September 20, 2011
A new document prepared by the Congressional Joint Committee on Taxation provides an excellent primer on the federal taxes paid by individuals, including the impact of different taxes on individuals at different income levels. Data cited in the report provide the facts behind billionaire investor Warren Buffett’s often-repeated statement that his federal tax rate is lower than that of his secretary. When all federal taxes – income, employment (Medicare and Social Security), and excise – are considered, millionaires pay an average tax rate of 23.6 percent. This rate is lower than that paid by households earning $200,000 to $500,000 (24.1 percent) or $500,000 to $1,000,000 (26.8 percent).
How can this be true? In brief, the preferential treatment of income from capital gains, which accounts for a larger fraction of millionaires’ incomes than do wages. Millionaires pay an average tax rate of 14.7 percent on income from capital gains – less than the average combined income and payroll tax rate paid by wage earners with incomes over $20,000. The same data show that the poorest individuals – those with incomes under $10,000 – actually pay a larger average tax rate than do those with somewhat higher incomes, due to the impact of employment taxes paid as a percentage of their modest earnings. These data vividly illustrate the importance of looking at all taxes, not just the income tax, when evaluating tax policies, especially since three-quarters (75.4 percent) of all taxpayers, but just 1.5 percent of millionaires, pay more in employment taxes than they do in income taxes.
One strength of California’s personal income tax is that it treats wage earners and investors equally, imposing the same tax rate on income regardless of how it is earned. The importance of this policy and the values behind it is one reason why we opposed the Governor’s end-of-session tax deal, which would have created a new tax preference for individuals with business income.
– Jean Ross
July 29, 2011
Here at the CBP, we never tire of pointing out that budgets express our values and priorities as a society. Public opinion research, however, suggests that Californians lack basic knowledge about how their tax dollars are spent. In January, the Public Policy Institute of California reported that an astounding 45 percent of California adults thought that prisons and corrections made up the biggest share of state spending. In fact, the largest share of state spending goes toward public schools, which most voters identify as a high priority along with higher education and services for vulnerable children and seniors. Corrections accounts for a little more than 10 percent of the state budget. Our new Policy Basics shows that the vast majority of state spending supports public schools, higher education, health and human services, and other key public services that build a strong economy and protect our quality of life.
– Scott Graves
April 15, 2011
Tax day – the day Californians file their income tax returns and make a collective investment in our communities – is also a time when urban legends abound about who does and who does not pay taxes and how much they pay. Income taxes are just a part of the story. Our new Policy Points, Who Pays Taxes in California, examines who does (and doesn’t) pay taxes in California in greater detail. Here are a few highlights:
- First, we all pay taxes. All Californians pay taxes, whether we fall on the low-end, middle, or high-end of the income distribution. Part of the confusion about who does not pay taxes stems from the fact that most people tend to think about who pays taxes in terms of the income tax, but it is important to remember that we pay many other taxes, too. In fact, income taxes make up just a small share of total taxes in the United States.
- As a share of income, wealthy Californians actually pay the least in taxes. California’s top earners pay a smaller share of their income in state and local taxes. The top 1 percent of California’s earners, with an average income of $2.3 million, pay 7.8 percent of their income in state and local taxes, while the bottom-fifth of earners, with an average income of $12,600, pay 11.1 percent of their income in state and local taxes. This is partly because lower-income individuals pay a greater share of their income in sales and property taxes than do higher-income Californians.
- Over the past two decades, wealthy Californians’ incomes have far outpaced those of other Californians. Between 1987 and 2008, the most recent year for which data are available, the average adjusted gross income (AGI) – the income reported for tax purposes – of California’s wealthiest 1 percent increased by 81.1 percent. In contrast, the average AGI of the bottom 80 percent declined by 9.1 percent during the same period. To put it another way, approximately 40 percent of California’s income gains over the past two decades went to the wealthiest 1 percent.
- The effective tax rate – the share of income actually paid in income taxes – for the nation’s wealthiest households has declined while their incomes have increased. The typical AGI of the top 400 households increased by 399 percent between 1992 and 2007, the most recent year for which data are available. During this same period, the median household income for a family of four – the income at which half of all households earned more and half earned less – increased by 13.2 percent. Additionally, the effective tax rate for the 400 wealthiest households declined by almost 10 percentage points between 1992 and 2007, while the effective tax rate for the average household declined by less than 1 percentage point during the same period.
- More than 2,400 high-income Californians pay no state income tax at all. In 2008, the most recent year for which data are available, 2,431 of the 611,318 taxpayers who reported incomes of $200,000 or more paid no California personal income tax. The number of “no tax” returns has more than quadrupled since 1997. These taxfilers are able to do this by using a variety deductions and credits, such as the mortgage interest deduction or the state’s Enterprise Zone Hiring and Enterprise Zone Sales and Use Tax Credits.
We all benefit from the taxes contributed by all Californians. They support our public schools, streets and highways, public hospitals, parks and beaches, and the public health infrastructure that ensures that our food is safe to eat and our water is safe to drink, as well as a range of other services. This tax day we should ponder what the absence of additional tax dollars means for the public structures and institutions they support. Protecting our core public systems and structures is essential for securing a prosperous future and paving the way for a more robust economic recovery, and a more balanced approach aimed at bringing the state’s budget into balance over a multi-year period is the only path to a brighter future.
– Luke Reidenbach
February 8, 2011
The Legislature faces many tough choices to help bring the state’s budget into balance, but eliminating the Enterprise Zone (EZ) Program should be a no brainer. As the Legislative Analyst’s Office (LAO) noted yesterday in a joint hearing before the Assembly Budget Subcommittee on State Administration and the Committee on Revenue and Taxation, this is one of the few proposals before the Legislature that is supported by rigorous, independent research. That research shows that EZs are ineffective, making their elimination a logical place to start balancing the budget. In fact, LAO staff who testified yesterday said that the EZ Program ought to be near the top of the list of programs to eliminate.
Our hot-off-the-press analysis of the EZ Program pulls together facts about the program and shows that:
- The cost of EZ tax breaks has skyrocketed, increasing by an average of 35 percent per year from $675,000 in 1986 to $465.5 million in 2008, for a total cost to the state of $3.6 billion since the program’s inception. In contrast, state spending rose by an average of 6 percent per year during that period.
- Corporations with assets of $1 billion or more are the primary beneficiaries of EZ tax breaks: They claimed seven out of 10 EZ tax break dollars in 2008, even though they represented less than half of 1 percent of California’s corporate tax filers.
- EZs fail to create jobs or new businesses, according to an extensive study by the Public Policy Institute of California (PPIC), which the LAO called the more reliable of the studies discussed at yesterday’s hearing.
We agree with the assessment of the PPIC researchers, who concluded that “the absence of evidence of a beneficial effect of California’s enterprise zones on job and business creation clearly calls into question whether the state should continue to grant enterprise zone tax incentives. … For a cash-strapped state, it is too costly a program to simply continue with ‘business as usual’ without clearer evidence of the program’s benefits or a well-defined plan to make the program more effective.” When the other options for closing the state’s budget gap include dropping more than 230,000 low-income children from CalWORKs, the state’s highly successful welfare-to-work program, or cutting funding for child care at a time when parents are struggling to find and retain jobs in the aftermath of the Great Recession, eliminating costly tax breaks that fail to deliver on their promises should be one of the easiest choices of all.
– Alissa Anderson
August 30, 2010
Nearly two months into the 2010-11 fiscal year, the Legislature is scheduled to vote on competing versions of the 2010-11 budget on Tuesday, August 31, the final day of the 2010 regular legislative session. Democrats will likely propose the Budget Conference Committee’s plan, while the Republican proposal – which was reportedly being finalized late last week – will likely mirror the Governor’s May Revision. Press reports indicate that Democrats will only put up the spending side of their budget proposal, not the tax plan proposed by Senate President pro Tem Darrell Steinberg and Assembly Speaker John Pérez earlier this month. Neither spending plan is expected to garner the required two-thirds vote of each house, so the current budget deadlock is destined to continue into September. For more information, see the CBP’s side-by-side for a comparison of the Governor’s May Revision and the Conference Committee’s spending plan and the CBP’s recent analysis of the Democrats’ tax plan.
– Scott Graves