The budgets of states like California and New York have been blown to hell since the financial crisis, and even in the lukewarm “recovery,” they’re miles from being balanced.Why?
One big reason, Robert Frank points out in the WSJ, is that these states depend enormously on the welfare of their richest residents.
Almost half of California’s income taxes come from the top 1% of earners. In New York, the percentage is now 41%, up from 25% in 1994. In Connecticut and New Jersey, the top 1% pay more than 40%.
Being so dependent on super-rich people is great when times are good, because revenues soar. But the trouble is that the earnings of super-rich people are super-volatile, so when times are bad, or even mediocre, tax revenues plummet.
If governments approached budgeting the way smart people would, they would run massive surpluses in boom times, thus storing acorns for the inevitable winter ahead. But if our government officials have demonstrated anything over the years, it’s that they are utterly incapable of doing this. Instead, they look at the revenues in the boom times and think “WOW! We’re rich! We can spend every penny of that and more!”
And then the boom times end and deficits explode.
This phenomenon is especially acute in states in which huge portions of the total tax base are paid by super-rich people, because the incomes of super-rich people are wildly volatile.
In a boom year, for example, a successful Wall Street managing director might make $5 million. In a crappy year, he or she might make $1 million. Both of these incomes are otherworldly when compared to what normal folks make, so it’s no surprise that most people are in favour of socking it to the rich. But with said managing director paying a big slug of those incomes in taxes, the hit to the state’s budget is huge.
All of which is to say: There’s a downside to socking it to the rich.
For budgets dependent on the incomes of super-rich people to remain sustainable, government officials have to see the huge revenues in the boom years for what it is: Temporary.
And everything we know about government in this country suggests that that will never, ever happen.
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