Tax Volatility Is a Good Thing

How you frame a problem very often determines the solution. Over recent months, “revenue volatility” has been singled out by many policymakers as the problem in California’s tax system in need of a solution. But as Betty Yee, chair of the State Board of Equalization, and Alan Auerbach, a professor of economics and law at UC Berkeley, discuss in a talk they gave at the California Budget Project’s annual conference last week, revenue volatility is actually in itself a good thing. It’s a result of California’s progressive income tax system, which requires those with more income to pay a higher percentage of their income in tax than those with less income. As Yee states, a discussion about reducing volatility very quickly turns to “solutions” like reducing taxes on capital gains and stock market income. That would mean shifting more of the costs of public programs onto low- and middle-income Californians, whose incomes come almost entirely from work, rather than investments. As Yee mentions, if Californians want to avoid exacerbating the income gap between high- and low-income Californians, any discussion of tax fairness must also include a consideration of another kind of volatility: the daily uncertainty many low- and middle-income Californians are experiencing about their jobs, their houses, or the choice to put food on the table or pay the energy bill.

“Volatility is what they’re experiencing day-to-day,” Yee said.

You can listen to Betty Yee and Alan Auerbach discuss reforms to California’s tax system here.

— Lisa Gardiner

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