The creaky feast-or-famine financial machinery that powers California’s government — your schools! your roads! your prisons! etc. — continues to rely heavily on the capricious fortunes of its richest residents.
But reforms that might make revenue more predictable, and shrink the feast-or-famine cycle, have been repeatedly rejected by the powers-that-be. Would a proposed “billionaire’s tax” for the richest-of-the-rich — aiming for next year’s ballot — make things better or worse?
In recent years, personal income taxes from the top 1% — folks whose adjusted gross income clocked $1 million or more — furnished a tremendous share of total income taxes and the state’s general fund.
According to data from the Franchise Tax Board:
-In 2021, the $1-million-plus club (0.9% of taxpayers) furnished nearly half of all personal income taxes paid in California — 49.2%. That totaled $62 billion, and equated to more than a quarter of California’s general fund (27.7%).
-Revenues plunged in 2022. That year, the $1-million-plus club — which comprised just 0.7% of taxpayers — paid 35.7% of all personal income taxes in the state. That totaled $38.4 billion, a $23.6 billion drop from the year before, and equated to less than a quarter of California’s general fund (19.4%).
The California Center for Jobs and the Economy compared these recent years to the not-so-distant past of 2011 (the last before Propositions 30 and 55 raised sales taxes and high-income taxes).
Back then, the top 0.3% of taxpayers furnished 29.6% of all personal income taxes. That totaled $13 billion in 2011, a bit more than 15% of the general fund.
Pundits have called this the “capital gains roller coaster,” as taxes on capital gains from stock market booms swell state coffers during fat times and leave it floundering during lean times.
‘Volatile’
“Major sources of revenues to the state’s main budget account, the General Fund, are volatile,” notes the Legislative Analyst’s Office.
“This means revenues tend to grow faster and fall more quickly than underlying cost pressures. Swings in revenues can lead to large increases in spending during good economic times and the need to make large cuts in bad economic times.”
California has been using reserves to smooth over this volatility, the LAO noted, but that’s not going to work forever. “If our estimates hold, the Legislature will face a fourth consecutive year of budget problems—all during a period of overall revenue growth,” said its recent fiscal outlook review.
Whatever you think of taxing the rich — and clearly, in California, we think pretty highly of it — we might all agree that large revenue fluctuations from year to year do not a stable foundation make.
So far in 2025, personal income tax receipts exceeded projections by $6.2 billion, or 13.6%, the State Controller said.
That’s driven by enthusiasm around AI, the LAO said, which has pushed the stock market to record highs and boosted compensation among the state’s tech workers. But “it now appears time to take seriously the notion that the stock market has become overheated,” the LAO said.
Corporation taxes, however, were down ($287.1 million below estimates, or 3.9%), as were sales tax receipts ($276.4 million below projections, or 2.1%). And expenditures were up, surpassing projections by $3.1 billion, or 3%, “increasing pressure on the state’s budget position,” State Controller Malia M. Cohen said in her most recent cash report.
“(T)he state’s underlying fiscal challenges remain significant,” she said.
The LAO was more specific: “Under our revenue and spending estimates, the Legislature faces an almost $18 billion budget problem in 2026‑27. This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue. This is because constitutional spending requirements under Proposition 98 (a 1988 law that mandates funding formulas for schools) and Proposition 2 (passed in 2014, which funds school repairs and construction) almost entirely offset revenue gains.
“Moreover, we estimate costs in other programs to be about $6 billion higher than anticipated. Starting in 2027‑28, we estimate structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth.”
Major drivers of the deficits include pension and health care promises made to state workers, health and food programs for the poor, and the state’s prison system.
“This moment calls for discipline,” the controller said. “We must work together to reduce spending, rebuild reserves, and limit our reliance on internal borrowing so that California is prepared to withstand future economic volatility and protect the programs Californians rely on.”
Good luck with that.
Fix?
The governor and legislators have a lot of work to do to get the spending side under control. But there are things they can do to make the revenue system less volatile as well.
More than a decade ago, a most unlikely band of leaders — including Condoleezza Rice, Gray Davis, George Schultz and Willie Brown — put their heads together to brainstorm fixes for California’s tax structure.
“While we tax the sale of a doughnut eaten in a coffee shop, we don’t, for example, tax the sale of legal, consulting, accounting or architectural services,” its 2011 report said. “In essence, those who produce goods such as donuts or machinery are subsidizing those who produce services and information.”
Thus, nearly half of the state’s economic output is untaxed, it said, recommending an extension of the sales tax to services, a restructure of personal and corporate income taxes. Most folks would pay less in sales taxes at Target and Macys, but more when they take their dogs to the veterinarian.
In 2009, then-Gov. Arnold Schwarzenegger‘s Commission on the 21st Century Economy recommended much the same. California’s rainy day fund grew out of all this, but, by and large, the reforms didn’t get particularly far.
Enter now the 2026 Billionaire Tax Act, a union-backed initiative aiming to fill state budget holes with really really rich people’s money. It would levy a one-time, 5% tax on California’s 200 or so billionaires “who collectively possess an astonishing $2 trillion in wealth,” generating $100 billion or so in revenue, proponents say.
I can barely see my calculator through the smoke, but that appears to be extracting an average $500 million per billionaire.
Rather than targeting earnings, though, the billionaires’ net worth would be taxed, from investments to property to jewelry to paintings. It’s aiming for next year’s ballot, CalMatters explains,
It’ll be interesting to see if Californians think this is going to help.
We’ll note here that the state has been on something of a bender. Its per-capita spending more than tripled over 50 years, even when adjusted for inflation, according to state data.
Its population doubled over that time — the sort of growth that often comes with increased efficiencies. Which means, one might expect to see fewer state workers for every 1,000 residents. But rather than decreasing, the number of state workers per 1,000 residents grew.
Which is to say, the problem is not just the creaky tax structure; it’s lawmakers’ unsustainable spending.
“While important components of the state economy are sluggish, revenues are not falling, nor are conditions as bad as they would be in an outright recession,” the LAO said. “This makes solving the budget problem with ongoing solutions all the more important. Continuing to use temporary tools — like budgetary borrowing — would only defer the problem and, ultimately, leave the state ill‑equipped to respond to a recession or downturn in the stock market.”
Now, for your enjoyment, here’s state personal income taxes by county from the most recent year available, according to the Franchise Tax Board:
-In Orange County, folks’ total adjusted gross income was $178.7 billion, and state personal income taxes assessed totaled $9.1 billion.
-In Los Angeles County, AGI was $453.8 billion and assessed income taxes were $22.5 billion.
-In Riverside County, AGI was: $76.7 billion and assessed income taxes were $2.8 billion.
-In San Bernardino, AGI was $62.8 billion and assessed income taxes were $1.9 billion.
