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.

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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

New CBP Video: Proposition 30 Would Move California Toward More Broadly Shared Prosperity

November 1, 2012

In this brief video, CBP Deputy Director Alissa Anderson discusses the importance of Proposition 30 in the context of widening income inequality in California. Proposition 30, which will appear on the November 6 statewide ballot, would raise significant new revenues through temporary tax increases that would largely affect the wealthiest Californians.

This is the latest in an ongoing series of videos from the CBP highlighting key issues and trends in budget policy and what they mean for individuals, families, and communities statewide.

Proposition 39: Should Corporations Choose How They Are Taxed?

November 1, 2012

During the recent recession, when state revenues were at their lowest level as a share of the economy in more than three decades, lawmakers quietly passed a set of significant tax cuts that benefit a small number of large corporations at a cost of more than $1.5 billion a year to our state budget. Proposition 39, one of the measures on the November 6 ballot, singles out the largest and most costly of these tax cuts for public scrutiny. The CBP recently released an analysis of the measure, which would end the state’s current policy of allowing multistate corporations to choose the more favorable of two methods for determining their California income tax.

Under a system known as “optional single sales factor apportionment,” in effect since 2011, multistate corporations operating in California are allowed to choose the more favorable of two methods for determining what share of their income will be subject to state tax. Proposition 39 would change the law so that nearly all multistate firms would be required to calculate the share of their income subject to the state’s corporate income tax the same way: based on the percentage of their total sales that occur in the state. The proposed new system, called “mandatory single sales factor,” has been adopted by almost half of all US states.

Starting in 2013, Proposition 39 would result in an estimated $1 billion annually in additional state revenues, an amount expected to grow over time. From 2013-14 through 2017-18, half of these dollars would be used to fund energy efficiency and clean energy initiatives. After 2017-18, all the dollars would be deposited in the state’s General Fund. Proposition 39 is also expected to increase school funding because significant growth in General Fund revenues tends to boost the state’s minimum funding guarantee for K-12 education and community colleges.

The current system for taxing multistate corporations neither encourages firms to locate in California nor offers an incentive to hire Californians. Instead, it provides an arbitrary tax break for multistate firms by letting these corporations choose the most advantageous formula for calculating their annual tax bill. Currently, California is one of only two states that allow corporations to choose each year between single sales factor and another tax apportionment formula based on the firm’s property, payroll, and sales in the state. All other states that have adopted single sales factor have made it mandatory – either for all corporations or for certain categories of firms. States that have adopted the mandatory approach provide both a “carrot” and a “stick”: the carrot of lower taxes for firms that locate in-state and export out-of-state and the stick of higher taxes for firms that sell to the state’s market without locating a proportionate share of property and payroll there.

In the CBP’s analysis of Proposition 39, we find that the largest firms would provide the majority of Proposition 39’s new revenues. Firms with gross annual receipts over $1 billion would provide approximately 70 percent of the revenues. In a given year, only about 2 percent of all corporations doing business in California would likely be affected by the tax change.

Proposition 39 has its drawbacks: It includes an exception that specifically favors cable companies, and it dedicates a share of its revenues to specific, inflexible uses (namely, renewable and clean energy projects). Voters will need to weigh these concerns against the fact that Proposition 39 would revoke a sizeable and unnecessary corporate tax break and bring in $1 billion a year in new revenues, helping to stave off deeper cuts to California’s vital public systems and programs.

— Hope Richardson

New CBP Analysis: What Makes a Tax System “Fair”?

May 31, 2012

The issue of fairness in the tax system is the topic of continued discussion and interest among policymakers, families and individuals, businesses, and the media, but there is little consensus as to what specifically constitutes a “fair” or equitable tax system. A new CBP analysis looks at the idea of “fairness” in taxes: what economists believe makes a tax system fair, how fair our state’s tax system is, and why fairness matters.

This CBP analysis shows that California’s tax system is modestly regressive after taking into account taxpayers’ ability to deduct state income and property taxes for federal income tax purposes. This means that lower-income households pay a larger share of their incomes in taxes than higher-income households do. The report also explains which taxes within California’s tax system are regressive, such as sales and excise taxes and the Vehicle License Fee, and which are progressive, such as the income tax. The analysis briefly discusses the characteristics of a good tax system: that it provides an appropriate level of revenue on a timely basis, distributes the cost of taxation fairly, promotes economic growth and efficiency, can be easily administered, and ensures accountability.

— Steven Bliss

Tax Day 2012: Who Pays?

April 17, 2012

Today is tax day – the day when Californians file their income tax returns and make a collective investment in their communities. Tax day presents an opportunity to reflect on all of the public structures that taxes support. Today, families will turn on the tap and be certain that the water coming out is clean and drinkable thanks to our public health infrastructure. When their kids play at the local park, parents can rest easy knowing that their tax dollars helped support environmental regulations that made significant improvements in the quality of air we all breathe. As commuters across the state head to work or school, they can thank taxes for the roads, bridges, bike paths, and transit systems they’ll use. And all of us will benefit from our collective investment in public schools, colleges, and universities that prepare the next generation for the workforce and help ensure that California remains economically competitive in the future.

While we all benefit from these investments, a new CBP analysis released for tax day shows that the wealthiest Californians actually pay a smaller share of their incomes in taxes than low- and middle-income Californians. As this chart shows, the top 1 percent of California’s families, with an average income of $2.3 million, pays 7.4 percent of their incomes in state and local taxes, compared to 10.2 percent paid by the bottom fifth of families, whose average income is just $12,600, and 8.1 percent paid by families in the middle fifth. This difference partly reflects the fact that lower-income families pay a larger share of their incomes in sales and property taxes than higher-income families.

Our analysis also shows that the number of high-income households paying no California income tax at all has more than tripled since the late 1990s. Nearly 2,000 taxpayers with incomes of $200,000 or more paid no California personal income tax in 2009 – the most recent year for which data are available – up from fewer than 600 households in 1997. These households paid no California income tax by using a variety of deductions and credits, such as the mortgage interest deduction and the state’s Enterprise Zone Hiring and Enterprise Zone Sales and Use Tax Credits.

Taxes are likely to remain front and center even after tax day is over. Californians could have the opportunity to vote on one or more tax initiatives on the November ballot, as we recently blogged about here. Stay tuned for the CBP’s analyses of these measures in the coming months.

— Samar Lichtenstein