Strengthening Our Tax System to Improve Our Quality of Life

Although discussions around tax policy can often seem dry and wonky, our tax policy choices have a profound impact on our quality of life. Taxes generate resources that allow us to strengthen our communities and economy. And tax expenditures — spending through the tax code — reduce the resources available for other priorities. Recognizing the importance of our tax system to people’s economic well-being, the Coordinating Council of the Family Economic Security Partnership — a project of First 5 Contra Costa — devoted a morning last week to learning how federal and state tax policies could be changed to increase economic security and opportunity.

Ezra Levin, Associate Director of Government Affairs at CFED, kicked off the convening with an engaging video that makes learning about federal tax policy fun. The video and Ezra’s presentation point out that many federal tax expenditures, such as the mortgage interest deduction, disproportionately benefit the wealthiest households, in turn exacerbating inequality. For example, federal tax programs designed to encourage homeownership provided an average of $1,236 per month for multimillionaire households in 2013, compared with an average of just 8 cents per month for low-income households. CFED recently launched a campaign called Turn It Right Side Up that seeks to improve federal tax policies so that more people have the opportunity to build wealth.

After Ezra’s presentation, the conversation turned to ways to strengthen California’s tax system. In my presentation, I highlighted two major limitations of our current state tax code:

  • First, California’s tax system is regressive, and it will become more regressive if the Proposition 30 tax increases expire. Currently, the lowest-income households pay a larger share of their incomes in state and local taxes than the top 1 percent, and California’s tax system will become even more regressive if the Prop. 30 personal income tax rates on high-income earners are allowed to expire at the end of 2018. Why should we be concerned about this? As I show in my slides, the wealthiest 1 percent of Californians have seen their incomes more than double, on average, since the late 1980s, while the average incomes of low- and moderate-income Californians have actually declined, after adjusting for inflation. Given this rise in inequality, it’s deeply unfair that the top 1 percent contribute a smaller share of their incomes to state and local taxes than families lower on the income scale.
  • Second, California’s tax system doesn’t currently generate enough resources to meet the needs of our communities. California made deep cuts to critical public systems and services to close budget shortfalls during and after the Great Recession, and many of these systems are still operating with diminished resources in spite of increased revenues resulting from our improved economy and Prop. 30’s tax rates. For example, support for seniors and people with disabilities through SSI/SSP grants remains below the recession-era level, in spite of a modest cost-of-living increase provided this year. What’s more, California will see an even greater need for public services in coming years as our state’s population continues to grow and age. (The number of seniors in our state is expected to nearly double by 2030, increasing the need for services, such as health care and in-home care.) This underscores the need to shore up our tax system so that it produces enough revenues to meet our communities’ needs well into the future.

My presentation last week outlined three policy options for improving the progressivity and adequacy of our tax system. California could:

  • Maintain the Prop. 30 personal income tax rates on high-income earners. Extending these tax rates would not only prevent our tax system from becoming more regressive, but also avoid a permanent gap in state revenues. As we show here, the expiration of the Prop. 30 personal income tax rates is expected to create a gap in General Fund revenues of $7.7 billion in 2019-20 — nearly as much as the state budget provides for higher education this year. In the coming weeks, watch for our analysis of how Prop. 30 helped California begin reinvesting in our communities after years of deep budget cuts, and our brief analyzing the potential impact of Prop. 55, a measure on this year’s November ballot that would temporarily extend the Prop. 30 personal income tax rates.
  • Expand California’s new state Earned Income Tax Credit (EITC). The CalEITC, established last year, is a refundable tax credit designed to reward work and help the lowest earners in our state better afford basic necessities. California’s credit is modeled after the highly successful federal EITC, which decades of research shows has boosted employment among women-headed families and, together with the federal child tax credit, cut poverty among children more than any other federal policy. Given the federal EITC’s track record of success, California should gradually expand the CalEITC so that it benefits more low-earning workers. Watch for our work later this year outlining specific options for strengthening this important tax credit.
  • Reduce or get rid of ineffective, costly tax expenditures. Major personal and corporate state income tax breaks are expected to cost California over $48 billion this year. That’s more than total General Fund spending on K-12 schools in this year’s budget. There are many problems with these tax expenditures, including that 1) they are not reviewed or approved annually like spending through the state budget, even though they are forms of spending in that they reduce revenue available for other purposes; 2) it only takes a majority vote of the Legislature to establish a tax break but a two-thirds vote to get rid of it — even if it fails to achieve its intended purpose; and 3) some of our most costly tax breaks, such as the mortgage interest deduction, disproportionately benefit high-income households who least need the help. Reducing or eliminating ineffective, costly tax expenditures would not only make the tax system more progressive, but also free up revenue for other priorities. Watch for our forthcoming analysis on this critical issue.

With wealth inequality higher than at any point since 1929, and new research suggesting that widening inequality may actually reduce people’s ability to move up the economic ladder, it’s critical that our state make tax policy choices that put economic opportunity within more people’s reach.

— Alissa Anderson