Californians may tax the rich more to subsidise electric cars & More News

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Gavin newsom, California’s Democratic governor, has presented himself as an environmental warrior, pushing for aggressive rules to reduce greenhouse-gas emissions and ban the sale of petrol-powered cars from 2035. So when Mr Newsom recently began appearing in television adverts encouraging voters to reject “Proposition 30”, a ballot initiative to increase taxes on the wealthy in order to fund electric-vehicle expansion, it turned heads. In the advert, Mr Newsom describes Prop 30 as a “Trojan horse that puts corporate welfare above the fiscal welfare of our entire state”.

“Prop 30”, which will appear on the ballot on November 8th, has a motley crew of critics. While the state’s Democratic Party and a couple of mayors have endorsed Prop 30 as a sensible way to raise funds to fight climate change, Mr Newsom has instead taken the side of the California Republican Party and California Teachers Association, the powerful teachers’ union, in opposing it. “There has never been a coalition like this,” says David Crane of Govern for California, a good-governance group against the bill.

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The diverse opposition is especially striking because the ballot initiative sounds so innocuous. Prop 30 promises to raise taxes on those earning $2m a year or more by 1.75%, potentially generating $3.5bn-$5bn in state revenue a year, which would be used to fund the roll-out of electric vehicles through tax rebates and charging stations, as well as providing more money for wildfire prevention. Why is the push to tax the rich in order to fight fires and carbon emissions so controversial?

Some of it has to do with how Prop 30 has been bankrolled. Prop 30’s biggest backer is Lyft, the ride-hailing firm, which has spent around $35m to support the measure (and has already committed to moving all of its fleet to electric vehicles by 2030). Critics, including Mr Newsom, say that Prop 30 is a way of getting taxpayers to foot the bill for Lyft going green. (Uber, which is larger and better capitalised than Lyft, has not given to or endorsed Prop 30.) Starting in 2030, California will require 90% of miles travelled by ride-sharing firms’ drivers to be in electric vehicles. Prop 30 would help pay for that transition by offering rebates to drivers to buy electric vehicles.

Some also worry this could set a precedent for companies to try to siphon off tax-payer funds to prop up their companies’ expenses and agendas. California has already allocated $10bn to aid the transition to greener vehicles, and with the Inflation Reduction Act, the federal government will offer more tax credits and other incentives for electric cars. A further criticism is that the new tax money would bypass the state’s “general fund”, which pays for education, health care and other basic services, setting up a competition for tax dollars between electric vehicles and Californians’ many other needs. This explains why the teachers’ union has come out against it.

While Prop 30 might sound like a niche issue, it is anything but. The fight over it exposes three larger issues facing the Golden State. The first is California’s attempt to be a pioneer on environmental and climate issues through pursuing tougher policies on emissions than the rest of the country. California’s policies may be good for the rest of humanity, but the result is that petrol prices are the highest in the country, running about 56% higher than the national average, because the state requires a unique formulation of cleaner fuel that only a handful of refineries can produce.

Second, Prop 30 highlights the potential downside of direct democracy. California allows for citizens to bring forward ballot initiatives, if they collect enough signatures to qualify for the ballot (equivalent to 5% of the number of people who voted for the governor, which this year is around 623,000 signatures). “We can have the best legislature in the world, and then some company can go around us and raise taxes,” says Mr Crane, who worries that if Prop 30 passes it will embolden more companies to try to push ballot measures that benefit them.

Ballot initiatives have enacted big fiscal tolls on the state before. Prop 13, passed by voters in 1978, limits the amount by which a home can rise in value each year. That has narrowed the state’s tax collections from property, making it heavily reliant on volatile personal-income tax to fund its operations, and limiting housing stock by making it uneconomical for longtime homeowners to move house.

Third, Prop 30 also shines a spotlight on California’s existential battle to remain a home for innovators and entrepreneurs at a time when no-income-tax states like Texas and Florida are more aggressive in wooing new residents. California relies on personal income tax for around 59% of state taxes, compared with an average of 47% in the 41 states and Washington, dc, that collect personal income tax, according to the Tax Foundation, a think-tank. This makes California’s tax collections more volatile, because they depend on the stock market to deliver capital gains, and more vulnerable to outmigration.

One way to think about California’s tax structure is as a bear balanced on a wine bottle. The state relies heavily on the support of a narrow group. In 2019 only 35,000 people earned $2m or more a year, with a total tax liability of $27bn, around 33% of the statewide total. Already California’s top-earners face the highest income-tax rate of any state, at 13.3%. Since 2009, the state has raised taxes on top-earners twice.

Hiking the rate further could be risky. In 2020 California had a net outflow of 260,000 taxpayers, up nearly 58% from 2019 and representing about 1% of total state-income tax collections (see chart). It does not take many departures to have a big impact on tax collection. “A depressing number of California’s wealthiest have already left,” says Michael Moritz, a venture-capitalist who opposes Prop 30. By Mr Moritz’s calculation around twenty billionaire Californians have moved out of the state recently, depriving the state of around $15bn-20bn in lifetime taxes. Even if Prop 30 triggered only a few departures, it could be meaningful.

The Prop 30 debate also offers a window into Mr Newsom’s political calculus. Rumoured to be eyeing a run for president, he is being cautious not to alienate wealthy donors and preside over yet another tax hike that could be used against him on the national stage. A recent poll suggests support for Prop 30 has been dropping, but it still has support from 49% of voters against 37% who are opposed. Requiring a “yes” vote from a majority of Californian voters for its passage, Prop 30’s fate is also balanced on a wine bottle. So, some feel, is California’s appeal for its wealthiest taxpayers.

Californians may tax the rich more to subsidise electric cars

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