As Californians who have not yet filed their tax returns rush to get that unpleasant chore done this week, many residents are feeling overly burdened.
Forty-five percent of adults polled earlier this year said they thought California’s taxes were “near the top” among states nationally, according to the Public Policy Institute of California. Another 26 percent said the state’s taxes were above average.
Our top personal income tax rate is far higher than any other state’s. California’s combined state and local sales tax, and the corporate income tax, are also among the nation’s highest. Only the property tax, limited in the constitution by voter-approved Proposition 13, is on the low end of the range of taxes across the country.
One reason for our higher taxes is that everything costs more here, not just government services. California’s higher cost of living drives up salaries and benefits for public employees, infrastructure contracts with private companies, and health and social service programs for the poor.
It is generally well known that the state’s wealthiest residents foot the bill for much of the cost of state government. The personal income tax accounts for nearly half of the state’s general fund revenue, and that tax’s progressive nature means that about 10 percent of California taxpayers pay more than 75 percent of the income tax the state collects.
But that’s only part of the story. The state’s poorest residents actually pay a larger share of their income in taxes than do the rich, according to studies by the California Budget and Policy Center. This is true because low-income people tend to spend everything they earn, and much of that spending is subject to the state’s relatively high sales tax rates.
Californians with lower incomes also benefit less and sometimes not at all from the federal rule that allows people to deduct state taxes from their federal income tax bill.
All of this will be especially relevant next year when voters will likely face a ballot full of tax proposals.
Unions and progressive groups are expected to seek an extension of the temporary tax increase Gov. Jerry Brown proposed and voters approved in 2012. That increase in the sales tax and the personal income tax expires fully in 2018. To make it more politically palatable, those seeking to extend it might keep only the income tax portion, which hits the wealthy hardest, and drop the sales tax increase.
Others might seek to amend Proposition 13 to remove the state limit on property tax increases for business property. Another attempt to impose a severance tax on oil may also be on the ballot.
But rather than leaving tax policy to the voters, and crossing our fingers in the hope that the blunt instrument of the ballot can fix one of the most complex aspects of public policy, it would be better if state legislators and the governor made a serious effort at tax reform. To ensure a more stable revenue flow, the state could benefit from broader base of taxpayers paying lower rates.
The sales tax, for example, was designed in a time when goods were a much bigger part of the economy than services. Now the service economy is growing relative to the sale of goods. Applying the sales tax to services would allow the state to dramatically lower the rate on all sales. This would not only raise more money in the long run, it would probably also be more progressive, because low-income people tend to buy fewer services than the rich.
Tax reform is always a sensitive and politically explosive issue. But with Democrats in control of both houses of the Legislature and a governor who will not be running for re-election, there’s no better time than now for policymakers to show the courage to tackle one of the state’s most vexing problems.