Two new reports shed light on income inequality and who is paying for California’s government

by Brian Leubitz

It is probably just happenstance that these two reports came out on top of each other, but it weaves a narrative that has been out there for years.  The middle class is hurting, and the corporations, who need and require a strong middle class of consumers, is doing little to help.  In fact, they are actively working to strangle their own customers.

First, let’s start with our shrinking middle class.  The Public Policy Institute of California is out with a new report focusing on California’s increasing income inequality.  The statistics on the middle class from the report fairly summarize what has happened to our economy over the past thirty years.  In 1980, 60 percent of California families were middle income. By 2010, 47.9 percent of Californians lived in families considered middle income, after adjusting for the state’s cost of living. These are families with incomes between $44,000 and $155,000.  

Now, that’s a pretty broad swath of income levels, and it could be argued that a family earning $44,000 isn’t really middle class, but bright lines are always difficult in situations like these.  But the underlying truth remains the same, California’s (and the nation’s) middle class is disappearing.

California has always been somewhat exceptional, however. And such is the case for income inequality.  As a state, we tend to have a richer top income bracket and poorer bottom income bracket.  During the so-called Great Recession, income levels of the bottom 10% of earners fell more than 21 percent between 2007 and 2010. While the top 10% didn’t increase their fortunes, they only fell 5%. The gap between California’s upper- and lower-income families-which has been larger than in the rest of the nation for decades-grew twice as wide as it was in 1980. High-income families earn nearly $12 for every $1 earned by the lowest income families.

While this is going on, corporations are maintaining pay ratios of CEO to average workers of somewhere in the neighborhood of 200 to 1.  Unfortunately, not all of their customers, you know, the average worker, are doing so well.  Many of these customers are slipping further behind and finding that the California social safety net wasn’t really that robust after all.  But, losing their customer base still isn’t enough to get the Chamber of Commerce on board with tax increases or helping to fix our state’s economic situation.  After, all, it’s a pretty sweet deal they get now; many major California corporations pay little to no taxes:

California’s major corporations have rung up hundreds of billions of dollars in profits in recent years, but have paid only a few percentage points of those profits in income taxes here and in other states, according to a new nationwide study by several liberal organizations.

The compilation of corporate profits and state taxes … covered 265 of the Fortune 500 corporations that reported profits for three straight years, 2008-2010, including 33 based in California. Nationwide, the 265 firms had a combined $1.33 trillion in profits during the three-year period but on average, paid just 3 percent of those earnings in state corporate income taxes.

The 33 California corporations’ tax bills ranged from minus-1.5 percent (McKesson Corp.) to 8 percent (Apple). The California corporation with the largest profits during the period, Wells Fargo Bank at $49.7 billion, paid $344 million or 0.7 percent in state taxes. Second-place Intel Corp., with $23.3 billion in profits paid no state income taxes, the study found.(SacBee)

Now, all this isn’t to say that these companies did not pay taxes, after all, their shareholders paid capital gains taxes on any realized profits, and their employees paid taxes, and so on.  Nor did they do anything illegal.  They followed the letter of the law, which was largely written by their corporate lobbyists, but it is the law of the land nonetheless.  It isn’t really a California issue either, it is an issue of how we are going to fund state governments and balancing our priorities.

Our tax laws are generally a good way of offering incentives to taxpayers, but there is such thing as over incentivizing as well.  As we look at overhauling our tax code, which seems to be coming up at all levels of government, we need to ensure that both the federal and state governments have the resources they need to provide their services.

And as we are seeing with the increasing income inequality, those services are going to be more necessary than ever.