Corporate Tax Cuts Reveal Misguided Priorities

June 22, 2009

In an op-ed that appears today in the Sacramento Bee, CBP Executive Director Jean Ross urges legislators to repeal corporate tax cuts that were slipped into two recent budget agreements, without public hearings. Legislators should repeal not just some of them, but all of them.

The Budget Conference Committee has approved rolling back the credit sharing tax cut and a portion of the expansion of net operating loss deductions. But this still leaves the largest and most costly of the tax breaks, the elective single sales factor apportionment, in place. Supporters argue that this tax change creates jobs. But a study by the Center on Budget and Policy Priorities refutes these claims.

Jean writes of these tax cuts, “Slipped last-minute into budget deals with no public hearings, these significant changes to state policy will benefit a tiny handful of large corporations. With Governor Schwarzenegger proposing to close state parks, eliminate health coverage for more than a million children and severely cut education – indeed, as lawmakers consider sacrificing services to children to balance the budget – these tax cuts represent misguided priorities, and carry a price tag California can’t afford.”

– Lisa Gardiner

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Payday Loans: Bigger Is Not Better II

June 19, 2009

On Monday we blogged about AB 377 (Mendoza), which would allow Californians to write a personal check for up to $500 to secure a payday loan, up significantly from the current maximum of $300. Under this proposed change, a borrower who writes a $500 check to a payday lender would get a $425 loan – which must be repaid in full in just two weeks or so – and pay a $75 fee. That’s quite a payday for payday lenders. But more than that, a larger loan size would likely increase the number of Californians who become repeat payday-loan borrowers – paying off one loan and then immediately taking out another (and another) because they lack sufficient income to both repay their initial loan and meet their basic living expenses for the next two weeks.

The Senate Banking, Finance and Insurance Committee heard the bill on Wednesday, and things did not go well for the bill’s opponents, who included the Center for Responsible Lending and Consumers Union. The committee passed the bill on a bipartisan 7-1 vote. Despite overwhelming evidence that payday loans trap many borrowers in long and expensive cycles of debt, the committee decided that allowing payday lenders to make much larger loans is sound public policy. One Democrat asked rhetorically: “Is the industry perfect? No. Does it provide a valuable credit option for Californians? Absolutely.”

This concern about credit options was echoed by several committee members. Legislators seem to believe that Californians who currently use payday lenders would have nowhere to go but “Louie the Loan Shark” if the state made it harder for payday lenders to stay in business or legislated them out of existence, as many states have done. But that’s not the case. A 2007 survey of low- and moderate-income residents in North Carolina, which ended payday lending in 2006, found that households used an array of strategies to deal with financial shortfalls, including borrowing money from family or friends. In addition, our September 2008 report, Payday Loans: Taking the Pay Out of Payday, showed that Californians currently have a number of less-expensive alternatives to payday loans, including small-dollar loans offered by credit unions, banks, and a less-well-known category of lenders called consumer finance lenders.

– Scott Graves

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Shifting the Tax Burden to Low- and Middle-Income Californians

June 17, 2009

Earlier this week, we blogged about the upcoming meeting of the Commission on the 21st Century Economy – the “tax commission.” On Tuesday, the commission considered three options for restructuring California’s tax system. A staff overview of the three proposals shows that each of the three options under consideration would reduce the share of taxes paid by the wealthiest Californians and increase the share of the state’s taxes paid by those at the middle and lower end of the income distribution. For example, one option would – among other things – establish a 6 percent “flat tax” that would apply to taxpayers whether they had incomes of $10,000 or $10 million. Under this scenario, the share of taxes paid by middle-income Californians – those with incomes between $20,000 and $50,000 – would more than double, while the share paid by taxpayers with incomes of $200,000 or more would drop by almost one-third. Flattening personal income tax rates also would increase the share of income that California’s low- and middle-income households would pay in taxes – exacerbating an already regressive tax structure. Currently, the lowest-income households pay a larger share of their incomes in state and local taxes than higher-income households.

By increasing the share of taxes paid by low- and middle-income Californians, the tax packages under consideration would widen after-tax income gaps. Yet the level of inequality in California is already large and growing larger. The average taxpayer in the top 1 percent had an adjusted gross income (AGI) – income reported for tax purposes – of $1,832,123 in 2007 – 50.7 times that of the average middle-income taxpayer ($36,115). California’s income gap has been widening for years. The latest Franchise Tax Board data show that one-quarter (25.2 percent) of total AGI went to the wealthiest 1 percent of taxpayers in 2007, nearly twice the share (13.8 percent) in 1993, which is the earliest year for which data are available. In contrast, taxpayers with incomes in the middle of the distribution had just 10.0 percent of AGI in 2007, down from 13.0 percent in 1993. This means that the top 1 percent of taxpayers received approximately 25 times their proportionate share of AGI in 2007, while middle-income taxpayers received half their share. These disproportionate gains translate into a substantial concentration of income at the very top of the distribution. If the share of income going to the wealthiest 1 percent of taxpayers had remained the same since 1993, the bottom 99 percent of taxpayers would have an additional $123 billion in income – equal to $8,388 for each taxpayer.

– Alissa Anderson

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All Around Winners

June 16, 2009

Last week we blogged about a new CBP report, To Have and Have Not, which found that the corporate tax cuts enacted as part of the September and February budget agreements will result in a loss of $2 billion a year, and potentially as much as $2.5 billion a year, in corporate tax revenues – an amount equal to nearly one-quarter of the income tax dollars currently paid by California corporations. The vast majority of the benefits of these tax cuts will go to a handful of large corporations – those with gross incomes over $1 billion.

If not outrageous enough on their own, these tax breaks come at a time when corporate profits have skyrocketed. Total corporate profits reported for tax purposes more than tripled between 2000 and 2007, increasing from $33.9 billion to $122.2 billion, and the average corporation’s profits rose by 154.3 percent, according to the most recent data from the Franchise Tax Board. To put these gains in perspective, consider that if the average personal income taxpayer had experienced a gain comparable to the average corporation’s, that taxpayer’s income would have risen by more than $97,000 between 2000 and 2007. Instead, the average personal income taxpayer’s income increased by just $9,500 (15.0 percent).

Some of the sectors that emerged as big winners due to the recently enacted tax cuts have experienced the greatest growth in profits this decade. Information technology firms will receive the largest tax cut per firm from credit sharing, once fully implemented, and just 28 utility companies will receive tax cuts averaging $1.7 million per firm from the adoption of elective single sales factor apportionment. These cuts come after the average information and communications corporation saw its profits increase fivefold between 2000 and 2007, and the average firm in the transportation, warehousing, and utilities sector saw its profits rise fourfold.

The recently enacted corporate tax cuts come at a time when the share of corporate income paid in taxes is at its lowest level since at least the 1960s. Meanwhile, proposals to close the state’s budget gap largely rely on deep cuts to education, health care, and human services. Where’s the outrage?

– Alissa Anderson

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Taxing the Middle

June 15, 2009

The Commission on the 21st Century Economy, aka the “tax commission” will begin considering alternatives for restructuring California’s tax system in Los Angeles on Tuesday. The commission, which was appointed by the Governor, Assembly Speaker Karen Bass, and Senate Pro Tem Darrell Steinberg, has heard testimony since January and, after a delay due to the May election, will now begin work on what may or may not culminate as a set of recommendations.

One thing has become clear – the only thinly hidden agenda of the commission is to reduce taxes paid by the wealthiest Californians and, potentially, business and increase the share of the state’s taxes paid by those at the middle and lower end of the income distribution. The San Francisco Chronicle’s “PoliticsBlog” outlined Schwarzenegger Chief of Staff Susan Kennedy’s goals for the commission, “Asked what she’d like to see from the tax commission, Kennedy didn’t hesitate. ‘Flatness,’ she said. ‘Our revenue stream is way too progressive.’ But no matter how you slice it, she said, changes that come out of it may be seen as ‘a tax increase to the middle of the structure.’ ”

The three packages the Commission will consider in Los Angeles tomorrow would go a long way toward realizing Kennedy’s goal of a tax shift onto the state’s working families by lowering the state’s top personal income tax rates, limiting or eliminating the state’s corporate income tax, and creating new tax breaks for business. The “wild card” proposal? Creation of a business net receipts tax. While perhaps intriguing at first glance, policy experts, including Commission member Rick Pomp, argue that these taxes are “primarily a tax on consumers rather than on businesses.” As such, the net receipts tax proposal would replace a tax on corporate profits, which economists argue is largely paid by disproportionately higher-income shareholders, with a tax paid by consumers across the income distribution.

The Commission has not released details – such as proposed tax brackets – for the three packages that will be presented and there’s no time for public comment after the staff presentation of the alternatives. There’s clearly much more than can, should, and will be said on these proposals once we have the details.

– Jean Ross

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