Who Pays?

Yesterday, the CBP released our annual snapshot of who pays, and who doesn’t pay, taxes in California. Typically, the data are similar from year-to-year. However, this year a few things stand out. First and foremost, California’s tax threshold – the income level at which an individual or family begins to owe personal income taxes – dropped significantly as a result of the temporary income tax increases included in the February 2009 budget agreement. The increase is particularly stark for families with children. In 2008, a family of four with two children did not pay state personal income taxes unless their income exceeded $51,335. Primarily as a result of the reduction in the size of the dependent tax credit – a smaller tax credit results in a larger tax bill – included in the 2009 tax package, that figure dropped to $36,325 in 2009. And while we firmly believe that balancing the budget requires a balanced approach of prudent spending reductions and targeted tax increases, prominent economists argue that increases should be targeted at the top, rather than the bottom, of the income distribution. Interestingly, the 2010-11 cost – $685 million – of the corporate tax cuts enacted in 2008 and 2009 nearly equal the revenues raised – $702 million – from the reduction in the dependent credit. To put it simply, California taxed kids to pay for tax breaks for the state’s largest and most profitable corporations. And those tax breaks are permanent and increasing in cost each year and thus will require deeper cuts, or additional tax increases, in years to come.

Secondly, the most recent Census data show that California has moved solidly into the middle of the pack, ranking 21st among the states with respect to state tax collections as a percentage of the state’s economy.

Finally, and while this is not new news, it is always worth remembering that as a share of family income, families with the lowest incomes, not those with the highest, pay the largest share of their income in state and local taxes. All of which brings us back to one of our favorite homilies: budgets are about values and choices.

— Jean Ross

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