Three times in the past 15 years, California has reaped the vast rewards of the startup culture it helped to create.
The dot-com-era IPOs, Google’s initial public offering and now Facebook’s debut are going to create overnight billionaires and – by virtue of capital gains taxes – give the Golden State a handsome windfall.
With the dot-com boom and the Google IPO, we spent our fortune as foolishly as the Arab sheiks squandered the spoils from their first desert gushers. Now it’s time for something completely different.
Although the odds are slim to none that California actually will do it, now would be the perfect time to create an economic sustainability fund that smooths out these wild swings in revenue and creates a vehicle for distributing the windfall proceeds for the benefit of our kids and grandkids.
First, an explanation. Capital gains are some of the most volatile sources of revenue in California, where they have accounted for 12 percent of all revenue in fat years and 3 percent in lean ones. They are taxed at a hefty 9.3 percent and there are no easy ways to evade them. Thus, the Governor’s office assumes Californians will earn $96 billion in capital gains and pay $8.6 billion in taxes.
Now, some history. Although politicians profess to love them, capital gains windfalls have been unkind to governors of both parties.
In the dot-com era, we cut taxes, inked sweetheart deals with prison guards and ramped up spending. The resulting fiscal disaster that led to the recall of Democratic Gov. Gray Davis. When Google went public, Arnold Schwarzenegger, a Republican, used an estimated $6 billion one time gain to plug budget holes. Then he saw revenue plunge as the housing crisis kicked in and his approval ratings fell to the floor.
This time, California should be a lot smarter.
Imagine a world where all of the capital gains for IPOs worth more than $1 billion (in current dollars) flowed into an economic stabilization fund that was required by law to spend no more than 5 percent in any one fiscal year. The result would be a fund that smooths the flow over 20 years and creates a sustainable way forward that ends structural budget deficits and provides an unprecedented degree of certainty for business owners and bureaucrats alike.
Yes, teacher and public-employee unions and other big spenders will hate this idea — especially at a time of structural budget deficits. Yes, tax cutters will hate this idea because they would like to see capital gains not taxed at all.
But in my view, a sustainability fund is the only way that California will ever find a way to address its structural deficits over the long haul. The only other fix involves messing with Prop. 13 property taxes limits and we are far more unlikely to touch Prop 13 than to do something about capital gains. Only by smoothing out the big revenue swings will we be able to avoid the revenue bubbles that allow us to paper over our problems.
Teachers, public safety workers and others who are feeling the pain today will be grateful 10 or 15 years from now when the sustainability fund is providing more revenue than the car tax — and when it is large enough to fill the structural budget gap that exists today.
The idea of an economic sustainability fund isn’t something I dreamed up in the shower. The idea has been around for decades and it is heralded by the International Monetary Fund and others as a way to smooth out the swings in tax revenue so that government’s can make better decisions about how to budget.
The best example, one often cited by Peter Rupert of UC Santa Barbara’s Economic Forecast Project, is the Petroleum Fund of Norway, a constitutionally mandated fund with a spending limit of 4 percent annually. Heck, even 21st Century Arab rulers have recognized the problem of boom-bust budgeting, and now Oman, Kuwait, and Abu Dhabi operate various forms of stabilization funds.
In North America, Wyoming successfully recycles its oil severance taxes through a stabilization fund, as does the Canadian province of Alberta with its windfall from the booming tar sands.
In my view, California has become so profligate when it comes to spending and so incompetent when it comes to tax policy its role as the world’s startup capital is in jeopardy. We are killing the goose that lays the golden eggs of tax windfalls.
Putting those gains to work on curing our fiscal ills would sustain our startup culture for generations to come.
• Contact Editor Henry Dubroff at [email protected]