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Calling California home means sharing in the responsibility of creating strong communities and ensuring every child, family, and adult can be healthy and thrive. Like most Californians, we want quality education for our kids, rapid emergency response to keep us safe, access to affordable healthcare, and opportunities to broaden economic security and create wealth for more of our family members, friends, and neighbors.

To do this, California needs an equitable revenue system that better distributes our state’s wealth and resources to help individuals and families who face systemic barriers and are blocked from the opportunity to thrive in our state.

Did you know?

Californians with the lowest incomes pay a larger share of income in taxes.

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Check out our essential resources to help you advocate for a more equitable tax code:
California policymakers can make the tax and revenue system more equitable.

Our tax code benefits white Californians who are more likely to be homeowners, have access to employer-sponsored retirement plans, and have the financial means to invest in assets like retirement, stocks, and savings. This is at the expense of Black, Latinx, and other people of color who face systemic barriers to these wealth-generating activities and therefore don’t have the opportunity to benefit from a tax code that favors the wealthy.

Instead of rewarding the already wealthy, we should prioritize meeting the needs of Californians with low incomes and raise the revenue needed to expand economic security for all Californians.

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Calling California home means sharing in the responsibility of creating strong communities. Yet, corporations are contributing roughly half as much of their California profits in state taxes than four decades ago. In the early 1980s, corporations that reported profits in California paid more than 9.5% of this income in state corporation taxes. In contrast, corporations paid just 4.8% of their California profits in corporation taxes in 2019, the most recent year data are available. California’s budget would have received $14 billion more revenue in 2019 had corporations paid the same share of their income in taxes that year as they did in 1981 — more than the state spends on the University of California, the California State University, and student aid combined.

Corporations pay less of their income in taxes today than the 1980s in part due to tax rate reductions by state policymakers. The Legislature has cut the corporate tax rate twice: from 9.6% to 9.3% in 1987 and from 9.3% to 8.84%, its current level, in 1997.

In addition to cutting tax rates, state policymakers have enacted several tax breaks that reduce the share of corporate income paid in California corporation taxes. In the 1980s, policymakers established the “water’s edge” election and the research and development (R&D) tax credit — the state’s two largest corporate tax breaks that account for $6.1 billion of the $7.8 billion the state is projected to spend on corporate tax expenditures in 2021-22.

$14 Billion

California’s budget would have received $14 billion more in 2019 had corporations paid the same share of their income in taxes as they did in the 1980s.

California’s tax break spending for corporations far exceeds tax benefits for Californians with low incomes. In tax year 2020, California spent $1.3 billion on the state’s two largest tax credits targeted to Californians with low incomes — the California Earned Income Tax Credit (CalEITC) and the Young Child Tax Credit (YCTC).1Reflects credits from tax returns processed by the Franchise Tax Board through November 27, 2021. The CalEITC and YCTC benefited 6.6 million Californians in tax year 2020 by boosting the incomes of those with annual earnings of less than $30,000, a large majority of whom are people of color.2The 6.6 million Californians figure reflects the total number of tax filers, spouses, and dependents in 4.2 million “tax units.” Yet, most people get less than $200 from the CalEITC, far too little to help people earning low wages and living in poverty. Policymakers can make tax credits more equitable by providing a larger minimum CalEITC for eligible workers and pay for it by eliminating or reducing tax breaks for corporations that can afford to contribute more to support California communities.

  • 1
    Reflects credits from tax returns processed by the Franchise Tax Board through November 27, 2021.
  • 2
    The 6.6 million Californians figure reflects the total number of tax filers, spouses, and dependents in 4.2 million “tax units.”

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California will lose an estimated $69.2 billion in state General Fund revenues in 2021-22 to personal and corporate income tax breaks — or “tax expenditures.”1Department of Finance, Tax Expenditure Report 2021-22, 5, https://www.dof.ca.gov/Forecasting/Economics/Tax_Expenditure_ Reports/documents/2021-22%20Tax%20Expenditure%20Report.pdf. Many of the state’s largest tax breaks primarily benefit higher-income households and businesses, while just a fraction of the state’s tax breaks are targeted to Californians with low and middle incomes.2For a more detailed examination of California’s tax expenditures, see Kayla Kitson, Tax Breaks: California’s $60 Billion Loss (California Budget & Policy Center, January 2020), https://calbudgetcenter.org/resources/tax-breaks-californias-60-billion-loss/. This revenue loss equals approximately one-third of the state’s 2021-22 General Fund budget and represents dollars the state could otherwise use to support Californians to live, work, and thrive across the state.

Some of California’s tax expenditures also widen racial income and wealth disparities.

The state will forgo more than $18 billion in revenue due to just four itemized deductions that mostly benefit higher-income households and three tax incentives for businesses and investors. In comparison, California will spend less than $1.5 billion on tax breaks that primarily benefit low- and middle-income households, including the California Earned Income Tax Credit (CalEITC), the Young Child Tax Credit, the Renter’s Credit, the Student Loan Interest Deduction, and the Child and Dependent Care Credit.

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See our 5Facts: California’s Tax & Revenue System Isn’t Fair for All to learn how elements of California’s tax and revenue system further or impede the goals of economic and racial equity for households, communities, and the state.

Some of California’s tax expenditures also widen racial income and wealth disparities. Since Black and Latinx households are underrepresented in higher-income groups due to legacies of racist policies and ongoing discrimination, these households benefit less than white households from tax breaks skewed toward richer households. Additionally, many tax breaks reward wealth-building activities such as homeownership and retirement savings, to which households of color have less access.

When policymakers choose to spend public dollars via tax expenditures that largely benefit wealthy Californians and businesses, they are also choosing not to spend those dollars to help individuals and families who struggle with the costs of housing, child care, education, and other necessities. Eliminating or scaling back these tax expenditures would free up revenue that could be used to invest in resources that broaden economic security and create wealth and opportunity for more Californians.

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Overview

What’s the difference between income and wealth? Taxes for individuals and corporations in California? Tax credits and deductions? Understanding these key terms is critical to navigating the state budget and its intersection with California’s tax and revenue system to generate ongoing resources and provide quality education, affordable health care, child care, housing, and other services for communities.

Key Terms

Tax Justice Explained

Read our 5 Facts: California’s Tax and Revenue System Isn’t Fair for All to understand how elements of California’s tax and revenue system further or impede the goals of economic and racial equity for households, communities, and the state.

Watch our Empower 2021: Race, Taxes & Wealth — Reimagining California’s Prosperity to learn how the state’s current tax structures perpetuate wealth and racial disparities and how policymakers can work toward building a more equitable California.

Read our Report: Why Aren’t Large Corporations Paying Their Fair Share of Taxes? to see how far corporate taxes have fallen as a share of corporate profits in California and reasons for the decline.

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