California’s Regressive Tax System

As mentioned in yesterday’s open thread, the California Budget Project is out with answers to the question “Who pays taxes in California?” As their report makes clear, there’s another question that is equally important – “who doesn’t pay taxes in California?” What the CBP numbers reveal is a state where the tax burden is borne by the poorest, in order to let the richest escape their obligations.

Measured as a share of family income, California’s lowest-income families pay the most in taxes. The poorest fifth of the state’s non-elderly families, with an average income of $13,200, spent 11.1 percent of their income on state taxes. In comparison, the wealthiest 1 percent, with an average income of $2.2 million, spent 7.8 percent of their income on state taxes.

This is in spite of the fact that California’s income and corporate taxes are scaled progressively – the higher ends pay more than the lower ends. That isn’t the problem. The problem is instead that the upper ends of the scale, both for personal and corporate income taxes, simply aren’t paying enough. That’s compounded by the fact that over the last 30 years, there’s been a significant shift away from corporate taxes and toward personal income taxes, despite the fact that corporate profits have far outstripped personal income gains:

A number of recent research reports have documented the rise in corporate profits and decline in the share of national income accounted for by wages and salaries. While comparable data are not available for California, the data that are available show that the recent growth in corporate profits reported for California tax purposes far exceeds that of income reported by individual taxpayers. Between 2001 and 2008, the most recent year for which data are available, the total adjusted gross income of California’s personal income taxpayers increased by 27.8 percent. In contrast, the net profits reported by corporations for California tax purposes increased more than fivefold, rising by 411.6 percent.

That’s a huge amount of wealth that is going untaxed by the state of California, even though we’ve had a structural revenue shortfall for the last 30 years and are now faced with calls to destroy the public services that enable economic growth to occur in the first place.

The CBP report also again disproves the notion that California is a high tax state – our combined state and local taxes put California at 19th in the nation, pretty much in the middle of the pack as tax burdens go.

What does this all mean? It’s obvious – California’s tax policies are designed to let the rich and the large corporations off the hook. The CBP report showed that over 2,000 high-income Californians paid no state taxes whatsoever:

In 2007, the most recent year for which data are available, 647,547 taxpayers reported incomes of $200,000 or more. However, 2,044 of these taxpayers paid no California personal income tax. How did they do it? The tax breaks claimed most often by “no tax” taxpayers include enterprise zone tax credits, miscellaneous deductions, and mortgage deductions. The number of high-income “no tax” returns more than tripled between 1997 and 2007, rising from 579 to 2,044.

Despite this, Meg Whitman is determined to make matters worse by eliminating the capital gains tax while increasing the financial burden on working- and middle-class Californians by cutting the state programs they rely upon.

California clearly has the room to increase taxes on the higher end of the scale – we had 11% rates on upper income brackets during much of the 1990s and it didn’t stop economic recovery. We’ve had much higher corporate tax rates – around 9%, instead of the current rate of about 5% – in the 1970s when California still experienced economic growth.

The choice California faces is quite clear: either we restore the successful tax policies of the past, make the system more progressive and demand the wealthy and corporations pay their fair share, or we continue to destroy our schools, health services, and transportation systems in order to continue giving wealthy away to those that already have it.

3 thoughts on “California’s Regressive Tax System”

  1. For a single person in California, the top tax bracket kicks in at only $46,349 income (after deductions, so roughly $50k before deductions).   So a single mother making $50k pays the same marginal tax rate as a corporate exec making $2 million a year, and the single mother pays Social Security tax on every dime, while the exec pays only on the first $107k or so.

    California should put the top brackets that we used to have back.  Bump it up a percent at $200k single/$400k married filing jointly, and then another percent at $500k/$1M.

  2. Also on the subject of dispelling tax myths, David Leonhardt has a great piece at the New York Times smacking down that odious meme that 47% of American’s don’t pay taxes.  And Jonathon Chait at The New Republic addresses another attack on progressive taxation, and his post includes a chart showing that when total tax payments are considered (state, local and federal), the tax system is barely progressive, hardly the oppressive burden on the rich that the right moans about this time of year.

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