The “Left-Wing” Austerity, California Version

Blocked in Washington, but approved in Sacramento. It’s the tax on the rich that Obama wants but can’t have passed while the Republicans have the majority in the House of Representatives and reject every budget law. This tax on the highest incomes, which reverses a “regressive” fiscal tendency going on for a decade, was instead approved in the capital of California. The local legislative assembly, dominated by the Democrats, said yes to the proposition formulated by Gov. Jerry Brown, also a Democrat.

The new budget law of California deserves attention for several reasons. It promises to resolve a crisis of public local finance that had no precedent since the time of the Great Depression: the current deficit got to $16 billion. The California model is also important because this state, besides being the richest of the U.S. (it would be a member of the G-8 if it were independent; it has a GDP higher than Canada and Italy) is often a “laboratory” for solutions that are then adopted somewhere else, too. At the moment we could define it a left wing laboratory, considering that Brown is a liberal with a radical past: way before Obama’s election, he was the one who broke the first racial barrier because, when he was a candidate running for the White House, he announced that he would choose the black Jesse Jackson as his running mate. Therefore, for several reasons, the therapy passed by Brown to heal the deficit in California can prefigure what would be a left-wing austerity, in the hypothesis Obama gets re-elected and has a Congress with a Democrat majority.

It’s not a bed of roses. On the one hand, there’s the increased taxes on the middle and high incomes. It’ll start from $250,000 annual gross income for the individual. The local income tax will be raised from the current 10.3 percent to 13.3 percent — a three-percentage-point rise. In the American system, this charging will add to the federal one, which, for the richest, prefigures a marginal maximum income tax of 35 percent (it’ll be brought to 36.5 percent if, at the end of the year, George Bush’s tax cuts expire, which is likely to happen). Therefore, taxation on the income of a Californian making over $250,000 will be brought to 48.8 percent (and will go over 50 percent at the end of the year), levels not too far from Europe which contradict the common perception of the U.S. as a fiscal paradise compared to the “oppressive socialism” of the Old Continent. A moderate increase of sales tax (a sort of local VAT on the consumer goods, which will go from 7.5 to 7.75 percent) adds to this.

Anyway, the revenue increase is not enough. They come with cuts to spending, anything but painless. Financial aid to the unemployed will end in two years, abandoning those long-term unemployed who are the most vulnerable. There are 900,000 children of families on the poverty line who will lose the local assistance offered by the Healthy Families Program and will lose the umbrella of federal Medicaid, an already ungenerous aid program.

Since the tax increases are put to a popular vote, if they don’t pass, Brown has already inserted a further cut of $6 billion in state funding for schools in the budget law. Other cuts could be necessary if the revenue predictions of $1.9 billion in capital gains from the placement of Facebook on the stock market reveal themselves too optimistic — predictions based on the hypothesis of the stock being valued at $35 per share. There’s no reason to be happy about the California version of austerity, either.