Two bad choices: should California borrow more or tax more?

As California faces the economic consequences of the pandemic, the government is forced to either borrow more or tax more. Dan Walters with CalMatters explores this dilemma.

The state budget that Gov. Gavin Newsom signed earlier this summer had been hastily adjusted to cope with predictions that state revenues would plummet by tens of billions of dollars due to the COVID-19 pandemic and the sudden recession it sparked.

The borrow-more faction, which includes the legislative leadership, has floated a $100 billion plan to “securitize” various revenue streams — using them as collateral for loans. It also would borrow money from personal and corporate income taxpayers by inducing them to pre-pay future taxes with discounts.

The tax-more faction is a coalition of left-of-center organizations, particularly public employee unions, and their legislative allies. Their plan, contained in Assembly Bill 1253, would impose surtaxes of 1% to 3.5% on taxpayers with taxable incomes over $1 million a year and raise perhaps $6 billion a year.

One is that relying on so few taxpayers is fiscally dangerous, as past experience has shown. The incomes of the rich are especially volatile because a high percentage are capital gains, thus making state tax revenues especially volatile. Adding surtaxes would make revenues even more unpredictable, creating even deeper deficits during economic downturns.

Finally, $6 billion, as large as that number sounds, is small potatoes in a budget deficit that’s many times larger. But AB 1253’s enactment — which is very unlikely this year — could also undermine another tax increase that many of its backers also support. That’s Proposition 15 which, if passed by voters, would increase property taxes on commercial buildings such as warehouses and hotels by about $12 billion a year.