California's tax system and some interesting numbers
George Skelton is a columnist for the Los Angeles Times and he's been covering politics and government issues for more than five decades. He recently wrote a column about California's tax system. It points out the following:
The top 1% in CA pay 48% of the income taxes
The top 10% in CA pay 79% of the income taxes
The bottom 60% in CA pay only 2% of the income taxes
To be in that top 1% you have to have an adjusted gross income (AGI) of $556,638
To be in that top 10% you have to have an AGI of around $149,000
In the upcoming CA fiscal year income taxes will be around 70% of the total revenue.
In CA in 1950 income taxes provided only 10% of the total revenue.
In that upcoming CA fiscal year, sales taxes will provide 22% of the total revenue.
In CA in 1950, sales taxes provided 60% of the total revenue.
* * *
Now before I launch into my analysis of those numbers, I want to point out that in the entire column penned by Mr. Skelton there are absolutely no mentions of the third rail of California politics. That is of course, Proposition 13. To be fair, he does mention that the commercial property tax is sacrosanct. It may be but it is nowhere near as sacred as is the Proposition 13 limitation on personal residence property taxes.
To better understand the property tax, the CA Legislative Analyst's Office prepared a primer on the subject. This excerpt gives credence to Mr. Skelton's comment about the commercial property tax being both sacrosanct and a problem in terms of how much/little revenue is generated from it:
"Has the Distribution of the Property Tax Base Changed Over Time?
There is little statewide information regarding the composition of California’s property tax base over time. Based on the available information, however, it appears that homeowners may be paying a larger percentage of total property taxes today than they did decades ago. We note, for example, that the assessed value of owner–occupied homes has increased from a low of 32 percent of statewide assessed valuation in 1986–87 to a high of 39 percent in 2005–06. (The share was 36 percent in 2011–12.) It also appears likely that owners of commercial property are paying a smaller percentage of property taxes than they did decades ago. For example, Los Angeles County reports that the share of total assessed value represented by commercial property in the county declined from 40 percent in 1985 to 30 percent in 2012. In addition, the assessed value of commercial property in Santa Clara County has declined (as a share of the county total) from 29 percent to 24 percent since 1999–00."
Why in the world are personal residence property tax value assessments increasing while those of commercial properties decreasing??
* * *
Mr. Skelton points out that the state portion of the sales tax rate in 1950 was 3%. In case you did not know the current rate for the state portion, it is 6.25% and there is a mandatory local rate of 1.25%. Now some of you who live in CA are saying "wait a minute, my sales tax rate is higher." True. In many locations the sales tax rate is much higher. If I'm in Culver City, the local rate is 9.5%. However if I'm in the Crenshaw district of the city of Los Angeles, it is only 9%. If I drive over to Cypress in Orange County, it drops to 8%. In Camarillo in Ventura County, down to 7.5%.
Does this matter a lot, the differences in local sales tax? Well, if you live in Los Angeles County and you're planning to buy a new car that will cost $40,000, you're going to pay the county sales tax rate of 9%. $3,600. But if you buy it in Orange County instead you pay only 8% and save $360. If you want to drive to Ventura County, you save another 1/2% and save $540. Now if you can afford that much for a car, you may not care about saving $500. But if it was a $20,000 new car then $250 would be a big deal to you and you might make that drive.
What people do not recognize at first glance just how regressive the sales tax is. We pay sales tax on gasoline, fast food, non-food items in grocery stores. and non-food and prescription drug purchases in drug stores. The percentage of a family income that goes to sales tax is much higher among the lowest earning families.
What are not taxed are services. Get your car repaired and you'll pay sales tax on the parts but no sales tax on the labor. Pay a doctor, no sales tax. Same for lawyers and yes, tax preparation services. Why not?
So why is all of this so critically important? Because of a man named David Tepper. He's a hedge-fund billionaire who lived in New Jersey for decades. Now he has moved to Florida. According to a Fortune.com article, 40% of New Jersey's gross revenues come from personal income taxes. One-third of that tax revenue comes from less than 1% of taxpayers. One man moving is going to cost New Jersey tens of millions in annual tax revenue. Compare these numbers for NJ to those for CA above and you can see the problem.
California needs to become less dependent on income tax revenues and build revenues coming in from other taxes. Sales tax on services, even at a lower rate than the current sales tax rate is one possible answer. Another would be to cut spending but that's never going to happen in this state.
2016 is not 1950. But in 1950 the state cut spending on social welfare by more than 75% over the prior year spending level. In 1950 the roughly $1.6 million being spent on social welfare represented less than two-tenths of the total budget. Conversely, the 2014-15 CA budget included $9.9 billion which was a 2.5% cut over the prior year. However, social welfare spending in CA represented 6.5% of the total budget.
Times have changed and I am not advocating cuts in social welfare spending. I'm pointing out that comparisons of today's spending to that of 1950 provide little perspective unless they are included in an overall comparison of the differences in revenues, spending and the entire socio-economic picture of the state. And that as long as California is too reliant on that 1%'s income for state spending, the risk is extreme if another economic downturn takes place.
The top 1% in CA pay 48% of the income taxes
The top 10% in CA pay 79% of the income taxes
The bottom 60% in CA pay only 2% of the income taxes
To be in that top 1% you have to have an adjusted gross income (AGI) of $556,638
To be in that top 10% you have to have an AGI of around $149,000
In the upcoming CA fiscal year income taxes will be around 70% of the total revenue.
In CA in 1950 income taxes provided only 10% of the total revenue.
In that upcoming CA fiscal year, sales taxes will provide 22% of the total revenue.
In CA in 1950, sales taxes provided 60% of the total revenue.
* * *
Now before I launch into my analysis of those numbers, I want to point out that in the entire column penned by Mr. Skelton there are absolutely no mentions of the third rail of California politics. That is of course, Proposition 13. To be fair, he does mention that the commercial property tax is sacrosanct. It may be but it is nowhere near as sacred as is the Proposition 13 limitation on personal residence property taxes.
To better understand the property tax, the CA Legislative Analyst's Office prepared a primer on the subject. This excerpt gives credence to Mr. Skelton's comment about the commercial property tax being both sacrosanct and a problem in terms of how much/little revenue is generated from it:
"Has the Distribution of the Property Tax Base Changed Over Time?
There is little statewide information regarding the composition of California’s property tax base over time. Based on the available information, however, it appears that homeowners may be paying a larger percentage of total property taxes today than they did decades ago. We note, for example, that the assessed value of owner–occupied homes has increased from a low of 32 percent of statewide assessed valuation in 1986–87 to a high of 39 percent in 2005–06. (The share was 36 percent in 2011–12.) It also appears likely that owners of commercial property are paying a smaller percentage of property taxes than they did decades ago. For example, Los Angeles County reports that the share of total assessed value represented by commercial property in the county declined from 40 percent in 1985 to 30 percent in 2012. In addition, the assessed value of commercial property in Santa Clara County has declined (as a share of the county total) from 29 percent to 24 percent since 1999–00."
Why in the world are personal residence property tax value assessments increasing while those of commercial properties decreasing??
* * *
Mr. Skelton points out that the state portion of the sales tax rate in 1950 was 3%. In case you did not know the current rate for the state portion, it is 6.25% and there is a mandatory local rate of 1.25%. Now some of you who live in CA are saying "wait a minute, my sales tax rate is higher." True. In many locations the sales tax rate is much higher. If I'm in Culver City, the local rate is 9.5%. However if I'm in the Crenshaw district of the city of Los Angeles, it is only 9%. If I drive over to Cypress in Orange County, it drops to 8%. In Camarillo in Ventura County, down to 7.5%.
Does this matter a lot, the differences in local sales tax? Well, if you live in Los Angeles County and you're planning to buy a new car that will cost $40,000, you're going to pay the county sales tax rate of 9%. $3,600. But if you buy it in Orange County instead you pay only 8% and save $360. If you want to drive to Ventura County, you save another 1/2% and save $540. Now if you can afford that much for a car, you may not care about saving $500. But if it was a $20,000 new car then $250 would be a big deal to you and you might make that drive.
What people do not recognize at first glance just how regressive the sales tax is. We pay sales tax on gasoline, fast food, non-food items in grocery stores. and non-food and prescription drug purchases in drug stores. The percentage of a family income that goes to sales tax is much higher among the lowest earning families.
What are not taxed are services. Get your car repaired and you'll pay sales tax on the parts but no sales tax on the labor. Pay a doctor, no sales tax. Same for lawyers and yes, tax preparation services. Why not?
So why is all of this so critically important? Because of a man named David Tepper. He's a hedge-fund billionaire who lived in New Jersey for decades. Now he has moved to Florida. According to a Fortune.com article, 40% of New Jersey's gross revenues come from personal income taxes. One-third of that tax revenue comes from less than 1% of taxpayers. One man moving is going to cost New Jersey tens of millions in annual tax revenue. Compare these numbers for NJ to those for CA above and you can see the problem.
California needs to become less dependent on income tax revenues and build revenues coming in from other taxes. Sales tax on services, even at a lower rate than the current sales tax rate is one possible answer. Another would be to cut spending but that's never going to happen in this state.
2016 is not 1950. But in 1950 the state cut spending on social welfare by more than 75% over the prior year spending level. In 1950 the roughly $1.6 million being spent on social welfare represented less than two-tenths of the total budget. Conversely, the 2014-15 CA budget included $9.9 billion which was a 2.5% cut over the prior year. However, social welfare spending in CA represented 6.5% of the total budget.
Times have changed and I am not advocating cuts in social welfare spending. I'm pointing out that comparisons of today's spending to that of 1950 provide little perspective unless they are included in an overall comparison of the differences in revenues, spending and the entire socio-economic picture of the state. And that as long as California is too reliant on that 1%'s income for state spending, the risk is extreme if another economic downturn takes place.
posted by me at 3:49 PM
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