Five groups and counting – including Gov. Jerry Brown – aim to help California by convincing voters next November to approve billions in tax increases.
It’s difficult to say how many of the nearly 15 million Californians who file state tax returns would be digging into their wallets – and how deeply – if all of the measures pass, despite that being an unlikely prospect.
Even examined separately, the billions add up quickly.
The latest iteration of the Democratic governor’s revenue plan, which he is expected to unveil within the next few days, boosts taxes on Californians earning $500,000 or more and ratchets up the sales tax by half a cent to raise more than $6 billion.
Billionaire Nicolas Berggruen’s Think Long Committee would reduce income taxes but expand the sales tax to include services like dry cleaning, auto repair and accounting. Even with a $4.5 billion fund to “rebate” lower income Californians for the bigger sales tax bite they’ll take, the plan contemplates a net revenue gain for the state of some $10 billion.
Another proposal, this one by the Advancement Project, a Los Angeles based nonprofit, would boost state income taxes, with those in higher brackets shouldering more of the increase. That would pour as much as $10 billion into public school classrooms and preschool programs.
Californians for Clean Energy and Jobs, headed by hedge fund manager Tom Steyer, would raise state taxes by $1.1 billion – mostly on out-of-state companies – and earmark half the windfall to promote green building projects.
Proponents are already gathering signatures for the aptly named “Tax Oil to Fund Education Act,” which imposes a 15 percent tax on oil and natural gas, generating about $3 billion per year of which roughly two-thirds would be sent to state universities and community colleges and the remainder to public schools.
“If all of these measures go forward, taxpayers will throw up their hands,” said Joel Fox, president of the Small Business Action Committee and the former head of the Howard Jarvis Taxpayers Association from 1986 to 1998.
“Even if someone is inclined to support a tax because they think California needs it, how are they going to determine which of the five is the best option?”
Like the old adage says, all politics is local. That’s why one of the most time-honored determiners of the “best option” is how it personally affects the taxpayer making the decision.
Using that yardstick, Steyer’s proposal to recalibrate how out-of-state companies are taxed on their California profits appears to have little direct impact on individual taxpayers.
It would base the portion of taxes those companies pay on the level of sales within the Golden State.
Indirectly though, Californians investing in the affected companies – Microsoft, IBM, Proctor & Gamble and General Motors, for example – might see lower returns, reducing their capital gains income, a major component of the state’s tax receipts.
Petrochemical companies subjected to an oil and gas severance tax would likely pass that increase onto customers who already pay between $3.50 and $4 per gallon of gasoline.
Severance taxes also disproportionately fall on in-state based oil companies, potentially causing a further drag on California’s slowly recovering economy.
“The taxes I’ve seen that the people of California are mostly likely to support are taxes imposed on somebody other than themselves and even then they’re not too excited about it,” said Allan Zaremberg, president of the California Chamber of Commerce, whose support –or at least neutrality – Brown is trying to win for his revenue plan.
No position has yet been taken by the chamber’s board.
On the other hand, a USC Dornsife College of Letters, Arts and Sciences and Los Angeles Times poll published Nov. 19, found 64 percent of respondents either strongly or somewhat in favor of increasing money for public schools – even if that meant higher taxes.
Seventy-four percent of parents surveyed said they would pay more for better schools.
And Californians, who pay an average of $3,200 on their state return, can write off their state taxes against what they owe in federal taxes.
The impact of the other proposals on individual taxpayers requires understanding who pays the bulk of California’s $41.7 billion in state income taxes. That was the total liability in 2008, the most recent tax year data compiled by the Franchise Tax Board.
Of the 14.8 million state income tax returns Californians filed in 2008, 8.7 million contained some tax liability.
The 9.1 million filers with income below $50,000 paid $1.5 billion in taxes, 3.5 percent of the total collected. The remaining persons who filed returns paid $40.2 billion.
The 118,349 Californians with income of $500,000 or more contributed $16.9 billion – almost 41 percent of all taxes collected by the board in 2008.
Just under $7 billion in taxes were paid by the 4,774 Californians with income of $5 million. That’s nearly 17 percent of total taxes paid in 2008, an average tax payment of $1.5 million for each of the 4,774 filers.
This skewing of the state’s income tax towards the state’s highest earners is cited by the Think Long Committee – just as it has been in previous studies like that of the Commission on the 21st Century Economy in 2009 – as a key factor for California’s boom-bust budget cycles.
“A tax code reliant on the most volatile component of the economy – high-end earners caused revenues to soar by 23 percent in a single year,” the committee says in its 24-page Blueprint to Renew California, noting that seven years later, tax revenues plunged by 19 percent.
Think Long offers the most complicated revenue proposal. It’s summarized this way by Lenny Goldberg of the California Tax Reform Association:
“Taxpayers will pay taxes on services but get an income tax cut. That cut, on average, is designed to overcome the amount of additional sales tax they pay.”
Think Long reduces the state’s six tax brackets to two and lowers the rate: A 2 percent rate for those earning $95,000 or less and 7.5 percent for those above.
Currently, joint filers up to $95,000 pay a maximum of 8 percent. Most of the 9.1 million filers from 2008 earning $50,000 or less pay no more than 4 percent. Californians with more than $95,000 in annual income pay 9.3 percent now. Those with over $1 million pay an additional 1 percent to support state mental health programs.
The Advancement Project’s revenue proposal creates 11 different tax brackets.
Proponents say a couple earning $75,000 would pay $428 more each year. A couple earning $85,000 would see their tax bill rise from $3,200 to $3,750, under the plan. $750,000 would pay $12,516 more.
As with Brown’s plan and that of Think Long, higher earners would shoulder more of the tax increase’s impact.
Couples with $750,000 in taxable income would pay $12,500 more. Those 4,774 Californians pocketing $5 million would see their tax rate climb from the current 9.3 percent maximum to 12.5 percent.
Brown’s proposal would increase the maximum rate for those with $1 million in income or more by 2 percent and those earning $500,000 by 1 percent.
Think Long increases the state’s standard personal deduction from this year’s $3,769 for single filers and $7,568 for joint filers to $27,000 and $45,000 respectively.
That means Californians earning less than those totals would p
ay no state taxes although as the 2008 returns show, those nearly 9 million filers don’t pay much now.
Only deductions for mortgage interest, property taxes, charitable contributions and research and development would be kept. That said, those are by far the bulk of the deductions claimed by most Californians.
Nearly 5 million Californians deducted $24 billion in property taxes in 2008. More than $88 billion in mortgage interest was written off by nearly 4.7 million Californians. And $21 billion in cash and on-cash contributions were claimed.
The cut in tax rates is offset by broadening the sales tax to include services like accountants, attorneys, architects and advertising – and that’s just the “A”s.
Education and medical expenses would not be taxed under Think Long but how that is defined hasn’t been established.
Under the plan, the net effect would be that households with income up to $1 million would pay from $71 to $806 more in taxes, Think long estimates. Households with income over $1 million, $11,478.
“The sentiments of the Think Long Committee are probably correct. We have too much reliance on a volatile income source that discourages people from investing in California,” said Loren Kaye, president of the California Foundation for Commence and Education, a think-tank affiliated with the state chamber.
“But what’s the effect of the solution on economic activity, investment and competitiveness?”