California’s Lowest-Income Families Still Pay the Most in State and Local Taxes

New Budget Center Report Shows That Even Under Proposition 30, Bottom Fifth in Income Pays Highest Share of Their Incomes in State and Local Taxes

A new report from the California Budget & Policy Center shows that the lowest-income families in the state pay a greater share of their incomes in state and local taxes, on average, than other families, including those at the very top of the income ladder.

Who Pays Taxes in California? underscores that this is true even with Proposition 30’s temporary tax increases, which were largely targeted to the wealthiest residents.

Released for Tax Day — April 15 — the Budget Center’s report highlights data from the Institute on Taxation and Economic Policy (ITEP) illustrating that, on average, families in the lowest fifth of California’s income distribution pay a larger share of their incomes in state and local taxes than do other families, including the very wealthy. Families in the bottom fifth have an average annual income of just $13,900 and pay an estimated 10.5 percent of their incomes in state and local taxes. In contrast, the wealthiest 1 percent of families pay notably less of their incomes in state and local taxes — just 8.7 percent — while having an average annual income of $2.0 million.

California's Lowest-Income Families Pay the Largest Share of Their Incomes in State and Local Taxes

“California’s current system of state and local taxes goes against the basic principle of having people pay based on their ability to do so,” said policy analyst William Chen, author of the report. “What’s especially troubling is that California’s tax system exacerbates a critical economic challenge facing our state, which is the widening income inequality between the wealthiest and everybody else.”

Who Pays Taxes in California? shows that between 1987 and 2012, the inflation-adjusted average income of Californians in the top 1 percent more than doubled, increasing by 125.8 percent. Meanwhile, the bottom 80 percent of Californians on average saw their incomes go down, with the largest decline being among low-income households. During this period, the share of income held by the top 1 percent of Californians nearly doubled, going from 13.0 percent in 1987 to 24.9 percent in 2012.

The Budget Center’s report points to specific ways that state policymakers could create a fairer tax system while also fostering greater economic security for California’s low-income families:

  • Create a state Earned Income Tax Credit (EITC). An EITC benefits low-income workers by lowering their tax liabilities and, in certain cases, providing a tax refund for eligible households. A state EITC that builds on the federal credit would reduce the regressivity of California’s system of state and local taxes while also providing a financial boost for low-income working families.
  • Better target existing tax credits to low-income households. Making tax credits refundable— meaning that taxpayers can make use of them even if they earn too little to owe income tax— is critical to ensuring that these credits benefit low-income households. Restoring the refundability of California’s Child and Dependent Care Expenses Credit, which helps low-income families offset the high costs of child or dependent care, is one way policymakers could better target tax credits to low-income households. (Policymakers eliminated the refundable portion of this credit in 2011.)

“California can choose to have a tax system that is not only fairer, but also helps low-income families to increase earnings and advance economically,” said Chris Hoene, executive director of the Budget Center. “Our state needs public policies that reflect a multifaceted, long-term approach to increasing opportunity for low- and middle-income Californians, especially with so many still struggling in the long aftermath of the Great Recession.”

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The California Budget & Policy Center engages in independent fiscal and policy analysis and public education with the goal of improving public policies affecting the economic and social well-being of low- and middle-income Californians. Support for the Budget Center comes from foundation grants, subscriptions, and individual contributions.