Corporations Pay Far Less of Their California Income in State Taxes than a Generation Ago

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.

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.

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.

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.

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.

Californians deserve to have quality education and affordable health care, child care, and housing. To support such services, California’s tax and revenue system needs to generate adequate ongoing resources. Policymakers must regularly examine the state’s revenue system and revise it as needed to fairly raise enough revenue to support services and investments that help Californians thrive in their communities.

California largely relies on three revenue sources — the personal income tax, the sales and use tax, and the corporation tax. Together, they make up 95% of General Fund revenues. General Fund money may be used for any purpose and is the primary source of state support for health and human services, K-12 education, and higher education.

The personal income tax provides more than two-thirds of General Fund revenue. Individuals are taxed on income from sources such as wages, salaries, investments, pensions, and certain types of businesses. Higher portions of income are subject to higher tax rates, ranging from 1% to 12.3%, plus a 1% surtax on income over $1 million for a mental health services special fund.

The next largest revenue source for California is the sales and use tax, making up about one-sixth of General Fund revenues. The sales and use tax is levied on purchases of tangible goods in the state — not services — or the in-state use of goods purchased elsewhere. The statewide sales and use tax rate is 7.25%, but local governments may levy additional taxes.

California’s third-largest revenue source is the corporation tax, providing about one-tenth of General Fund revenues. This is a tax levied on the California profits of corporate businesses at a rate of 8.84%, or 10.84% for financial corporations. California generally taxes the share of a corporation’s income equal to the proportion of their sales that are attributable to California. The remainder of General Fund revenues come from taxes on insurance company premiums, alcoholic beverages, and cigarettes as well as non-tax revenue sources.

It is critical for policymakers and advocates to understand how California raises revenue and identify opportunities to improve the state’s tax and revenue system to equitably generate enough revenues to support services Californians need to thrive. This Fact Sheet is one of a series of publications looking at: the state’s tax and revenue system, tax breaks for the wealthy and large corporations, and how tax policies can better promote economic security for Black, Latinx, Asian, American Indian, and undocumented Californians, and families with low incomes.