By Michael Hiltzik
Not only does California tax capital gains at the same rate as any other income — not higher, as gubernatorial candidate Meg Whitman says — but it also is in the mainstream in its practice.
Is it too much to ask that the best-financed statewide political campaign in the country — maybe in U.S. history — get things right about a central tenet of its electoral platform?
The question arises from GOP gubernatorial candidate Meg Whitman's new glossy campaign brochure, titled "Creating Jobs for a New California." In it she proposes killing the state tax on capital gains. "California is one of a few states in the country that taxes capital gains at a higher rate than traditional income," the booklet states.
Sorry, but that's not remotely true.
California taxes capital gains — profits from investments in stocks, bonds, real estate or businesses — at exactly the same rate as any other income, whether it's wages, dividends or your prize from Publishers Clearing House.
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The Whitman campaign's policy director, Richard Costigan, tried to tell me that the booklet's language meant the same thing as a phrase appearing in an earlier Whitman brochure, which said that California was one of a few states that "doesn't tax capital gains at a lower rate than traditional income."
But that's not accurate, either. First, as my son the PhD candidate points out, "not lower" is not synonymous with "higher."
Second, of the 40 other states that levy an income tax, all but 10 essentially treat long-term capital gains the same as ordinary income — at least they did in 2007, according to a 2008 study by the business accounting firm Ernst & Young.
In other words, California does what 30 other states do. By my reckoning, that makes it not "one of a few," but "right in the mainstream." (The brochure lists nine states with "no state capital gains taxes," but it's wrong about one of them, Tennessee, which does tax some cap gains.)
Let me say here that I hate to be picking on Whitman's tax policy, which is far superior to that of her opponent, Democrat Jerry Brown, in that she has a tax policy.
Brown's campaign remains in the "Don't bug me, I'm sleeping" mode, and as soon as he makes a proposal, I'll be happy to have at it. Meanwhile, Whitman's is the default tax plan for the state's near future.
Her claim about the capital gains tax is important for several reasons.
One is that there are only two explanations for why the Whitman campaign, which has put more than $90 million of the candidate's own money into the effort to get its message to voters, might publish a fundamental untruth like this: It's unbelievably sloppy, or it's deliberately trying to mislead people. Neither conclusion is very encouraging, especially the latter. If they really think California's capital gains tax is too high, why rely on a bogus claim to make the case?
There's also the question of why anyone would think that eliminating the capital gains tax would spur job growth in the state. The Whitman brochure says she is determined to implement "targeted tax cuts … to get Californians back to work," but her capital gains proposal is the model of an untargeted cut.
She wouldn't restrict the tax break to investments in California enterprises — you would get the same break on a stock market gain whether it came from shares in Dell (Texas) or Apple (California), or from backing a profitable start-up in Las Vegas rather than Long Beach.
Costigan says "there's a school of thought that reducing the capital gains tax stimulates the economy." But it's a school of ideologues, not empirical economists.
In 1998, when Congress was pondering a cut in the tax on long-term gains to 15% from 20%, the Congressional Budget Office projected that the change might add two or three hundredths of a percent at best to annual gross domestic product after 10 years — but it might reduce GDP instead. The cut went into effect in 2003 anyway, and obviously didn't prevent the economy from going in the tank in 2008.
The real problem with this proposal is that it looks like a pure handout, and a costly one, to the wealthy, a group that includes the billionaire Whitman herself. In 2008, according to figures from the Franchise Tax Board, more than 82% of the $56 billion in capital gains earned by California residents were reported by the top 1% of income earners (those touching about $500,000 or more) in 2008.
Costigan maintains that the state needs these well-heeled taxpayers because they're the investing class. But if they have no incentive to invest in California, it's hard to see any gain in relieving them of a huge chunk of their responsibility for supporting the state budget. The capital gains tax produces as much as $11 billion in revenue in a good year, and even in 2008, a terrible time for the stock market, it brought in $4.6 billion.
Costigan told me the capital gains tax proposal should be viewed as a piece of an integrated job-creating whole. Indeed, Whitman's plan involves incentives for a wide range of industries, some of which may make good sense.
She wants to relieve manufacturing companies of the state sales and use tax on equipment. That would cost $1 billion at the current year's 6% state sales tax rate, but if the savings is translated into jobs it might be money well spent. She wants to kill an $800 annual business tax, which she describes as a tax on "start-ups," though it applies to all limited partnerships.
Whitman proposes tax incentives to create "academic enterprise zones" around major universities. Unfortunately, the history of enterprise zones in this state is already a scandal, given that the ones we have cost some $500 million a year and don't seem to create jobs.
Costigan says Whitman's academic zones are a "more focused approach," though why technology firms need new incentives to locate near Berkeley, Stanford, UC San Diego and UC Irvine, neighborhoods already bristling with them, isn't too clear.
The common flaw in these proposals is the absence of evidence that they'll create new jobs, much less produce growth in a cost-effective way. Without that, Whitman is just offering a menu of handouts to favored industries and the rich.
The campaign says it ran all these ideas past business groups such as the California Chamber of Commerce. But I wouldn't trust the chamber for objective advice on business tax policy any more than I'd trust an edited videotape from Andrew Breitbart.
If Whitman were really interested in remaking the state's tax policy for the better, she'd be talking about the obvious flaws in the fabric. For starters, there's the lack of an oil severance tax. She's against it, even though Alaska, which she praises for having a 0% capital gains tax, charges oil companies 25% of the value of the crude they pump out of the earth. Then there are the property tax inequities created by Proposition 13, rewarding commercial landowners at the expense of homeowners. (She's also against rectifying those.)
Whitman's platform is a start, but only a start, in the debate we desperately need about state tax policy. But a debate with one participant won't do. Can someone wake up Mr. Brown and get him to engage?