In my column last week I reported the results of a new Tulchin Research poll that showed that Californians favor raising taxes on the rich and closing corporate tax loopholes by large margins. Perhaps this is true because they sense that something has gone very wrong in our economy over the past several decades. The gap between the rich and the poor has dramatically widened and the middle class has become increasingly unstable. Many more of us are feeling unsure about the future.
The Right’s answers to this has been to scapegoat union workers by pointing to their gold-plated pensions, but as George Skelton recently pointed out, pension costs only account for 4% of the state budget deficit. Hence the demonization of the public sector is largely an exercise in demagoguery designed to shift our attention away from the stark fact that the only people doing better economically are the rich and the corporate elite.
Recently, the California Budget Project put out a policy points study entitled “Who Pays Taxes in California?” What it reveals is that many often-repeated truisms about our tax system are myths.
Who pays the largest percentage of their income in taxes? Those with the highest incomes, right? Think again. According to the CPB study: “Measured as a share of family income, California’s lowest-income families pay the most in taxes. The bottom fifth of the state’s non-elderly families, with an average income of $12,600, spent 11.1 percent of their income on state and local taxes. In comparison, the wealthiest 1 percent, with an average income of $2.3 million, spent 7.8 percent of their income on state and local taxes.”
But California is a very high tax state, correct? Again, not true. As the CPB states: “California is a moderate tax state. In 2009-10, California ranked 15th among the 50 states with respect to state taxes as a percentage of personal income. California’s ranking is up from 21st in 2008-09, a reflection of increased revenues from the temporary increases in the personal income tax, which expired on December 31, 2010, and the sales tax and vehicle license fees, which will expire on June 30, 2011.”
OK, but aren’t taxes driving businesses out of the state? CEO’s are strapping their hot tubs to the roofs of their Mercedes and caravanning to Arizona for a better business climate, right? In truth, the tax burden for funding state services has shifted away from corporations to personal tax filers. CPB again: “Over the past two decades, the cost of funding state services has shifted from corporations to personal income tax filers. The Department of Finance estimates that personal income tax receipts will provide 51.5 percent of General Fund revenues in 2010-11, up from 35.4 percent in 1980-81. Corporate tax receipts are expected to provide 12.4 percent of General Fund revenues in 2010-11, down from 14.6 percent in 1980-81. New, increased, and expanded corporate tax breaks and the 1996 corporate tax rate reduction are responsible for the decline in the share of state revenues provided by the corporate income tax. Additional corporate tax cuts were included in the September 2008 and February 2009 budget agreements that will result in a loss of nearly $2 billion per year when fully implemented.”
So despite the mantra to the contrary, corporations are actually providing a smaller share of the state’s general fund than they did in the early eighties. Hence, much of the current budget deficit can be attributed to the fact that California has a revenue problem. Thus, as the howls of outrage on the Right about taxes have gotten louder, the share of taxes contributed to the general fund by corporations has actually shrunk in comparison to individual tax payers. In fact, due to decades of loopholes, the corporate tax rate (officially 8.84%) is effectively really only 4.7% according to the business friendly Council on State Taxation.
As for the exodus of tax fleeing corporations, one needs to consider that, as the California Tax Reform Association has pointed out, state and local costs are usually less than 2% of the cost of doing business. Thus if California raised its business tax rate by 1.3% as Oregon recently did in order to fund schools and vital public services it would only account for a .026% increase in the cost of doing business. Indeed, factors like quality schools and infrastructure (things that require tax revenue) usually rank higher on the list of factors determining where businesses decide to locate. Add to this, the fact that there has been no credible study that links corporate tax breaks to job creation, while there is plenty of evidence that corporations do chase cheap labor abroad and frequently pocket the money given to them in tax breaks without creating any jobs at all.
So the fact that corporations aren’t shouldering their fair share of California’s tax burden means that wealthy individuals are picking up the slack, right? Alas, not so. Sadly, the CPB study indicates that: “In 2008, the most recent year for which data are available, 611,318 taxpayers reported incomes of $200,000 or more. However, 2,431 of these households paid no California personal income tax. The number of high-income ‘no tax’ returns more than quadrupled between 1997 and 2008, rising from 579 to 2,431.”
So while we listen to politicians of all stripes rail about pension reform and demonize public sector workers, the truth is that they aren’t on your side against the privileged class. They are in bed with the real privileged class (on both sides of the aisle) and they are laughing at us all the way to the bank.