California Taxes: What’s a Fair Share?

April 15, 2013

Today, April 15, is tax day — the deadline for filing California and federal income tax returns. It’s also an opportunity to reflect on the shared investment in our communities that taxes represent.

The dollars we pay to the state in taxes are invested closer to home than you might think. More than 70 cents out of every dollar spent through the state budget goes to local communities to fund public schools and community colleges, health and human services programs, public safety, and more.

While we all benefit from these public investments, the question of who does and doesn’t contribute their fair share provokes passionate debate. Last week, the CBP released our annual tax day report, Who Pays Taxes in California?, a snapshot of how tax payments — and tax breaks — are distributed among Californians.

The simplest answer to the question posed by the report’s title is that we all pay California taxes in some form. California households of all income levels pay sales taxes on most purchases, including household staples like soap and tissue. Those of us who drive pay fuel taxes. Californians who consume beer, wine, or cigarettes pay the alcohol tax or the cigarette tax on those purchases. Homeowners pay property taxes — and renters do, too, since this cost generally gets passed on in the form of higher rents.

The thornier question is how the overall tax bill is distributed among various income groups, and whether that distribution is fair. (For an in-depth discussion of tax fairness, see our recently released report Principles and Policy: A Guide to California’s Tax System.) Here at the CBP, we believe a stronger case can be made for a progressive tax structure — in which higher-income households pay a larger share of their incomes in taxes — than for a proportional (“flat”) tax structure, in which all households pay the same share of income in taxes, or a regressive tax structure, in which lower-income households pay a larger share of their incomes in taxes.

But as we report in Who Pays?, when all California taxes are taken into account, a family making $13,000 a year pays a larger share of their income in state and local taxes, on average, than a family making $1.6 million a year.

Even factoring in Proposition 30’s temporary tax increases, which on the whole are progressive, California’s overall tax system remains modestly regressive. The lowest-income families pay the highest share of their incomes when all state and local taxes are counted — including regressive taxes such as the sales tax and alcohol and tobacco taxes.

Another important consideration is who benefits from the spending that occurs through the tax code in the form of exemptions, deductions, credits, and exclusions. Here again, the simple answer is all of us. For instance, anyone who has ever bought groceries or filled a prescription in California has benefited from the fact that many purchases — including food and prescription medicine — are exempt from the sales tax.

However, corporations — especially large corporations — receive outsized benefits from spending in the tax code. For the corporate income tax, the revenue loss from tax expenditures is almost 80 percent of the actual revenues collected from the tax. This is substantially greater than the percentage of revenue lost from tax expenditures for either the personal income tax (54 percent) or the sales tax (48 percent).

The CBP has always emphasized that California’s budget embodies our choices and values as a state. The same is true of our tax system. On tax day, and every day of the year, it’s worth shining a light on certain aspects of the state’s tax system and reflecting on whether we are making the right choices. Does asking the lowest-income Californians to pay the most in state and local taxes, and delivering a large share of tax benefits to corporations, truly represent the vision and priorities of California’s residents?

— Hope Richardson

New From the CBP: Who Pays Taxes in California? and a Guide to the State’s Tax System

April 12, 2013

Taxes represent our collective investment in our communities and our quality of life. 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 systems and services.

As tax day approaches — the day Californians are required to file their income tax returns — a new CBP analysis examines who pays taxes, who doesn’t, and how California’s tax system compares to those in other states. Who Pays Taxes in California? shows that even with the temporary tax increases put in place by voter approval of Proposition 30, California’s lowest-income families still pay the most in state and local taxes as a share of their incomes. The report also shows that over the past three decades, more of the cost of funding state services has shifted from corporations to personal income tax filers.

The CBP is also pleased to be releasing — in advance of tax day — a comprehensive overview of the state’s tax system. Principles and Policy: A Guide to California’s Tax System explains fundamental concepts in tax policy, examines the types of state taxes paid by individuals and businesses, and discusses key trends, policy issues, and options for reform.

— Steven Bliss

Taxes Are What We Pay for a Civilized Society

April 15, 2009

Taxes are what we pay for a civilized society — Former Supreme Court Justice Oliver Wendell Holmes

Taxes are the collective price we pay for public goods and services. State and local taxes support our public schools, streets and highways, public hospitals that form the backbone of the state’s trauma care system, parks and beaches, the public health infrastructure that ensures that our food is safe to eat and our water is safe to drink (and that delivers water to homes across California), as well as a range of other services. While the primary purpose of a tax system is to raise the money needed to support public services, tax policy can also serve as an end in itself, providing incentives for taxpayers to engage in desired activities or providing cash assistance to certain individuals.

April 15 – the deadline for filing income tax returns – is a day when Americans, and particularly the media, reflect on what we pay and, hopefully, what we get in return for tax dollars. Unfortunately, a lot of that reflection is informed by misinformation, distorted information, and urban legends that just plain aren’t true.  We’ve blogged on this before, but in honor of “tax day,” here’s a run down of the facts:

  • Low-, not high-, income Californians pay the largest share of their income in state and local taxes. Here’s an updated analysis of data we’ve blogged about before that takes into account the temporary tax increase included as part of the February budget agreement.
  • California is a moderate, not high, tax state when all state and local taxes and fees are taken into account.  This results from the fact that California has moderately high state taxes, but low local property taxes due to the impact of Proposition 13 on local property tax collections.
  • High-income Californians aren’t leaving the state due to higher taxes. In fact, the number of millionaire taxpayers is growing at a rate that far exceeds the increase in the number of personal income taxpayers as a whole.
  • Over the past 15 years, lawmakers have enacted tax cuts that will cost the state nearly $12 billion in 2008-09. That’s a larger loss than the $11.0 billion 2009-10 temporary increase in state tax revenues included in the February budget agreement.
  • Moreover, while the tax increases included in the budget are all temporary, regardless of the outcome of the May election, the September 2008 and February 2009 budget agreements included massive corporate tax cuts that are permanent and that will reduce state revenues by approximately $2.5 billion per year when fully implemented.

And finally, our friends at the Oregon Center for Public Policy (OCPP) offer an interesting history lesson for the organizers of the tax day “tea parties” around the country. The OCPP notes that, “Misunderstood by many, the real Boston Tea Party of 1773 was a protest not against taxation but against a tax cut for a multinational corporation of the day…The Boston Tea Party, in which American colonists dumped British tea into Boston Harbor, was an act of defiance against the Tea Act of 1773, which gave a tax break to the British East India Company. As noted by the Boston Tea Party Historical Society, the tax break was an effort by the British Crown to help the East India Company establish a tea monopoly in the American colonies.”

Don’t forget to file your taxes. And while you are at it, don’t forget to add the “use tax” you owe on your out-of-state Internet purchases!

— Jean Ross