State's Voters Agreeable to New Tax -- on Millionaires

By Evan Halper

Oct. 12, 2004 12 AM PT

Times Staff Writer

SACRAMENTO — Despite widespread taxpayer aversion to new taxes, there is one that most Californians don’t seem to mind: the one that they don’t have to pay.

Supporters of a measure on the November ballot are seizing on the sentiment to push for a vast expansion of services for the mentally ill.

Their plan is to let millionaires pay the bill. And, so far, judging by polls, it is proving to be quite effective.

The proposal targets a small group of taxpayers for one of the largest state tax hikes in recent history. It would place a 1% surcharge on all taxable income exceeding $1 million. The tax would cost the state’s 25,000 or so millionaires $10,000 for every million they earn after their first million. The cost to nonmillionaires would be nothing.

“For most voters, it just doesn’t affect them,” said Mark Baldassare, director of research at the Public Policy Institute of California. “They are not in the million-or-more income bracket. And they think mental health services are underfunded.”

Polls taken in August by the institute and Field Research showed Proposition 63 enjoying the support of as many as two-thirds of likely voters in the Nov. 2 statewide election.

On Monday, opponents were joined by Gov. Arnold Schwarzenegger, who said that he commended the authors of Proposition 63 (and two other health initiatives) for “good motives,” but that such measures should not be considered “until California’s fiscal health is fully restored.”

The measure would bring in up to $800 million per year to pay for mental health services that are increasingly in short supply, including:

* Hundreds more beds, added counseling, more vocational assistance and new prescription drug programs for overrun county clinics.

* Building more clinics and training more mental healthcare workers to address continuing shortages.

* New prevention and early intervention outreach programs to help people showing signs of mental illness get aid before the problem becomes severe.

As California has struggled with multibillion-dollar deficits over the last few years, polls have shown strong public support for taxing the rich to pay for pressing social needs. But in the Legislature, such proposals have been blocked by Republicans.

So now backers of Proposition 63 are taking the idea directly to voters. Some warn that it could have unintended consequences.

“Bashing the rich is sort of a popular American sport,” said Jennifer Roback Morse, an economist at Stanford University’s Hoover Institution. “We look to root for the underdog and that sort of thing. But do you really want to drive all these people to Arizona?”

The popularity of Proposition 63 is alarming conservative activists, who have managed to kill or roll back every one of the dozens of tax hikes proposed over the last few years. Yet so far they have done little to effectively organize against the new initiative.

“This is a serious threat,” said Joe Rodota, a Republican political strategist. “Thus far, the more politically attuned parts of the business community haven’t had their ears to the ground on this one. Time is running out.”

Financial advisors who work with the wealthy in California said the initiative has not registered among their clients. Bob Kelly, president of the California region for Mellon Financial Corp.’s private wealth management group, said “this has not been part of the conversation or concerns of any of our clients.”

“We’re talking about a very small portion of the population,” Kelly said about individuals reporting an income of more than $1 million. “It would be a worry like with anybody else, but at the same time it would not change their lifestyle or what they do.”

Kelly said the 1% tax increase alone likely would not prompt his clients to change their primary residence to escape the California-only tax.

New Jersey recently passed a “millionaires tax” similar to the one in Proposition 63. The state placed a surcharge on incomes above $500,000. But instead of going toward expanding a new government program, the money was used to provide property tax relief for the middle class.

Proponents of the move argued there -- as they do here -- that even with the new surcharge, the wealthiest taxpayers were still paying less overall than they were a few years ago, thanks to President Bush’s federal tax cuts.

The California initiative is being championed by Assembly Budget Committee Chairman Darrell Steinberg (D-Sacramento), who says the state promised to expand local services after closing a number of state institutions for the mentally ill in the 1960s. But the expansion never came, mental health advocates say, leaving thousands of ill Californians without care.

“We do not have a decent system of mental health care in this state,” Steinberg said. “The state made a promise. And for 30 years that promise has been unfulfilled.”

Supporters of the measure say the neglect of the mentally ill has caused a strain on cities, with would-be patients left wandering the streets.

Sheree Kruckenberg, the California Healthcare Assn.’s vice president for behavioral health, said those people often wind up in hospitals that don’t have the resources to properly care for them.

“They languish in our hospitals and their symptoms come back. Or they get new symptoms,” she said.

“They need the follow-up services to get back into the community, back to school, back to work, back into a routine of daily life.”

The California Department of Mental Health estimates that there are 50,000 mentally ill homeless people in the state. The proposal’s price tag of up to $800 million is staggering even by the standards of California’s mammoth bureaucracy. It is equivalent to nearly 1.5% of the state’s entire general fund. Managing it would alone cost tens of millions of dollars.

As supporters of Proposition 63 prepare to place advertisements on television with the $2.3 million they have raised, the campaign against the measure is meager. So far, the campaign committee No on 63 has reported $6,000 in donations. Anti-tax and business groups opposed to the measure have put all their resources into other business-related initiatives on November’s crowded ballot.

“There are a jillion measures out there,” said David Yow, spokesman for No on 63. “With all these issues, there are a lot of other places for business to get involved.”

Yow calls it a “David and Goliath” situation in which the protectors of millionaires are the underdog. “I don’t want to say ‘It’s early,’ because those of us in the business know it isn’t,” he said. “But the public is still largely uninformed.”

Some anti-tax groups are trying to put together a campaign that will lump opposition to all of the measures that raise taxes or place what the groups perceive as onerous requirements on businesses, including Proposition 63.

“It’s a crazy tax,” said Jonathan Coupal, president of the Howard Jarvis Taxpayers Assn. “There is something unseemly about taxing a very small part of society for programs that benefit the public at large.”

Coupal warns that relying on the rich for government revenue is dangerous because their incomes tend to fluctuate from year to year depending on the stock market. Most economists generally agree that the state’s tax structure is heavily reliant on the wealthy, which contributed to California’s dire budget problems. State revenue evaporated along with the fortunes of millionaires when the recession hit.

Many economists -- even those who support higher taxes on the wealthy and expanded mental health programs -- are also wary of budgeting at the ballot box.

“If there is popular support for raising income taxes, why not put the money in the general budget?” said Stephen Levy, head of the Palo Alto-based Center for Continuing Study of the Economy.

But, he asked, should a tax that would bring in so much money be distributed in a better way, instead of all going to the interest group that got to the ballot first?

Levy warns that voters need to keep in mind what they would be trading away. It’s one of the only ways of bringing new money into the state that voters support, and the measure locks all of that money into one thing only.

The proposal prevents the funds from ever being used for anything else Californians want.

“Our problem in this state is that our wants exceed our willingness to pay,” Levy said, “And this doesn’t help.”

Times staff writer Robert Salladay contributed to this report.