transportation, medical and taxes.

The CBPP recognizes that the state’s personal income tax is progressive yet calculates that the California tax system is regressive overall. The 40 percent of tax filers with the lowest incomes pay the largest share of family income in aggregate state and local taxes (including sales, excise, property, and personal income) compared to most other income groups.

What can state and local governments do to ensure that the ultra-wealthy and large corporations pay their fair share?

First, the Legislature can end tax breaks that primarily benefit large corporations and high-income households, resulting in an estimated revenue loss of $70 billion annually. For instance, multinational companies can exclude profits made in foreign countries from reportable earnings, and wealthy Californians can deduct mortgage interest for second homes.

Second, State Senator Nancy Skinner, D-Oakland, has proposed a 2 percent increase in the corporate tax rate on California’s largest 2500 national companies, yielding $6 billion to fund education and public services that benefit all Californians.

According to the CBPP, California corporate profits in 2021 were a record-breaking $368 billion. However, today, due to tax breaks and a reduction in the corporate tax rate, corporations contribute only half as much of their earnings to state taxes as they did in the early 1980s.

Third, the state can tax excessive CEO pay. The Economic Policy Institute reports that in 2022, the typical CEO of the largest 350 companies made more than $25 million annually–or 344 times as much as the average worker. Yet in 1965, CEO pay was only 21 times that of the typical worker. A 2020 bill that stalled in the legislature would apply graduated corporate tax rate increases for large companies based on the CEO-to-median worker pay ratio. Companies with more than a 300-to-1 earnings ratio would pay the most.

Local jurisdictions can also implement taxes on bloated CEO compensation. In 2020, San Francisco voters approved a surtax on large companies whose total executive pay ratio (including wages, bonuses, and stock options) exceeds 100-to-1 ratio.

Finally, in seven states including California, legislators have introduced a wealth tax on extreme wealth. In California, the legislation would impose a 1 percent wealth tax on the top .01 percent of households with a net worth of more than $50 million. The tax could generate an estimated $22 billion, half of which would come from California’s 186 billionaires (the highest number of any state).

Governor Newsom opposes the wealth tax, but public pressure is building. A 2021 poll by the respected David Binder and Associates found that more than two-thirds of California voters support imposing a wealth tax on the richest people in the state. A 2023 Target Smart poll indicates that 76 percent of California voters support taxing billionaires and expect state legislators to act.

Martin J. Bennett is Instructor Emeritus of History at Santa Rosa Junior College and a consultant for UNITE HERE Local 2