Vallejo Times Herald (California)
June 16, 2009 Tuesday
Aren't California taxes high enough?
By Steven Harmon/MediaNews Group
SACRAMENTO - Are Californians overtaxed?
On the face of it, the question should not even have to be posed. Californians pay the nation's highest sales tax. Its top-bracket earners have the second-highest income tax rate in the country. The middle class to upper class - those making $48,000 to $1 million annually - are among the most highly taxed, too. California's gas tax, at 35.3 cents per gallon, is third-highest. Corporations face the highest tax rates in the West.
If you mix in the contention that California has the nation's third-worst business climate, any argument for new taxes would appear to stand on wobbly legs. Why raise taxes, even if it is just on the wealthy and corporations, when the state is facing the deepest recession since the Great Depression, when jobs are scarce and companies are being driven out of the state by its burdensome tax and regulatory system?
That's what Republicans and conservative taxpayer rights groups are stressing as the debate heats up over how to overcome the $24.3 billion budget deficit facing the state. They argue that any added taxes would be ruinous to the already-teetering economy. Californians already are facing $12 billion in new taxes over the next two years.
Some Democrats and liberal tax fairness groups, however, insist that targeted tax increases - including loophole closures - are needed to keep the state from collapsing into fiscal chaos. They also make the case that the tax burden is not as bad as Republicans say it is - particularly for the wealthy.
"California has relatively high tax rates, but it's because we have a loophole-ridden tax system," said Jean Ross, director of the California Budget Project. "If we had fewer loopholes for the rich, we could have lower tax rates."
Resisting tax increases, Ross said, "is really a smoke screen for saying we believe government ought to do less for education, children and health care."
So, who is right? Those who say we are overtaxed and cannot afford more in times of economic stress, or those who say there is room for more taxes, especially in a fiscal crisis?
According to rankings compiled by the Tax Foundation, a conservative Washington, D.C.-based think tank, California is in no position to absorb more taxes. The state is ranked as having the nation's third-worst business climate because of its high corporate, individual income and sales taxes.
"The high cost of living that continues to force Californians out of state should serve as a powerful reminder of the effect high taxes are having on our society," said Ron Nehring, the state Republican Party chairman. "Higher taxes that make California even less affordable at a time of high unemployment and economic uncertainty is a prescription for failure."
Polls consistently show voters think taxes should be raised on the wealthy, whom they think have floated above the damaging effects of the economic downturn that most others have experienced.
There may be a reason for this class resentment. The wealthy pay a far smaller share of their income in taxes than the working class and poor, according to a study by the liberal Washington, D.C.-based Citizens for Tax Justice.
Even after the last round of tax increases approved in February, people making $2.3 million or more pay only 7.8 percent of their income; those in the lowest rungs - making $20,000 or less - pay more than 11 percent of their income in state taxes.
The number of tax loopholes that California offers corporations reduces the effect of high tax rates, analysts say.
California has the highest research and development credit in the country, costing the state $1.2 billion this year, according to the Franchise Tax Board. Certain foreign companies are exempted from taxes under the state's "water's edge election" policy, costing the state $700 million. Enterprise zones get nearly $500 million in tax breaks, benefiting companies like Wal-Mart, which locate their distribution centers in economically distressed areas. Businesses are able to avoid taxes on gains from the sale of commercial property at a cost of $350 million. Tax havens cost the state at least $150 million from companies that park their profits offshore.
In addition, California stands alone in giving oil companies a pass on taxes for oil extraction, leaving about $1.3 billion in the companies' pockets.
It is no wonder that California has more billionaires than Texas, Florida and Nevada combined - states with no income taxes, said Lenny Goldberg, executive director of the liberal California Tax Reform Association.
"You're not going to get as much from them as you would in a boom time, but the wealthy are making money being in California and they're doing well in California," he said. "We're leaving a lot of money on the table that could have an impact (on the debate over spending), and that includes the top bracket. The problem is that every time we have a recession, they yell 'It's the business climate!' and that taxes should be cut instead of being raised."