Taxing Child Care To Give Tax Breaks to Millionaires

A tax attorney friend of mine recently characterized the Commission on the 21st Century Economy’s proposal to eliminate the corporate income and state sales taxes and reduce personal income taxes disproportionately for the wealthy while establishing a new business net receipts tax (BNRT) as “taxing child care to provide tax breaks for millionaires and taxing groceries so that oil companies don’t have to pay the corporate income tax.” One might wonder why this might be considered an “improvement” in California’s tax system. Last week we looked at underlying economic indicators and concluded that the Commission’s direction would likely result in a tax system that grows more slowly – and thus leads to wider budget gaps – than the state’s current tax system.  It turns out that modeling done for the Commission clearly discloses that the changes under consideration would lower the growth of revenues. Commission documents estimate that revenues raised by California’s current tax system would rise by 40.2 percent between 2012 and 2016, while the options under consideration by the Commission would increase by 32.4 percent or 35.6 percent over the same period. In dollar terms, the difference translates into $4 billion to $7 billion. By way of comparison, the state currently spends about $5 billion per year to support the California State University and University of California systems combined.

Who would ultimately pay the new tax? Documents prepared for the Commission address that question as well. About three-quarters (71 percent) of the BNRT would be passed on to consumers in the form of higher prices, just under a fifth (19 percent) would be passed on to workers in the form of lower wages or fewer benefits, and the remainder would be divided between shareholders and business owners (9 percent) and individuals outside of California (1 percent). The same report estimates that the lowest income Californians would pay twice as much of their income toward the new tax as the highest income Californians.  That makes the BNRT substantially more regressive than California’s current tax system – which results in the lowest-income Californians paying about a third more as a share of their income than the wealthiest Californians.

As with any complex area of public policy, the devil is in the details and the Commission’s plan still lacks critical details. We do know that the Commission’s draft proposals would eliminate exemptions in the state’s current sales tax – such as those for childcare, groceries, and prescription drugs – while giving disproportionate benefits to the wealthy and corporate shareholders. It is hard to see how a tax system that widens already significant income gaps and leads to larger, not smaller, budget gaps helps prepare California for the challenges of the 21st century.

— Jean Ross

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