“Taxifornia” Dreaming: Who Really Pays Taxes in California?

By Jim Miller

Tomorrow is tax day, and we are likely to hear the usual histrionics from the pity the millionaire crowd about how the draconian taxes on the affluent and businesses in “Taxifornia” are killing growth and jobs and driving folks out of the state.

There is only one problem with this—it’s not true. Indeed, far from the socialist hamlet that the anti-tax zealots like to portray us as, California’s tax system is still more regressive than progressive.

This is documented in the California Budget Project’s (CPB) Annual report “Who Pays Taxes in California?” that shows that, “Contrary to the oft-repeated claim that high-income Californians pay an unfair amount of taxes, it is actually California’s low-income households who pay the largest share of their incomes in state and local taxes.”

Consequently, the CPB argues that “Given widening income inequality over the last generation, and the ongoing economic challenges facing Californians in the aftermath of the Great Recession, policymakers could take specific steps to reduce the regressive nature of California’s system of state and local taxes and to promote economic security for low-income families.”

But before we get to their recommendations, it is worth underlining some of the myth-busting reality that this report provides. For instance, “Who Pays Taxes in California?” notes that even after the passage of the Proposition 30 increases in taxes for higher earners, the state’s lowest income families still pay the largest share of their income in taxes. Specifically, while the top 1% of earners pays 8.8% of their income in taxes with the next 4 and 15% paying 8.7 and 7.4% respectively, a heavier burden still falls on the bottom fifth of Californians who forgo 10.6% of their income in taxes.

Just above them on the income ladder the second to last fifth of earners pays 9.2% of their income in taxes with the middle range income brackets paying 8.2 and 7.6%. Hence, the CPB study shows, the poor shoulder the heaviest burden, as measured by percentage of income.

As the CPB study puts it:

A fair tax system is one that asks individuals and families to contribute to public services based on their ability to pay. However, California’s system of state and local taxes asks disproportionately more from lower-earning households. After taking into account Californians’ ability to deduct state and local taxes for federal income tax purposes . . . California’s overall tax system is moderately regressive, meaning that lower-earning households on average pay a larger share of their annual incomes in state and local taxes compared to higher income households. The bottom fifth of California’s nonelderly households, with an average annual income of $13,000, spend an estimated 10.6 percent of their incomes on state and local taxes. In comparison, the wealthiest 1 percent of households, with an average annual income of $1.6 million, spend an estimated 8.8 percent of their incomes on state and local taxes. These estimates include the overall progressive effect of Proposition 30, a ballot initiative approved by California voters in 2012. Proposition 30 temporarily increased the state’s sales tax and added new, temporary personal income tax rates for very wealthy Californians.

So far from robbing the rich to fatten the poor, California’s tax system is “mildly regressive.” As for corporate taxes, the CPB study shows that they only account for 5.2% of state and local tax revenues. Thus it is individuals—not corporations—who pay most of the state’s taxes, and the less you earn, the higher percentage of your income goes to taxes.

The CPB goes on to recommend the “better targeting of tax credits to low- income households” and the creation of a “state earned income tax credit” to make the system fairer for low-income earners and help address income inequality at the state level.

While these are good ideas, it must also be noted that the biggest flaw of Proposition 30 was not that it was unfair to the rich, but that the increased taxes on top earners are only temporary. If we are to meet the educational, health, infrastructure, and other key challenges of the future, the Proposition 30 taxes on high-income earners need to made permanent.

In addition to this, other quite reasonable progressive tax reforms should include an oil severance tax and a revision of Proposition 13 that saves the protections for ordinary homeowners but allows corporate property taxes to be revalued and taxed accordingly. Put simply, Disneyland doesn’t need the same tax break as your grandmother.

As Paul Krugman points out in his review of Thomas Piketty’s Capital in the Twenty-First Century “progressive taxation—in particular taxation of wealth and inheritance—can be a powerful force limiting inequality.” And this is evermore necessary because, “Tax burdens on high-income Americans have fallen across the board since the 1970s, but the biggest reductions have come on capital income—including a sharp fall in corporate taxes, which indirectly benefits stockholders—and inheritance.”

Otherwise we are left to continue what Piketty calls “the drift towards oligarchy” as the capitalism of the future trends toward the “patrimonial” with fewer and fewer gains trickling down to the rest of us.

The big picture answer, then, is more progressive tax reforms that help ease income inequality while addressing our pressing current needs with an eye towards the next generation.

If we do this, California will be able to move into the future with the revenue we need to be a leader in the 21st century. Ignoring the coming revenue crisis in the state in favor of politically expedient but short-sighted austerity budgeting will backfire big time when Proposition 30 expires and the cuts to education and other vital social programs come again to our state that has managed to stop the bleeding but hasn’t even come close to restoring what was lost over the last decade or so.

Of course, engaging the revenue question head on like this will require political courage that, at present, seems lacking not just from the minority party still held hostage by Grover Norquist but from the Democrats who seem content to pretend that the question of how to fund the future has been settled because Jerry Brown says so.

As one Democratic politician who knows better recently told me: “Nobody’s going to show any courage until they feel the pressure to do so.” Let’s hope that day is sooner rather than later or our drift towards oligarchy will continue unabated.