Tax day – the day Californians file their income tax returns and make a collective investment in our communities – is also a time when urban legends abound about who does and who does not pay taxes and how much they pay. Income taxes are just a part of the story. Our new Policy Points, Who Pays Taxes in California, examines who does (and doesn’t) pay taxes in California in greater detail. Here are a few highlights:
- First, we all pay taxes. All Californians pay taxes, whether we fall on the low-end, middle, or high-end of the income distribution. Part of the confusion about who does not pay taxes stems from the fact that most people tend to think about who pays taxes in terms of the income tax, but it is important to remember that we pay many other taxes, too. In fact, income taxes make up just a small share of total taxes in the United States.
- As a share of income, wealthy Californians actually pay the least in taxes. California’s top earners pay a smaller share of their income in state and local taxes. The top 1 percent of California’s earners, with an average income of $2.3 million, pay 7.8 percent of their income in state and local taxes, while the bottom-fifth of earners, with an average income of $12,600, pay 11.1 percent of their income in state and local taxes. This is partly because lower-income individuals pay a greater share of their income in sales and property taxes than do higher-income Californians.
- Over the past two decades, wealthy Californians’ incomes have far outpaced those of other Californians. Between 1987 and 2008, the most recent year for which data are available, the average adjusted gross income (AGI) – the income reported for tax purposes – of California’s wealthiest 1 percent increased by 81.1 percent. In contrast, the average AGI of the bottom 80 percent declined by 9.1 percent during the same period. To put it another way, approximately 40 percent of California’s income gains over the past two decades went to the wealthiest 1 percent.
- The effective tax rate – the share of income actually paid in income taxes – for the nation’s wealthiest households has declined while their incomes have increased. The typical AGI of the top 400 households increased by 399 percent between 1992 and 2007, the most recent year for which data are available. During this same period, the median household income for a family of four – the income at which half of all households earned more and half earned less – increased by 13.2 percent. Additionally, the effective tax rate for the 400 wealthiest households declined by almost 10 percentage points between 1992 and 2007, while the effective tax rate for the average household declined by less than 1 percentage point during the same period.
- More than 2,400 high-income Californians pay no state income tax at all. In 2008, the most recent year for which data are available, 2,431 of the 611,318 taxpayers who reported incomes of $200,000 or more paid no California personal income tax. The number of “no tax” returns has more than quadrupled since 1997. These taxfilers are able to do this by using a variety deductions and credits, such as the mortgage interest deduction or the state’s Enterprise Zone Hiring and Enterprise Zone Sales and Use Tax Credits.
We all benefit from the taxes contributed by all Californians. They support our public schools, streets and highways, public hospitals, parks and beaches, and the public health infrastructure that ensures that our food is safe to eat and our water is safe to drink, as well as a range of other services. This tax day we should ponder what the absence of additional tax dollars means for the public structures and institutions they support. Protecting our core public systems and structures is essential for securing a prosperous future and paving the way for a more robust economic recovery, and a more balanced approach aimed at bringing the state’s budget into balance over a multi-year period is the only path to a brighter future.
— Luke Reidenbach