FAIR TAXES AND EQUAL BENEFITS

 

Summary

• California’s taxes are high, regressive, and biased against younger Californians, thereby exacerbating socioeconomic and generational inequality.

• Californian public employees receive much larger retirement benefits than the taxpayers who fund them.

• The pension and retirement debt to public workers today stands at $366 billion and is growing.

• We need significant tax and budgetary reform to reduce inequality and increase fairness.

 
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Problem

California has a relatively high and regressive tax system. Its sales tax, which is regressive, is the largest in the country at 7.25 percent. California also has the highest income taxes in the country.

California’s most progressive tax, the property tax, is significantly lower than it is in other states. Proposition 13, passed in 1978, restricts property taxes significantly. As a consequence, homeowners saw their home values grow significantly but their tax burden grow only modestly.

The generational bias of California’s property tax makes it regressive, punishing newer and usually poorer entrants to the housing market. Two-thirds of the tax relief from Proposition 13 accrues to those with incomes over $80,000, and most of that accrues to those with incomes over $120,000.

The consequence of Proposition 13 is the accumulation of unproductive inherited wealth, which is an unfair aristocratic privilege. Homeowners keep their homes and pass them on to their children who not only inherit their parents extremely valuable homes but also the low taxes their parents paid.

Taxpayers fund retirement benefits for public employees far larger than they themselves receive. Most private sector employees do not have a pension and rely almost entirely on Social Security benefits totaling an average of $16,000 per year. By contrast, California’s public employees have pensions that pay an average of $96,000 per year that they start to enjoy at the age of 54, which is eight years earlier than the national average.

Public employees contribute to a small percentage of their retirement pensions. Most state workers contribute to just 5 to 11 percent of their retirement, and in their retirement are usually paid more than they received on average while working. By contrast, one-third of Americans have no savings for retirement at all, and the median amount saved is $111,000.

Californians today owe public employees $366 billion for future pension and health care costs. The debt is growing every year because California is under-funding future pension obligations at a rate of 20 percent per year. California’s fund is currently 35 percent short of the amount needed to pay future pensions.

The California governor who signed into law the overly generous retirement pensions says he now regrets it. The $5.4 billion that California taxpayers spend annually on public pensions is 30 times more than they paid before 2000. The governor, Gray Davis, received $5 million in donations from public sector unions before and after he signed the legislation.

A slowing economy would once again devastate California’s unstable finances. If a recession arrives, state economists predict a three-year, $55 billion budgetary shortfall.

California’s tax and public pension system thus exacerbates the inequality between rich and poor, old and young, and property-owners and renters.

 
 
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Solution

We need equal rights for public and private sector employees. Both groups should be responsible for their own retirement savings beyond Social Security. Neither should have the right to make others pay for their retirement benefits. Public employees hired after 2020 should be responsible for contributing to their own retirements.

We need to reform public pension system to make it more fair and to stop the exploitation of taxpayers. It is unfair for taxpayers to pay public employees for two to three times as many years as they worked. Public sector unions should agree to a reasonable reform of pensions, especially since the U.S. Supreme Court is soon going to prevent them from forcing government employees to pay dues.

We need fairness and reasonableness. Today’s system is extremely unfair. We need to mitigate the unfairness — but in a way that recognizes that homeowners should not be forced out of their homes due to radical increases in taxes.

Property taxes should be readjusted to market rates whenever ownership transfers including upon death. America must maintain its historic opposition to the creation of rent-seeking aristocrats, even middle-class ones.

Fairness dictates tax reform be overseen by a “citizens jury” and be written into the state constitution through referendum. The jury should come from a randomly selected representative sample and should deliberate in an evidence-based way to create a truly fair system.