They Spend 11.7 Percent of Income, While State's Richest Pay 7.1 Percent
By Scott Duke Harris San Jose Mercury News
Low-income Californians pay a disproportionately large share of their income in state taxes, while the Golden State's richest citizens spend a much smaller share on taxes, according to a joint study by two research groups.
The report, released five days before this year's April 17 tax filing deadline, showed that the state's strongly progressive personal income tax - demanding proportionately more from the wealthiest Californians and nothing from the poorest - falls far short of counterbalancing the regressive effects of sales taxes and excise taxes on items such as gasoline, tobacco and alcohol. Property tax is also regressive, according to the study.
Regressive taxes such as sales and excise taxes are set at fixed amounts, regardless of income levels, thus affecting the poorest most heavily.
"It's an upside down tax system: the more you earn, the less you pay," said Matt Gardner, executive director of the Institute on Taxation and Economic Policy, based in Washington D.C.
Such inequities and the state's chronic budget shortfalls underscore the need for a comprehensive "soups-to-nuts" review of the tax system, including shelters that corporations and wealthy individuals use to avoid taxes, said Jean Ross, executive director of the Sacramento-based California Budget Project.
The analysis found that the poorest 20 percent of Californians - with an average income of $11,100 in 2004 dollars - spent 11.7 percent of their income on all types of state taxes, both direct and indirect. The wealthiest 1 percent, with an average income of nearly $1.6 million, spend 7.1 percent on state taxes, and the next 19 percent spent 8 percent on state taxes.
Moreover, the report noted, 1,343 of the state's 449,277 households earning more than $200,000 paid no personal income tax in 2004, the most recent year for which data were available. They benefited from various tax breaks, including the research and development credit. The number of these high-income "no tax" returns had more than doubled since 1996, the research found.
While business groups and anti-tax advocates have often complained about California's tax regimen, the report judged it "a moderate tax state."
It ranked 13th among 50 states in terms of state taxes as a proportion of personal income in 2004-05. In terms of total state and local revenue as a percentage of personal income, the state ranked 19th in 2003-04, the most recent year for which data was available.
The report emphasized that California's tax burden has shifted from corporations to individual taxpayers over a generation. Forecasters have estimated that personal income tax will provide 54.7 percent of the General Fund revenues in 2007-08, up from 35.4 percent in 1980-81. Corporate taxes are expected to provide 10.6 percent of the General Fund in 2008, down from 14.6 percent in 1980-81.
Moreover, the report emphasized, the net profits reported by corporations for California tax purposes soared 143 percent from 2000 to 2004, while the total adjusted gross income of the state's individual taxpayers increased by only 1.4 percent.
The report did not seek to assess the impact of the underground cash economy or the wealthy who fail to report capital gains, Gardner said. Nor does the study compute the impact of fees, such as sewer bills or bridge tolls.
The tax inequities, the study concluded, exist despite California's high personal income tax thresholds. A family of four with two children that earned $47,671 would have no state income tax liability in 2006. (The state's median household income was $51,755 in 2005.)
But the high threshold, Ross said, also means that low-to-moderate income families receive minimal or no financial benefit from the state's various credits, deductions and tax benefits.
To help ease the burden on low-income families, the California Budget Project has long advocated a state earned income tax credit, patterned on the federal model, that would increase refunds to low-income families.
The research groups describe their work as non-partisan, but the report is sure to factor into partisan debates. Across the political spectrum, "everybody thinks they're the champion of fair tax policy," Ross said in an interview.
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