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The Burdens of California Taxation, Real and Imagined

by: Robert Cruickshank

Tue Apr 15, 2008 at 07:58:10 AM PDT

With the state budget again in crisis, tax reform is getting more attention these days. But where some see a structural revenue shortfall and a tax system that burdens the poor more than the rich, some of the usual suspects are trying to use the crisis to push solutions that will accomplish little if any good.

A new study from the California Budget Project shows that California's tax burden is regressive - the lowest 20% income group pays 11.7% of their income in state and local taxes, whereas the top 1% only pays 7.1%. California's income tax is highly progressive, but that income tax isn't as high as it should be on the upper ends - as a result of that and of Prop 13, localities have had to turn to sales taxes to provide for police, fire, and public transportation.

The study also shows that corporate income was FAR larger than personal income during the last economic "recovery" - whereas the median income grew by 11%, corporate profits grew by 557%. Yet most of that corporate income went untaxed, contributing to the burden on lower income Californians.

Finally, the study showed that when all taxes - state and local - were taken into consideration, California ranked 18th in overall tax burden. Our income tax is #3, but our property taxes are #38 - explaining both the unfair burdens and the structural revenue shortfall.

Looking at these numbers one might believe that we need to reform the property tax and find ways to force the wealthy and corporations to contribute their fair share to the running of our state. But to hear Dan Walters tell it, we should do no such thing - instead we should pursue pointlessly "revenue-neutral" reforms that would accomplish little of actual value for Californians. More below.

Robert Cruickshank :: The Burdens of California Taxation, Real and Imagined
In today's SacBee Dan Walters argues "It's time for a state tax overhaul" - and while the CBP numbers say the same thing, Walters goes in a very different direction than the CBP study would suggest.

Demographic change and various decrees by voters and politicians have transformed what was once a system that was roughly equally apportioned among property, sales and income taxes into one that's utterly dominated by income taxes. The vast majority of income taxes are paid by a relative handful of high- income Californians whose incomes are increasingly tied to stock market trades and other forms of capital gains, creating boom-and-bust budgetary cycles because the spending side of the budgetary ledger has much less flexibility.

It is true that the state is dependent on income taxes that are volatile. But does Walters propose balancing that out by taxing other forms of wealth, such as capital gains and property?

But taxing real estate is a medieval concept based on the theory that such property equaled wealth. If we're going to tax wealth, why should we tax land and buildings and exempt other forms of wealth, such as stock holdings and gold coins? It makes no sense.

Calling property taxes a "medieval concept" is flatly absurd. It's as modern a form of taxation as there is. Most wealth in this state is held in the form of land. The primary source of individual wealth is property. In states such as New York, schools are well-funded because property taxes are kept at a sane and reasonable level. Whereas here in California, property taxes are artificially low, fueling a boom-and-bust real estate cycle and leaving the wealth that has been generated in real estate over the last 30 years untapped by taxation.

If Walters doesn't want property tax reform, what DOES he think we should be doing?

The income tax system, as noted earlier, is terribly skewed toward high-income taxpayers. Some want to increase that burden, but that would exacerbate the volatility of the budget. Real reform would increase income taxes on middle-income Californians, who tend to get their money from wages, and thus bring more stability to a dangerously unstable system - or reduce the overall income tax burden and put more emphasis on sales and other consumption taxes.

Yet middle-income Californians already pay a larger burden of taxes than their wealthy counterparts - from 8.7% to 10.5% of their income. Any budget solution will necessarily involve getting more revenue from middle-income Californians, but it should also involve getting a lot MORE revenue from upper-income Californians.

And we already have enough emphasis on sales and consumption taxes - which are themselves volatile and decline during a recession. Those taxes help create the regressivity in California's tax system.

Now, I do support sales tax modernization, as Walters does in his column. And I firmly believe the VLF should be restored to 1998 levels, which Walters ignores. But the primary work of tax reform should be done by eliminating the 2/3 requirement in the legislature and at the ballot box for new taxes; by excluding commercial property from Prop 13 protections; and by increasing taxes on the wealthy and corporations, including but not limited to income taxes. Finally, we should go after the $12 billion in tax loopholes that were created since 1993, most of which favor corporations and were eliminated in the "good times" only to haunt us here in the bad times.

And whereas Walters approvingly quotes Arnold's call for "revenue-neutral" solutions, it is clear that California needs revenue-adding tax reform. Our schools, our health care, our transportation systems all need massive new investment if we are to maintain economic security and opportunity for all Californians here in the 21st century.

Perhaps the most important tax reform, however, isn't in the numbers or the brackets or the rates. It's in the mind. Californians need to start seeing taxes as an investment in their future, in their economic prosperity. A few hundred dollars a year in new taxes per person would generate significant savings to that person, especially if the revenue went to lowering the cost of college, went to hiring new teachers and reducing K-12 class sizes, went to providing alternatives to driving, went to single-payer health care (by far the most significant economic stimulus this state could provide).

The method of tax reform counts, but so does the underlying concept: we need to do a better job taxing wealth, and a better job showing Californians the value of investment in public services.

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