By Dan Morain
dmorain@sacbee.com The Sacramento Bee
Published: Thursday, Sep. 30, 2010 – 12:00 am | Page 19A

You knew the race for governor would come to this: a clash between the classes.

Democrat Jerry Brown is homing in on one of Republican Meg Whitman’s signature issues – eliminating California’s capital gains taxes – to make his point that Whitman would help the wealthiest among us.

In one form or another, Brown whacked Whitman during their hourlong debate this week no fewer than seven times over her proposal to end the capital gains tax.

Questioners asked Brown about all sorts of issues. And by many different routes, he returned to the theme:

Is he beholden to his many organized labor contributors? Brown was asked.

Brown answered that Whitman raises money from her donors, too – “I would bet you the majority would get an immediate tax break from her key economic plan, which is to eliminate totally the California capital gains tax.”

What about a misleading television commercial that is airing?

“I will say this. One of these targeted tax cuts is targeted to billionaires like Ms. Whitman and millionaires,” Brown answered.

If elected governor, how would he create jobs?

“I have a very specific plan, and it’s not to give a $5 billion tax break to myself and much less to the billionaires and millionaires,” Brown responded.

What about cutting red tape?

“I have a plan. It’s on my Web page. It’s about investing in California, not giving tax breaks to the most fortunate.”

You get the picture.

Along with his wife, Brown is wealthy by most standards, and would benefit from a capital gains tax cut. But Brown is more interested in the political benefit to be gained by attacking Whitman, knowing that the bulk of his voters receive few capital gains.

In California, capital gains are taxed as if they are regular income. The Franchise Tax Board, which collects California income taxes, reports that 93 percent of the residents who received capital gains earned $200,000 or more in 2008, the last year for which figures are available.

Whitman proposes to stimulate economic growth by eliminating taxes imposed on gains made on investments on everything from real estate and stocks to high-end venture capital gambles on the next big startup or product.

On the stump and in campaign material, Whitman has pointed to other states where, in her view, the economy is better than in California in part because those states impose zero tax on capital gains, among them Texas, a state she regularly extols.

Whitman told the statewide audience Tuesday night that Texas Gov. Rick Perry comes on “hunting trips” to California, seeking to lure businesses by offering few bureaucratic obstacles and lower taxes.

Oddly, however, Whitman didn’t rise to defend her capital gains proposal during the debate – to the consternation of one of her more prominent backers, Joel Fox, a blogger who heads a political campaign committee, Small Business Action Committee, which aired an ad attacking Brown last month.

“There is a great counter – jobs. I was stunned that she didn’t make that effort,” Fox told me by phone, after he criticized Whitman’s failure to respond on his Fox & Hounds website.

As Fox sees it, the argument for cutting capital gains taxes is straightforward economics: Entrepreneurs would use the savings to make more investments and hire more workers.

There is a flip side. One is that taxes on capital gains generate big money for state coffers. In the boom years last decade, capital gains taxes generated more than $10 billion.

Even in the recession with 12.4 percent unemployment, taxes on capital gains are expected to generate $5.3 billion for this year’s budget. Without that chunk of money, the $19 billion deficit would be even worse.

There is a middle ground. Federal tax law offers a sliding scale, imposing a higher rate if the gains were short-term, and a lower rate if the gains were earned over more years, a step intended to reward long-term investment over short-term speculation.

San Francisco Mayor Gavin Newsom, the Democratic nominee to become lieutenant governor, advocates paring it back and targeting it at businesses that invest in California-based investments and jobs.

For the most part, and this is where the class warfare is being waged, wealthy people remain wealthy, even if the recession has put a crimp in their capital gains.

However, the number of poor folks is on the rise. The latest U.S. Census Bureau report shows 14.2 percent of California’s population fell below the federal poverty line in 2009, up from 13.4 percent in 2008.

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