California Taxes: What’s a Fair Share?

Today, April 15, is tax day — the deadline for filing California and federal income tax returns. It’s also an opportunity to reflect on the shared investment in our communities that taxes represent.

The dollars we pay to the state in taxes are invested closer to home than you might think. More than 70 cents out of every dollar spent through the state budget goes to local communities to fund public schools and community colleges, health and human services programs, public safety, and more.

While we all benefit from these public investments, the question of who does and doesn’t contribute their fair share provokes passionate debate. Last week, the CBP released our annual tax day report, Who Pays Taxes in California?, a snapshot of how tax payments — and tax breaks — are distributed among Californians.

The simplest answer to the question posed by the report’s title is that we all pay California taxes in some form. California households of all income levels pay sales taxes on most purchases, including household staples like soap and tissue. Those of us who drive pay fuel taxes. Californians who consume beer, wine, or cigarettes pay the alcohol tax or the cigarette tax on those purchases. Homeowners pay property taxes — and renters do, too, since this cost generally gets passed on in the form of higher rents.

The thornier question is how the overall tax bill is distributed among various income groups, and whether that distribution is fair. (For an in-depth discussion of tax fairness, see our recently released report Principles and Policy: A Guide to California’s Tax System.) Here at the CBP, we believe a stronger case can be made for a progressive tax structure — in which higher-income households pay a larger share of their incomes in taxes — than for a proportional (“flat”) tax structure, in which all households pay the same share of income in taxes, or a regressive tax structure, in which lower-income households pay a larger share of their incomes in taxes.

But as we report in Who Pays?, when all California taxes are taken into account, a family making $13,000 a year pays a larger share of their income in state and local taxes, on average, than a family making $1.6 million a year.

Even factoring in Proposition 30’s temporary tax increases, which on the whole are progressive, California’s overall tax system remains modestly regressive. The lowest-income families pay the highest share of their incomes when all state and local taxes are counted — including regressive taxes such as the sales tax and alcohol and tobacco taxes.

Another important consideration is who benefits from the spending that occurs through the tax code in the form of exemptions, deductions, credits, and exclusions. Here again, the simple answer is all of us. For instance, anyone who has ever bought groceries or filled a prescription in California has benefited from the fact that many purchases — including food and prescription medicine — are exempt from the sales tax.

However, corporations — especially large corporations — receive outsize benefits from spending in the tax code. For the corporate income tax, the revenue loss from tax expenditures is almost 80 percent of the actual revenues collected from the tax. This is substantially greater than the percentage of revenue lost from tax expenditures for either the personal income tax (54 percent) or the sales tax (48 percent).

The CBP has always emphasized that California’s budget embodies our choices and values as a state. The same is true of our tax system. On tax day, and every day of the year, it’s worth shining a light on certain aspects of the state’s tax system and reflecting on whether we are making the right choices. Does asking the lowest-income Californians to pay the most in state and local taxes, and delivering a large share of tax benefits to corporations, truly represent the vision and priorities of California’s residents?

— Hope Richardson