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Facing a significant budget shortfall, state leaders must do everything they can to protect critical services and exhaust all alternatives to cuts that would jeopardize people’s well being. This should include responsibly drawing on state budget reserves and raising additional revenue by making the tax system more fair.

California spends tens of billions of dollars each year on tax breaks, some of the largest of which benefit wealthy corporations and individuals. These tax breaks take billions of dollars away from communities, while perpetuating racial income and wealth gaps. Yet the governor proposes raising just $400 million by closing tax breaks this year — less than 1% of his proposed budget solutions.

Making the tax system more fair should be a top long-term priority — not just to prevent cuts when there’s a budget shortfall, but to make possible the investments that are needed to help Californians thrive. All Californians deserve access to economic opportunity, housing, and health care, and policymakers have the means to achieve this vision through fairer taxation.

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key takeaway

Despite record profits, corporations pay a tiny fraction of their California expenses in taxes — just 0.11% on average. Modest corporate tax increases could generate substantial revenue to boost income for families in poverty, fund crucial public services, and address economic inequality, especially for Californians of color.

State tax revenues make possible the public services and infrastructure that Californians rely on, like education, roads and transit, and the social safety net to help families and individuals make ends meet during times of financial instability. Corporations doing business in California benefit from the state’s resources and investments and should be expected to fairly contribute to state revenues.

Corporations Underpaying Their Fair Share

Meanwhile, corporations have been paying around half of what they did a generation ago in state taxes as a share of their California income — less than 5% in 2019 compared to 9.5% in the early 1980s — due in part to state tax rate reductions and the creation and growth of corporate tax breaks over the years. This is despite the fact that pre-tax corporate profits have been near record highs (as are after-tax profits).

In addition, the taxes these corporations pay to the state on their California profits are an incredibly small fraction of their expenses — just 0.11% on average from 2017 to 2019, according to a Budget Center analysis of Franchise Tax Board data.1Business expenses are defined in this analysis as the total deductions reported to the Franchise Tax Board for corporations filing taxes in California. Data for tax years 2020 and 2021 are excluded from this analysis because a pandemic-era temporary policy was in place for these years that limited the ability of corporations to fully utilize tax credits and to offset current-year income with prior-year losses. Therefore, corporate tax collections were higher in these years than in normal years. In other words, just over one cent of every $10 of what these businesses spent went to California corporate taxes.

Even if state leaders increased corporate taxes to protect and strengthen public services — by raising tax rates on the most profitable corporations and/or limiting corporate tax breaks — these taxes would still represent a small fraction of total business expenses. For example, if corporations had contributed $2.5 billion more in taxes each year, their California corporate taxes would have made up 0.13% of total business expenses. If they had contributed $5 billion more, these taxes would have made up 0.16% of their expenses.

To put this in perspective, $2.5 billion in additional revenue could boost the incomes of families by more than $2,000 for every child living in poverty in the state, and $5 billion could provide more than $4,000 per impoverished child. However, it would not substantially increase the costs of doing business for profitable corporations and would be unlikely to drive companies’ decisions about how much business to do in California. This is especially true considering that corporations’ tax obligations to the state are based on how much of their sales are made in California, and California provides a considerable customer base.

Substantial Benefits for Struggling Californians

While a tax increase of either size would be manageable for wealthy corporations, the resulting revenue could be very meaningful for Californians struggling with the basic costs of living, including housing, food, child care, and health expenses. Many of these Californians have been locked out of economic security in large part due to the low wages, insufficient benefits, and few advancement opportunities provided by some of these very wealthy corporations. Californians of color have been particularly excluded from economic opportunities due to structural racism and discrimination in employment and other arenas.

Corporations Can Afford to Contribute More

Highly profitable businesses in California benefit from having healthy, well-educated workers who can afford to live near their jobs and have the necessary care and education for their children while they work. These corporations can afford to pay a small increase in state corporate taxes to support caring for and educating California’s children and youth, keeping the state’s residents healthy and housed, and ensuring they don’t fall through the cracks when faced with a crisis.

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    Business expenses are defined in this analysis as the total deductions reported to the Franchise Tax Board for corporations filing taxes in California. Data for tax years 2020 and 2021 are excluded from this analysis because a pandemic-era temporary policy was in place for these years that limited the ability of corporations to fully utilize tax credits and to offset current-year income with prior-year losses. Therefore, corporate tax collections were higher in these years than in normal years.

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key takeaway

California’s refundable tax credits for low-income residents make up a small fraction — less than 2% — of the state’s nearly $80 billion of tax breaks, which disproportionately benefit profitable corporations and the wealthy.

California’s three refundable tax credits — the California Earned Income Tax Credit (CalEITC), the Young Child Tax Credit, and the Foster Youth Tax Credit — are the only credits that benefit people with very low incomes.

Yet, these credits make up less than 2% of the nearly $80 billion total cost of state tax breaks for individuals and businesses. Many of these other tax breaks largely benefit high-income individuals and profitable corporations.

Everyone deserves an opportunity to achieve economic security. State leaders can make the tax system more fair by expanding credits that reach Californians with low incomes.

A donut chart showing the estimated cost of tax breaks in the fiscal year 2023-24 where tax credits for Californians with low incomes make up less than two percent of individual and business income tax breaks.

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