Urban Legends Live On

We’ve written about the “urban legends” that surround state budget and tax issues on a number of occasions this year. These assertions warrant scrutiny since they are often cited in the context of critical policy debates.

Earlier this week I appeared on KQED’s Forum and KXPR’s Insight discussing the “tax swap” proposed by Legislative leaders. We’ve discussed the impact of the swap here before and in our paper that takes a detailed look at the impact of this proposal. During these discussions, fellow guest Senate President pro Tem Darrell Steinberg repeated two of the most pervasive urban budget legends that deserve a closer look.

The first is the statement that, “as Governor Schwarzenegger has accurately pointed out that California only gets 78 cents on the dollar” in federal spending in return for each dollar of taxes paid. In fact, as we noted back in January, in 2009, California received approximately $1.50 in federal support for each dollar of taxes paid. The figure frequently cited by the Governor is based on obsolete data and questionable assumptions as we discuss here. We believe that a strong economic and policy argument can be made for more federal aid to states in these troubled economic times, but an honest debate should be based on sound data and acknowledge the critical role that federal funds have played in moving the economy down the road toward recovery.

The second pervasive legend is the focus of our annual look at Who Pays Taxes in California. During the Forum show, Senator Steinberg repeated the often-made statement that “48 percent of the taxes are paid by the highest income earners.” In fact, the wealthiest one percent paid 42.8 percent of the personal income taxes paid in 2008 – the most recent year for which data are available – down from 48.1 percent in 2007, but high-income earners pay a far smaller share of other state taxes, such as the sales, gas, and other excise taxes. Moreover, as a share of income, low- and middle-income Californians pay a far larger share of their income in state and local taxes than do higher-income Californians. That’s why we’re so concerned about the impact of the proposed tax swap and its free ride for the top end of the income distribution.

The bad news about urban legends is that they are just that. The good news is that they provide a ready source of opportunities to discuss the facts that should inform important budget debates.

— Jean Ross

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