The Lesson We Need to Teach Our Nation’s Rich
We will not let your wealth come at the expense of our children’s future.
This may be the year when how California voters cast their ballots really matters again.
That surprise you? Given what we all know about “battleground states,” any prediction that has California mattering on Election Day can sound just plain silly.
California hasn’t been a “battleground” nationally for years. Presidential candidates never visit the state to campaign. National pundits never fly in to probe what the average Californian is thinking. On the national political scene, goes the conventional wisdom, California simply does not matter.
But look closer, please. The voting on two initiatives in California this year — one statewide, the other a local balloting in San Francisco — could mark the end of one national political era and the hopeful beginning of another. California voters this Election Day could signal, at long last, our national emergence out of the darkness of maldistributed income and wealth
That darkness descended markedly back in June 1978 when Californians went to the polls and passed Proposition 13, a move to cut taxes on properties in the state down to 1 percent of their current assessed value and limit future increases in that value to no more than 2 percent a year.
Ever since then, Californians who owned property back in 1978 have paid taxes on these properties at amazingly low rates. Only the sale of a property enjoying Prop 13’s blessing ends this low-rate situation. New owners pay taxes on the actual market value of their properties.
In effect, note historians Palma Joy Strand and Nicholas Mirkay, Prop 13 “declared open season on newcomers.” In the years after Prop 13’s passage, immigrants able to scrape up enough money to afford the down payment for a home would find themselves paying much higher property taxes on their houses than neighbors who had purchased their homes before Prop 13’s passage.
Even worse, the huge decline in property tax revenue that Prop 13 ushered in translated into huge cutbacks for the public schools the kids of these immigrants attended.
A generation earlier, by contrast, California had invested heavily in public education, recognizing the potential of the “Dust Bowl” migrants who had poured into the state during the Great Depression. After Prop 13, California began disinvesting in public schools and dropped from the top of the nation’s school funding rankings to the bottom. Other public services suffered the same fate.
California’s corporate property owners, meanwhile, would experience Prop 13 as a most generous property tax loophole. The Disney corporation, for instance, is still paying property taxes on Disneyland at the bargain-basement rate that Prop 13 cemented into place. Orange County would collect at least $19.6 million a year more in property tax revenue if Disney had to pay taxes on Disneyland at the property’s current market value.
Chevron, another big Prop 13 beneficiary, would today pay another $100 million more a year statewide in a world where the Prop 13 tax break no longer existed.
But we can’t appreciate the overall impact of Prop 13 until we look well beyond California’s borders. Prop 13’s passage sparked a national “tax revolt” that conservative pols would quickly exploit to push their case for “small government” — and save their deep-pocket benefactors mega millions.
In the months after California’s 1978 Prop 13 vote, tax-limit campaigns erupted from coast to coast, in states like Oregon and huge suburbs like Maryland’s Prince George’s County. That fall, chronicles historian Josh Mound, presidential wannabe Ronald Reagan and New York congressman Jack Kemp barnstormed across the country — in a Boeing 727 nicknamed the “Tax Clipper” — on behalf of a sweeping across-the-board federal income tax cut.
In 1981, shortly after Reagan’s ascent into the White House, that tax-cut push morphed into law, and America’s richest saw the tax rate on income above $215,400 — over $580,000 in today’s dollars — sink from 70 to 50 percent. Five years later, the nation’s top tax rate dipped down to 28 percent.
Reagan’s tax cuts would mark the end of America’s high-taxes-on-high-incomes era. In the years right after World War II, high tax rates on the rich had helped the United States become a fundamentally more equal nation. In the new Reagan America, the nation began rushing to become a far more unequal place. The fortunes of the rich soared. Incomes for average Americans stagnated. Prop 13’s 1978 passage, more than any other single turn of events, gave this rush its political momentum.
After Prop 13, as former Reagan economic adviser Bruce Bartlett puts it, “Republicans glommed on to the idea that we should just cut taxes anytime, anywhere, anyway.”
Now today, here in 2020, progressives in California finally appear poised to turn the page on Prop 13’s legacy. They’re backing a new ballot initiative — Proposition 15 — that aims to amend the state’s constitution and assess big-time business property at its true market value.
Prop 15’s passage, independent analyses estimate, would net between $6.5 and $11.5 billion a year, with 60 percent of that going to local governments and the rest to schools and community colleges
Prospects for Prop 15’s passage, according to the polls, look somewhat promising. But the pushback that Prop 15 would deliver against tax breaks for the rich, even if writ large across the American political landscape, isn’t going to undo the corrosive inequality that so scars us. Prop 13 and its progeny didn’t just steer more wealth to America’s wealthy. The tax-cut fever that Prop 13 unleashed upon the nation revealed that mid-20th-century liberalism had made some faulty assumptions about just how much progressive taxes — higher tax rates on high incomes — could accomplish.
Heirs to the New Deal in the 1970s essentially saw America’s steeply graduated income tax rates as sort of a “miracle cure.” The economy generating too much money for the awesomely affluent? No big deal. We can always count on progressive income tax rates to even those inequalities down to a level our democracy can safely digest.
But that turns out not to be the case. In real economic life, we can’t afford to leave the marketplace to its own devices. Or to put the matter more bluntly: We can’t let the rich rig the marketplace to stuff their own pockets. The more inequality we let the economy generate, the more power we let our most privileged amass, the more difficult sustaining progressive tax rates becomes.
To keep wealth from concentrating at hazardous levels, American progressives have increasingly come to understand, we have to wage a two-front struggle. On one front, we fight for progressive tax rates that keep income and wealth more equally distributed. On the other, as economist Dean Baker argues, we battle the marketplace rigging “that gives the rich so much money in the first place.”
We won’t have the Prop 13 era totally in our rear-view mirror until we start moving in this second direction. And on the ballot November 3 in San Francisco sits a proposal that gets that moving going — in an easy-to-understand, modest manner that other jurisdictions can model and expand upon.
San Francisco’s pending “Proposition L” takes aim on the locomotive driving contemporary American inequality: our major corporations and banks. The executives who run these enterprises make fabulously more than workers — and fabulously more than executives used to make. CEO compensation, the Economic Policy Institute reported this past August, has increased 1,167 percent since 1978, after taking inflation into account. Worker pay? Up just 13.7 percent.
In 1978, CEOs pocketed 31 times what typical workers earned. Last year, top execs averaged 309 times more.
Prop L — the “overpaid executive tax” — would, if enacted, push back against this growing spread by taxing corporations on the inequality they generate. Under this proposal, explains the San Francisco Chronicle, large firms would pay 0.1 percent of their gross receipts earned in San Francisco to the city “if their highest-paid employee makes 100 times the median salary of the company’s San Francisco-based workforce.”
The wider the pay gap, the higher the tax. Companies with execs taking home over 1,000 times their worker pay would face a 1-percent city levy on their gross receipts.
Opponents, of course, are predicting doom if the measure passes. Nonsense, says San Francisco supervisor Matt Haney, a moving force behind the proposal.
“We’re only taxing companies that have enough to pay their executives millions of dollars,” says Haney. “They can pay their executives less — or pay their workers more — and they won’t need to pay this tax.”
The San Francisco-based banking giant Wells Fargo, notes Mercury News reporter Evan Webeck, paid its top exec $23 million in 2019. Wells Fargo “would have to pay its median worker in the city” at least $230,000 to avoid the lowest tax rate that Prop L establishes. Uber, another San Francisco giant firm, would either have to drastically slash the $45-million compensation of its CEO or pay its median employee $450,000 to avoid the Prop L pay-ratio tax.
Measure L could raise as much as $140 million a year for public services. But the measure’s passage might have a substantially more significant political effect. In Oregon, the city of Portland has had a pay-ratio tax in effect since 2018, but no city as large and as economically pivotal as San Francisco has yet taken the pay-ratio plunge. Prop L’s success in the city by the Bay could spark action in cities and states all across the country.
Lawmakers have already introduced pay-ratio proposals in a variety of jurisdictions, and proponents are going beyond proposals that link tax rates to ratios. Some are tying government contracting decisions to CEO-worker pay divides and moving to deny taxpayer subsidies to enterprises that pay their top execs outrageously more than their workers. Inequality.org is keeping a handy scorecard on all these efforts.
By okaying Prop L, San Francisco voters could give these egalitarian drives much more of a national spotlight.
“If you want something that is going to directly get at the corporate model that has created such an unequal country, that has encouraged the dangerous behavior of chief executives, that is not good for the long-term economic health of our country,” sums up Sarah Anderson, an Institute for Policy Studies adviser on matters pay-ratio related, “then this is a really important way to do it.”
Sam Pizzigati co-edits Inequality.org. His latest books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Follow him at @Too_Much_Online.
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