Earlier this week, we blogged about the upcoming meeting of the Commission on the 21st Century Economy – the “tax commission.” On Tuesday, the commission considered three options for restructuring California’s tax system. A staff overview of the three proposals shows that each of the three options under consideration would reduce the share of taxes paid by the wealthiest Californians and increase the share of the state’s taxes paid by those at the middle and lower end of the income distribution. For example, one option would – among other things – establish a 6 percent “flat tax” that would apply to taxpayers whether they had incomes of $10,000 or $10 million. Under this scenario, the share of taxes paid by middle-income Californians – those with incomes between $20,000 and $50,000 – would more than double, while the share paid by taxpayers with incomes of $200,000 or more would drop by almost one-third. Flattening personal income tax rates also would increase the share of income that California’s low- and middle-income households would pay in taxes – exacerbating an already regressive tax structure. Currently, the lowest-income households pay a larger share of their incomes in state and local taxes than higher-income households.
By increasing the share of taxes paid by low- and middle-income Californians, the tax packages under consideration would widen after-tax income gaps. Yet the level of inequality in California is already large and growing larger. The average taxpayer in the top 1 percent had an adjusted gross income (AGI) – income reported for tax purposes – of $1,832,123 in 2007 – 50.7 times that of the average middle-income taxpayer ($36,115). California’s income gap has been widening for years. The latest Franchise Tax Board data show that one-quarter (25.2 percent) of total AGI went to the wealthiest 1 percent of taxpayers in 2007, nearly twice the share (13.8 percent) in 1993, which is the earliest year for which data are available. In contrast, taxpayers with incomes in the middle of the distribution had just 10.0 percent of AGI in 2007, down from 13.0 percent in 1993. This means that the top 1 percent of taxpayers received approximately 25 times their proportionate share of AGI in 2007, while middle-income taxpayers received half their share. These disproportionate gains translate into a substantial concentration of income at the very top of the distribution. If the share of income going to the wealthiest 1 percent of taxpayers had remained the same since 1993, the bottom 99 percent of taxpayers would have an additional $123 billion in income – equal to $8,388 for each taxpayer.
— Alissa Anderson