New CBP Brief: Who Pays Taxes in California?

April 11, 2014

A new brief from the California Budget Project — released in advance of Tax Day — reports that California’s lowest-income households on average pay a greater share of their income in state and local taxes than other households. This is even after accounting for the temporary tax increases of Proposition 30 — approved in 2012 — which largely targeted very-high-income Californians.

Using data provided by the Institute on Taxation and Economic Policy (ITEP)Who Pays Taxes in California? shows that nonelderly households in the state’s bottom fifth in terms of income, who earn $13,000 a year on average, pay 10.6 percent of their incomes in state and local taxes. This is a larger share than all other segments of households — including the very wealthy. The top 1 percent of Californians, with an average annual income of $1.6 million, pay just 8.8 percent of their incomes in state and local taxes — or nearly two full percentage points less than the state’s poorest families.

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Who Pays Taxes in California? examines how different components of California’s tax system — such as property taxes, sales taxes, and the personal income tax — affect lower- and higher-income Californians. The brief also suggests options for making California’s tax system fairer and promoting economic security for low-income families.

And also: if you’re looking for a comprehensive overview of California’s tax system, be sure to check out the CBP’s Principles and Policy: A
Guide to California’s Tax System.

— Steven Bliss


Recent Lessons in Tax Policy From California and Kansas

March 31, 2014

In 2012, as states across the country continued to cope with the aftershocks of the Great Recession, California and Kansas pursued markedly different paths in tax policy.

In Kansas, the state legislature in May 2012 passed — and Governor Brownback signed into law — a package of large tax cuts, including dropping the top income tax rate by approximately one-fourth and eliminating income taxes entirely on business profits that are “passed through” from businesses to their owners. In addition, the Kansas tax package raised the standard deduction and eliminated a number of tax credits that benefit low-income individuals and families.

In contrast, California voters in November 2012 approved Proposition 30, increasing personal income tax rates on very-high-income Californians for seven years and raising the state’s sales tax rate by one-quarter cent for four years.

The divergent paths pursued in California and Kansas provide an opportunity to compare state approaches to tax policy and the impacts of those policies on households, public systems and services, and economic performance.

According to a new report from the Center on Budget and Policy Priorities (CBPP), the tax cuts enacted in Kansas “were among the largest ever enacted by any state” in percentage terms. The evidence from Kansas so far:

  • Large revenue losses: Kansas has seen an 8 percent decrease in revenues used to fund schools, health care, and other public services, with the revenue loss projected to rise to 16 percent over the next five years.
  • Continuing cuts to schools: While most states are attempting to restore funding for schools after years of cuts, Kansas is proposing still more cuts. The Governor recently proposed another reduction in per-pupil general school aid for the next fiscal year that would leave funding 17 percent below pre-recession levels.
  • Little evidence of improving economic performance: Since the tax cuts, Kansas has added jobs at a pace slower than the country as a whole.

California’s experience since the passage of Proposition 30 in 2012 stands in stark contrast to the recent story Kansas. The evidence from California so far:

  • Large revenue gains: The state’s General Fund revenues increased from $85.6 billion in 2011-12 to an estimated $99.8 billion in 2013-14, and are projected to grow to $106.9 billion in Governor Brown’s proposed 2014-15 budget, an increase of nearly one-quarter (22.6 percent) since 2011-12.
  • Increased funding for schools: The Governor’s 2014-15 spending proposal assumes a total funding level of $61.6 billion for schools and community colleges in 2014-15, nearly one-third (30.6 percent) more than in 2011-12.
  • Improving economic performance: Since 2012, job growth in California has outpaced that of the US as a whole.

To be clear, higher state revenues in California are a product of Proposition 30 and a recovering economy, just as slower economic growth in Kansas contributes, along with tax cuts, to lower state revenues. The linkages between tax policy changes and economic performance are, in general, weak. As the CBPP study reports, “states that cut taxes in the 1990s performed worse, on average, over the course of the next economic cycle than states that were more fiscally prudent. And the academic literature overwhelmingly finds that states with lower personal income taxes perform no better economically than their peers.” Recent experiences in California and Kansas support this evidence — increasing taxes in California did not curb economic growth, while decreasing taxes in Kansas did not boost economic growth.

What is clear, however, is that large tax cuts in Kansas — most of which went to high-income households — have significantly reduced state revenues and resulted in cuts to the state’s schools and other public systems and services, while promises of economic improvement have failed to materialize. Meanwhile, in California, the revenues provided by Proposition 30 have provided the state with the fiscal policy space to boost school funding, pay down debts and liabilities, and begin to reinvest in other public structures and supports as the state’s economy recovers.

— Chris Hoene


K-12 Education in the Governor’s Proposed 2014-15 Budget: Increased Revenues Boost Funding for Schools

January 31, 2014

California’s public schools educate a large, diverse student population, with over 6 million students enrolled in more than 1,000 school districts statewide.

A new CBP analysis — the latest in a series of briefs on Governor Brown’s 2014-15 proposed budget — looks at state spending on K-12 education and discusses how higher revenues have boosted funding for California K-12 schools, increasing spending per student to nearly the pre-recession level. In addition, the Governor’s proposal would increase support provided through the state’s new school funding formula approved by policymakers last year.

This CBP brief also discusses how, over the long term, it will take additional state revenues for California to make the necessary investments in students and their families.

For additional analysis on the Governor’s proposed 2014-15 budget, read the CBP’s initial analysis of the proposal and our recent brief on child care and preschool in the the proposed budget.

— Steven Bliss


New CBP Report – Rising to the Challenge: Why Greater Investment in K-12 Education Matters for California’s Students

October 4, 2013

The CBP yesterday released a new School Finance Facts report, comparing California student demographics, education spending, and school staffing to that in the rest of the US. This analysis finds that the state’s investment in K-12 schools lags the nation, even as California faces unique challenges in educating its 6.2 million public school students. Rising to the Challenge: Why Greater Investment in K-12 Education Matters for California’s Students shows that:

  • California invests less in K-12 education than other states, despite having greater financial resources. California’s per capita personal income ($47,115) was higher than for the rest of the US ($43,905) in 2012-13. Yet this same year, the rest of the nation invested 4.04 percent of total personal income in K-12 education, a level more than one-fourth (27 percent) higher than the 3.18 percent in California (see chart).

  • California’s 1.3 million English learners (ELs) nearly equal the combined number of ELs in the next four most populous states — Texas, New York, Florida, and Illinois — even though these four states together have roughly twice as many students as California.
  • More than half (53.0 percent) of California’s students come from low-income families, a larger share than in the rest of the US (46.8 percent). Among the five most populous states, only Florida has a higher percentage of economically disadvantaged students (56.0 percent) than California.
  • California’s schools have more students per staff than schools in the rest of the US, ranking last or close to the bottom by a number of key K-12 student-to-staff ratios. California ranks 51st nationally (including all states and DC) in students per teacher, 51st in students per guidance counselor, 51st in students per librarian, and 48th in students per administrator.

Rising to the Challenge notes the importance of the new Local Control Funding Formula (LCFF), approved by the Governor and the Legislature this past summer, in directing additional resources to disadvantaged students, and also indicates that per student spending is expected to increase in the next couple of years due to voter approval in November 2012 of Proposition 30’s temporary tax increases.

Yet the report also cautions, as we’ve blogged about before, that the LCFF and Proposition 30 do not in themselves provide sufficient resources for educating California’s K-12 students. It will be critical that California work over the long-term toward providing schools with the resources needed to ensure a high-quality education for our state’s students.

— Steven Bliss


Six Years Later, State Spending Remains Below the Pre-Recession Level

July 24, 2013

The 2013-14 budget signed by Governor Brown in June includes state spending of $138.3 billion — $96.3 billion from General Fund revenues (the primary source of funding for state services) and $42.0 billion from special fund revenues (taxes, licenses, and fees designated by law for specific purposes). These state tax dollars support a range of public systems and services, from education and health care to transportation and environmental protection. (The 2013-14 budget also includes $7.0 billion in spending from bond funds, but we exclude these dollars from the analysis below because bond funds — which come from long-term loans — are provided by investors, not the state’s taxpayers.)

Thanks in large part to voter approval of two tax measures last November — Propositions 30 and 39 — policymakers this year were able to balance California’s budget while avoiding additional major spending reductions and taking small steps toward reinvesting in key state services that were cut deeply in recent years due to the impact of the Great Recession. But despite the positive elements of this year’s budget — and there were many — looking at a single year’s spending plan tells only part of the story. Taking a broader view reveals the following:

  • State spending is down by nearly 4 percent since 2007-08, the year the Great Recession began. State spending — General Fund plus special funds — in 2013-14 is projected to be $5.3 billion (3.7 percent) below what it was in 2007-08, after accounting for inflation.

  • State spending per California resident is down by nearly 8 percent since 2007-08. State spending per capita has fallen from $3,929 in 2007-08 to $3,628 in 2013-14 — a drop of $301 (7.7 percent), after adjusting for inflation. This drop reflects a smaller state budget as well as the continued growth of California’s population. The number of Californians has increased by more than 1.5 million since 2007-08, rising from 36.6 million on July 1, 2007, to an estimated 38.1 million on July 1, 2013. In other words, state spending is lower today than in 2007-08 despite the fact that California has added well over 1 million new residents during this period.
  • State spending is substantially below the level it likely would have reached if the Great Recession had not occurred. As we explained in a blog post last week, if California’s economy hadn’t hit a steep downward slide in 2008, total state revenues — General Fund plus special funds — likely would have increased to more than $160 billion in 2013-14. State spending probably would have grown more or less in tandem, in which case it likely would have exceeded this year’s budgeted spending level ($138.3 billion) by more than $20 billion. That $20 billion-plus spending gap represents dollars that are not available to support state investments in education, child care, job training, and other public systems and services vital to California’s future.

— Scott Graves


Key Facts About the Governor’s Proposed Budget, Part 1: Voters Boost Revenues by More Than $7 Billion in 2013-14

January 17, 2013

Last week, we published our initial analysis of Governor Jerry Brown’s proposed 2013-14 budget. To highlight some of the most important aspects of this proposal — and the context for it — today we’re launching a brief chart series, Key Facts About the Governor’s Proposed Budget. This first post looks at the impact of the new revenues approved by California’s voters this past November.

*  *  *

The Governor’s proposed 2013-14 budget shows that California is poised to turn the corner on years of severe budget shortfalls. One of the biggest factors contributing to this positive trajectory is voters’ approval of two revenue measures — Propositions 30 and 39 — last November. Proposition 30 increased personal income tax rates on very-high-income Californians for seven years and raised the state’s sales tax rate by one-quarter cent for four years. Proposition 39 ended a corporate tax break that primarily benefited a relatively small number of (mostly large) multistate firms.

State finance officials project that the two measures combined will raise $7.2 billion in 2013-14 (the fiscal year that begins July 1), accounting for more than 7 percent of total General Fund tax collections. In other words, had Propositions 30 and 39 not passed, 2013-14 tax collections would fall from $97 billion to less than $90 billion.

In addition to significantly lowering revenues for 2013-14, defeat of both ballot measures would have caused revenues in the current fiscal year (2012-13) to drop by nearly $6 billion. What would have been the impact of such a large revenue decline? The 2012-13 budget agreement passed last June provides an answer: Lawmakers approved roughly $6 billion in spending reductions to be implemented on January 1 of this year if voters had rejected Proposition 30, with public schools, community colleges, and universities bearing the brunt of these “trigger” cuts. (Proposition 30’s revenues were assumed in the 2012-13 spending plan; Proposition 39’s were not.) Moreover, it’s reasonable to assume that, in the absence of other revenue options, a comparable level of reductions would have been carried over to the 2013-14 fiscal year — and perhaps beyond.

Much work remains to be done in rebuilding the foundations of a strong California economy and healthy communities in the wake of the Great Recession and years of state spending cuts. But for now, thanks to California voters, the state budget has been stabilized and provides a platform for reinvesting in education and other public systems and services that are essential to all Californians.

— Scott Graves


Statement: Chris Hoene on the Passage of Proposition 30

November 7, 2012

The California Budget Project released the following statement from Executive Director Chris Hoene in response to the passage of Proposition 30 at yesterday’s statewide election.

“Yesterday was a very good day for the idea of laying the groundwork for California’s future. With voters approving Proposition 30, our state has taken a major step forward in stabilizing the budget and reinvesting in education and other public systems and services that are essential to all Californians. The new revenues from Proposition 30, along with those from Proposition 39, position California to turn the corner on years of severe budget shortfalls and start rebuilding the foundations of a strong economy, healthy communities, and a high quality of life.”