Note to readers: Each week through November 2019, a selection of our 101 California Influencers answers a question that is critical to California’s future. Topics include education, healthcare, environment, housing and economic growth.
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California Influencers this week answered the question: How would you change California’s tax laws to benefit middle class Californians? Below are the Influencers’ answers in their entirety.
Getting beyond taxing the rich
Steve Westly - Founder and Managing Partner of The Westly Group
Most Californians support a progressive taxation system. That’s why CA has one of the highest tax rates in the US, with the top 1% paying close to 50% of the state’s budget. But there is growing evidence (See July Economist article on Texafornia) that continuing to raise taxes is pushing both businesses and high income earners to leave the state. There are three things California should do to fix this:
- Broaden the tax base: Today the state is too dependent on capital gains. This is great news when the stock market is up, but it throws the state into havoc when the market is down and capital gains suddenly plummet. We would be wise to spread the burden more evenly.
- Tax services: We’re moving from a manufacturing economy to a service/information economy leaving an unfair burden on the former and giving the latter a windfall. CA should follow the lead of 20 other states and begin responsibly taxing key sectors of the service industry.
- Collect the current taxes, before adding new ones: Most experts estimate CA is only collecting 80% of taxes currently owed. By matching payroll databases and offering tax amnesty programs, we can collect more of what’s owed, reducing the burden for the rest of us.
Tax volatility hurts Californians just when government help is most needed
Karthick Ramakrishnan - Founding Director of the Center for Social Innovation at the University of California, Riverside
California’s economy, from its founding days of the gold rush to the “tech rush” of today, has been characterized by boom and bust cycles that swing more wildly than the rest of the country. One would hope that our state’s taxes are structured in a way to cushion the blows of those extreme highs and lows. Usually this means having a healthy dose of sales and property taxes to balance out the high volatility of personal income taxes. Thanks to the passage of Proposition 13 in 1978, however, and the public’s reluctance to increase sales taxes beyond brief spells (such as under Proposition 30, from 2013 through 2016), California has grown even more reliant on income taxes, its most volatile source of revenue.
Millions of middle class Californians run the risk of falling into poverty during the next recession, and the state can do more to make sure that government is there to provide assistance when we most need it. The state’s rainy day fund will help, but only temporarily. The state currently has about $18 billion in reserves and, if past recessions are any indication, these reserves will be depleted in a matter of months, as tax revenues fall and the need for social services soar. In order to have a more stable set of tax revenues, California needs to enact bolder tax reforms that bring in more sales and property tax revenues while still providing tax credits to help offset any increased tax burdens on low- and middle-income residents.
To help the middle class, we must have the courage to think long term
Debbie Mesloh - President of the San Francisco Commission on the Status of Women
To benefit the middle class we need to think long term and to make our tax code more sustainable and resilient to potential downturns and recessions. For the government to provide services and infrastructure investment, as well as mechanisms that help lift up working families, such as the Earned Income Tax Credit, the State needs a stable base of income. Our current tax system works well when the economy is doing well but is too dependent on capital gains, so tax revenues decline when the economy contracts. We need to have the courage and leadership to talk honestly about the need for having a broad and fair tax system.
Let’s boost investments in learning
John Chiang - Former California State Treasurer
In the early 1970s, my mom and dad, after receipt of a paycheck, would drive my brother and I in the family Chevy Impala to the neighborhood bank to deposit $1 in each of our savings account. While I wanted to use the money to buy bazooka bubble gum or a Tonka truck, my mom stated firmly that the money was for something called college.
Today, children with savings accounts, however small, are seven times more likely to attend and graduate college.
Our state lawmakers can support parents and others who build college nest eggs for their children by offering a state tax incentive for such investments.
Tax laws should be changed to help middle class Californians to deal with income volatility
Luisa Blanco Raynal - Associate Professor at Pepperdine University’s School of Public Policy
According to the Report on the Economic Well-Being of U.S. Households in 2018, 3 in 10 adults are in households that have income that varies from month to month, and 1 in 10 have struggled to pay bills due to their volatile incomes. Income volatility among households could be the result of many circumstances, such as health issues or working in the gig economy. An unexpected drop in income in a given month for households with low or no savings could result on financial hardship. According to research by the Tax Policy Center, changes in income from month to month make it harder for low and moderate income households to predict what they need to pay in taxes or what their tax refunds will be at the end of the year. The current tax laws do not accommodate for income volatility, which is a problem for the middle class. Some people have proposed an optional year-round earned income tax credit, which will allow families to receive the tax credit on a paycheck to paycheck basis. We ought to be creative on developing changes to tax laws to address the issue of income volatility in the state.
Sales taxes have gone wild
Cassandra Walker-Pye - Founder and CEO of 3.14 Communications
According to California Taxpayers Association (CalTax), Californians pay the highest personal tax (13.2%) in the Nation, the second-highest gas tax (55.22 cents per gallon) in the Nation and the highest sales tax (7.25%) in the Nation. Local governments are allowed to levy additional sales and use taxes and many of them are at or near the 2 percent limit – meaning some of us pay over 9% in total sales tax. There are several Bay Area cities with sales tax rates of 9.75% and more than two dozen locales in LA County with rates above 10%. This level of taxation impacts middle class Californians however I’d suggest that those living at or below the poverty line must disproportionally feel its effects as well. Some limitation on sales tax would be ideal however probably unrealistic without a full overhaul of the state’s tax system. Until that happens, I strongly suggest keeping tabs on efforts in several localities which would make it easier for local governments to increase taxes – by eliminating the 2/3 vote requirement for tax increases mandated by voters (Prop 218) in 1996. This strikes me as a serious threat for middle income Californians and those who are living at the margins.
“It is certainly about lowering burdens but it’s also about making sure we can invest in long-term upward economic mobility”
Manuel Pastor - Director of the University of Southern California’s Program for Environmental and Regional Equity and the Center for the Study of Immigrant Integration
It’s useful to start with a surprising fact: the middle twenty percent of income distribution in California actually pays a lower share of their income in total state taxes – that is, income, property, and sales taxes combined – than does either the top twenty percent or the bottom twenty percent. Of course, middle class Californians are legitimately feeling strained but it’s not so much the tax take as it is that real median wages have basically flat-lined for the last forty years.
That said, there are some fiscal fixes that could actually help middle class Californians, partly by shifting the tax burden and partly by generating the revenues needed to educate their kids so that they can stay in the middle class. One is coming up in the 2020 election: a measure called Schools and Communities First that would “split” the property tax rolls, with owners of commercial and industrial property paying taxes on actual market (rather than historic) value. Another no-brainer is an inheritance tax; remarkably, in a state that ranks fourth among the states in terms of income inequality (and with vast wealth being generated on the daily), we don’t have one. And since the share of profits California corporations pay in state income taxes has fallen by more than half since the early 1980s, there may be room for some upward movement on corporate taxes to provide concurrent relief for middle-class taxpayers.
Finally, while aimed at the working poor, the new expansion of the state Earned Income Tax Credit is a welcome development that will help those below the middle class eventually make their way into the middle class. When talking taxes, it is certainly about lowering burdens but it’s also about making sure we can invest in long-term upward economic mobility – which is really the central dilemma of California’s middle class.
“California’s tax structures should prioritize fiscal stability and economic competitiveness”
Jim Wunderman - President and CEO of the Bay Area Council
California’s tax structures should prioritize fiscal stability and economic competitiveness. The system we have today is heavily reliant on the contributions of the wealthiest Californians to provide the state with the fiscal resources needed to fund programs across levels of income – including K-12 education, health and human services, and higher education. In the state’s proposed 2019-2020 budget, more than 70% of general fund revenue is derived from personal income tax. This is a volatile source whereby state revenues move closely with the economy, creating scenarios where key programs for the middle class will be on the chopping block during down economic cycles. The existing tax structures also threaten our state’s overall competitiveness, as we have set by far the highest income tax rate in the US – a whopping 13% top marginal tax rate – on those we count on for investment and job creation. By relying on a volatile, top-heavy tax structure, the state has a system that puts stress on the middle class and all Californians, as funding for key programs cannot be guaranteed in the long term and our potential for sustained economic success is eroded as other states become more viable for investment and jobs.
“We must consider tax incentives that will enhance the middle class”
Monique Limon - California State Assemblywoman (D-Goleta)
California’s middle class are vital to the success of our economy. In addition to creating and maintaining jobs, we must consider tax incentives that will enhance the middle class. Economic opportunity is fundamental and a core value of our Nation. One way we can deliver on this promise is by expanding the California Earned Income Tax Credit (CalEITC) to include middles class families and individuals. In 2018, only 0.92% of tax filers resided in my Assembly District and qualified for nearly $2.9 million in earned income tax credits. The benefit of the program is tremendous, but the cap on maximum income earned in order to qualify, is low. A middle class expansion of the CalEITC could benefit taxpayers who work, but continue to struggle in making ends meet. Our tax system must evolve to support those in need and to put money back into the hands of Californians who are keeping our economy running.”
A rising tide lifts all boats
Lenny Mendonca - Chief Economic and Business Adviser to Governor Gavin Newsom
Putting money back into the pockets of working families benefits all Californians. The federal Earned Income Tax Credit (EITC) is estimated to deliver $70 billion in benefits to 26 million families. The newly signed California budget more than doubles the investment in the CalEITC to $1 billion; it also expands this vital social mobility tool to include people making $30,000 a year. Californians working full time at minimum wage shouldn’t have to struggle to afford life’s basic needs. Expanding CalEITC will support our local economies — with money going back into local businesses — and it will spur self-employment and entrepreneurism by helping our working families with children under the age of six thanks to a new $1,000 credit that kicks in after the first $1 of earning. You want to see economic justice for all, look no further than our most recent investment in hardworking Californians.
“More money won’t solve these problems without significant policy changes”
David Townsend - Managing Partner of TCT Public Affairs
I would have to challenge the basic assumption of the question.
California already has a highly progressive tax system. We have the highest personal income tax for the wealthiest than any other state in the union. The top 1 percent currently generate half of the personal income tax receipts collected by the state. Conversely, households making $50,000 or less make up nearly 60% of the tax filings but just 2 percent of the revenue.
Of greater concern is that California has the highest poverty rates in the nation. The focus needs to be on that economic group with equal pay for equal work, higher minimum wages, free tuition to community colleges, more affordable and accessible health care and more affordable housing. A redirection of where the state spends its money and the laws that shape our policies is the great need. More money won’t solve these problems without significant policy changes.
“What really affects middle class Californians are all the other state-imposed costs”
Jennifer Barrera - Executive Vice President of the California Chamber of Commerce
On the list of problems facing middle class Californians, taxes shouldn’t rank very high. After all, the top one percent of income earners pay nearly half of all income taxes. A typical family of four paying for child care and renting a house doesn’t even begin to pay income taxes until they make $61,000.
What really affects middle class Californians are all the other state-imposed costs:
Californians pay about the highest gasoline prices in the country, even at the old gas tax rate.
Californians pay some of the highest residential utility bills in the country.
California housing costs are considerably higher than the rest of the country.
Californians pay fees on everything from beverage containers and grocery bags to mattresses and cell phone calls.
California’s notorious business regulations trickle down to higher costs to consumers.
State leaders should daily challenge themselves how to reduce the everyday cost-of-living for Californians.
“We should change California’s tax code to address our state’s housing affordability crisis”
Jesse Gabriel - California State Assemblyman (D-Los Angeles)
Among other revisions, we should change California’s tax code to address our state’s housing affordability crisis. As rents continue to increase and homeownership feels out of reach for more middle class families, we can ease some of the strain through targeted tax policies like expanding California’s renter’s tax credit and enacting a first-time home buyer tax credit. In conjunction with increased housing production, these and other similarly targeted, means-tested tax benefits could make a real difference for millions of middle class Californians.
We need a two-pronged approach
Chad Peace - Founder and President of IVC Media
First: expand the homeowner’s property tax exemption to a $7,500 refundable tax credit for first-time home buyers (rather than a deduction). Then reduce the tax credit after three years by $1,500 for the next five years. This would help young, middle, and working-class families afford their first home. Second: simplify the tax code by eliminating the requirement to fill out a separate state tax return. Simply use the taxable income from the federal form and calculate state taxes and credits with a short form. This would save middle-class taxpayers, particularly small business people, significant accounting costs (in many cases the accounting cost savings may be as much or more as the tax liability). It would also save the state money by simplifying enforcement. This can be structured to reduce total costs to taxpayers while maintaining (or even increasing) net revenues to the state.
Eliminate separate California income tax forms
Tom Campbell - Professor of Law and Economics at Chapman University
The IRS estimates that the average non-business taxpayer takes eight hours to complete her or his income tax returns every year. The average business taxpayer spends three times that amount of time. In California, this task if made worse by the need to fill out a separate California income tax form once we’re done with our federal return. Eliminating that second step would be of great help to middle income taxpayers who do their own taxes and middle income taxpayers trying to run a small business. Each year, California would announce the correct percentage; each of us would multiply that by what we pay in federal income taxes, and we would be done. No more separate California forms, charts, schedules, etc. As a State Senator I was Vice Chairman of the Revenue and Tax Committee. I heard all the arguments for why California had to have different deductions, exclusions, amortization rates, etc. than the federal income tax. None of them was convincing when compared with the obvious benefit to every one of us to get our taxes done faster.
Save California’s shrinking middle class by defeating Donald Trump in 2020
Thanks to Donald Trump, many Californians paid HIGHER taxes this year. Because Trump limited the state/local tax deduction to $10,000 on federal tax returns (the average taken by California families using deductions was $18,500) California’s working families continue to be hurt by federal tax policies favoring corporate special interests and the wealthiest Americans. What to do? 1) Fully support efforts of US Congressional leaders seeking to double this unfair, arbitrary cap 2) Legislate a state workaround here in California– let the IRS take their chances by challenging us in court 3) Insist everyone in the Golden State pay their fair share by achieving Prop. 13 tax reform, overhauling an unfair system where some businesses are paying property taxes on 40-year old assessments. On California’s 2020 statewide ballot, this League of Women Voters and labor-backed measure — currently supported by 54% of likely voters — creates millions in new funding for our public schools, while achieving tax equity and giving kids from working and middle class families better job/college pathways. 4) Finally—DEFEAT TRUMP in 2020. Polling data already suggests these Trumpian tax policies cost Republicans dearly in previously red regions like Orange County. #staywoke #actnow #election2020
Young voters and taxpayers need to do their homework and make their voices heard
Maria Mejia - Los Angeles Director of Gen Next
The public debate around California’s economy and its infamously aggressive tax system lives and dies at the feet of the state’s most recognizable economic groups: the wealthy and the working poor.
If you’re a young, upwardly mobile worker, however, it is difficult to imagine this conversation has anything to do with you.
Young voters and taxpayers—do your homework and make your voice heard. As an investor in California’s future, it is your right to demand that legislators pursue innovative tax policies (incentives and tax breaks included) that reduce the burden of going to school, starting a business, and yes, even buying a home in California.