Tuesday, July 21, 2009

Rethinking California's Revenue Structure

California Assembly Speaker Karen Bass, who has no particular allergies to progressive taxes, cites an astonishing statistic about California Income Taxes: that 144,000 Californians (out of 38 million) pay half the state's income taxes. As I will discuss below, this does not necessarily imply that California taxes are, overall, too progressive, but it does mean that state income tax revenue is too undiversified. When such a small share of the population makes up such a large share of the revenue base, the fiscal conditions of the state will swing wildly with the fortunes of a few. This is what we have been witnessing here in California.

On the other hand, California has a very high sales tax as well, and everyone pays it. The best evidence I know suggests that the sales tax is regressive over the short term, but is more or less proportional over the life cycle. There is no question that the size of California's sales tax dampens the overall progressiveness of state revenue collections.

Finally, there is the property tax, which is completely detached from the ability to pay it, because of Proposition 13. Within a condominium complex, one can find two identical units that pay extraordinarily different levels of property taxes (sometimes by a factor of 10 to 1), because taxes are based on the price a property owner pays at the time of acquisition.

For California to have stable fiscal conditions going forward, it will need to broaden its income tax base and equalize its property tax base. I am not holding my breath.


Bill Roth said...

There have been some serious rumbings in the California Democratic Party about Prop 13 reform. If the current situation does not push us in this direction, i am not sure what will.

Don Coffin said...

This sounds prima facie improbable to me, but I don't have access to the data. A couple of questions.

Are both numbers (144,000 and 38 million) individuals, or is one (the 144,000) households while the other (38 million) is individuals?

What are the income shares?

Having said that, California's real budget problems seem to me to be a result of an out-of-control initiative process (in which expenditures can be mandated and difficult to change) and a legislative requirement that tax changes (or increases only?) require a 2/3 affirmative vote.

Anonymous said...

California attempted to increase the property tax intake by driving up home prices via restrictive zoning regulations. If the citizens could not pay the extra tax in the first place, paying the extra tax plus the extra price was even more unaffordable for them.

A progressive income tax limits taxation to what people can afford. All regressive taxes should be permanently abolished, as they place an unreasonable burden on those with meager resources.

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