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

Wealthiest 1 Percent Would Provide Most of the New Revenues Raised by Proposition 30

September 11, 2012

A new CBP Budget Brief released today looks at Proposition 30, which was placed on the November 6 ballot by Governor Jerry Brown via the initiative process. Proposition 30 would increase personal income tax rates on very-high-income Californians for seven years and raise the state’s sales tax rate by one-quarter cent for four years. The CBP has endorsed this ballot measure.

Proposition 30 would take an important step toward addressing California’s budget gap over the next few years. The measure would provide much-needed new revenues – an estimated $6 billion per year on average when fully implemented, according to the Legislative Analyst’s Office – and would help shield public priorities, such as education and safety-net supports for families hard-hit by the recession, from further budget cuts.

State General Fund revenues are lower today as a share of the economy than in all but two of the past 40 years. The state’s budget challenges are partly the result of a steep drop in revenues brought about by the Great Recession, but the shortfalls also reflect years of tax cuts, including large, permanent corporate tax breaks enacted during the depths of the downturn. 

Lacking sufficient revenues, lawmakers bridged recent years’ budget gaps through deep spending cuts to virtually all areas of the budget. To take one example, the state reduced Proposition 98 spending for K-12 education by $7.4 billion between 2007-08 and 2011-12 – a drop of $1,271 per student.

Proposition 30 raises new revenues by asking those who have benefited most from the economic growth of recent decades to contribute the most to laying the groundwork for California’s future prosperity. As shown in our Budget Brief, the measure raises nearly 80 percent of its revenues from the wealthiest 1 percent of Californians, who have annual incomes over a half-million dollars and who experienced substantial income gains over the past two decades. The average inflation-adjusted income of the top 1 percent was 82.0 percent higher in 2010 than it was in 1987, while the average inflation-adjusted income for Californians in each of the bottom four fifths was substantially lower than in 1987.

Low- and middle-income Californians  – who bore the brunt of the Great Recession’s effects on the job market – would see very small tax increases under Proposition 30, on the order of $24 to $55 annually in sales and personal income tax increases combined. In contrast, those in the top 1 percent would pay an additional $21,883 in taxes on average.

Proposition 30 presents voters with the opportunity to begin reversing a decade of disinvestment in California. The measure looks to the state’s wealthiest to provide the bulk of the revenues that would help stabilize the state budget and begin to restore funding for education and other critical public services, so that all Californians can share in the state’s future prosperity.

­– Hope Richardson

The Steady Decline in Smoking: Good for Public Health, Bad for Tobacco Bonds

May 7, 2012

The steady decline in smoking is unquestionably positive from a public health perspective. But what does it mean for states, such as California, that sold bonds backed by annual payments from tobacco companies following a landmark 1998 settlement? A recent New York Times article suggests an answer: Reductions in smoking could mean that several states, including California, will receive payments that are too small to cover the principal and interest due on the bonds. Why? Because the size of the payments partly depends on how well cigarettes are selling. Less smoking leads to smaller payments. States could dip into reserves to make up the difference – California already has done so – but “if smoking keeps declining at the current pace, some of the reserves set up as backstops will run dry,” according to the Times. “At that point, investors – including individuals, insurance companies and mutual funds – will be at a loss” because states, in general, are not legally obligated to step in and make the payments with their own tax dollars.

California, which sold tobacco bonds to help close budget shortfalls in the early 2000s, is a case in point. The state is not required to make up the difference if annual payments and reserve funds fall short, as we explain in our recent analysis of Proposition 29, the June ballot measure that would increase the state cigarette tax by $1 per pack. Some of the tobacco bonds, however, include a back-up state “guaranty,” which requires the Governor to ask the Legislature for funding to make bond investors whole. Does the Legislature have to provide the funds? No. But if tobacco payments and reserves drop below the level needed to repay the bonds, policymakers would either have to make up the difference from the state’s General Fund or allow the bonds to slip into default – a decision that most policymakers would probably hope to avoid.

– Scott Graves

Measuring Up: The CBP’s Annual Chartbook Is Out

February 7, 2012

The California Budget Project (CBP) has released Measuring Up: The Social and Economic Context of the Governor’s Proposed 2012-13 Budget – the CBP’s signature annual “chartbook.” This publication provides an overview of the Governor’s proposed spending plan and the social and economic context that will shape this year’s budget debate.

Measuring Up looks at:

  • How the economic downturn has contributed to the $9.2 billion budget shortfall facing California;
  • How the Governor’s proposed budget aims to close the budget gap;
  • What the Governor’s proposed budget would mean for state support for education, health and human services, and other key areas.

The full chartbook is available here.

— Steven Bliss

Some of California’s Wealthiest CEOs Run Corporations That Paid No Federal Income Tax

November 4, 2011

The gap between the wealthiest Californians and the less well-off has widened substantially in recent decades, as illustrated in a new CBP report, A Generation of Widening Inequality. The average income of the middle fifth of California’s taxpayers was approximately $35,000 in 2009 – almost 15 percent lower than in 1987 on an inflation-adjusted basis. In contrast, the average income of the top 1 percent was $1.2 million in 2009 – approximately 50 percent higher than in 1987, after adjusting for inflation. That means the average Californian in the top 1 percent earned in less than eight workdays what the average middle-income Californian earned in a year.

Who are the wealthy? Contrary to popular perception, entertainers and professional athletes make up just a small fraction of the wealthiest 0.1 percent of US taxpayers. Instead, six out of 10 of the top 0.1 percent are executives, managers, or financial professionals. And according to Forbes, many of the nation’s highest-paid executives run California-based companies, including Walt Disney’s CEO, Robert A. Iger, whose annual compensation of $53.3 million makes him the third-most-highly compensated chief executive of a US company.

Interestingly, a report released yesterday by Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) shows that some of the most highly compensated CEOs run California-based companies that paid no federal income tax in recent years, even though these companies earned profits. For example, San Francisco-based PG&E paid no federal income tax in 2008, 2009, or 2010 even while it earned profits in each of those years totaling nearly $5 million. In addition, San Diego-based Sempra Energy paid no federal income tax in 2008, even though the company earned a profit of more than $1 million that year. According to Forbes, the annual compensation of PG&E’s CEO, Peter A. Darbee, was $7.3 million last year, while that of Sempra’s CEO, Donald E. Felsinger, was $20.6 million.

The CTJ and ITEP report examined a total of 280 companies on the Fortune 500 list that were profitable in each of the last three years and provided sufficient and reliable information in their financial reports about their profits and taxes paid. Overall, 78 of the companies (27.9 percent) paid no federal income taxes in at least one of the past three years.

— Alissa Anderson