Is California’s Tax Burden “Fair”?

TaxesA recent report by the highly regarded Calmatters.com found that the State of California has been on a “taxing binge” over the past few years, having enacted a whole slew of recent tax increases such as the “gas tax,” the “cap and tax” energy taxation scheme.

The Calmatters.com analysis found that the recent state tax increases “plus a slew of new local government levies and hikes in personal income and taxable retail sales, will raise total tax collections to just under $300 billion, or $50 billion more than they were just two years ago,” according to the report.

“Nearly $200 billion will go to the state and more than $100 billion to schools and local governments,” states the report, which concludes that California likely has the “highest” tax burden in the nation.   (Note:  As good as the original Calmatters.com revenue analysis is, there appears to be several major revenue sources excluded such as “fee” revenue, county revenue sources, and “special district” revenue to name a few.  Based on my rough estimations the total state and local burden is likely closer to $400 billion, possibly more, if “all” revenue sources are included) 

That puts the state’s total estimated tax burden at an estimated $300 billion, which is roughly 11.5% of the state’s economy, based 2016 California Dept. of Finance figures that peg the state’s total economic activity at about $2.6 trillion.

To put this into perspective, the federal budget recently approved by the Senate proposes about $4 trillion in spending, which is about 21% of the nation’s $19 trillion in estimated gross domestic product (GDP), according to figures produced by the Trump Administration.

It must also be noted that these figures fail to adequately account for significant “deficit spending” and “mounting debt” at all levels of government, which have the effect of pushing an increasing tax burden into the future.

Thus, while the federal government is considering a dramatic reduction in tax rates, California government continues on a “taxing binge.”

A new updated report by the California Taxpayers’ Association (Cal-Tax) found that the Democrat-run California Legislature has proposed “more taxes and fees in the first half of the 2017-18 legislative session than in all of 2015 or 2016,” states the report.

The Cal-Tax report found that California Democrat lawmakers have collectively introduced 89 proposals that “cumulatively would cost taxpayers more than $373 billion annually in higher taxes and fees,” states the report.

This “taxing binge” at the state level, has been copied at the local level of government in California in recent years with a record amount of tax and bond measures being proposed in the June and November 2016 elections.

According to a report by CaliforniaCityFinance.com, there was an “unprecedented” 452 tax increases and 184 separate bond measures placed on the November 2016 ballot by California local governments and school districts.  More than 80% of the local tax increases passed and more than 97% of the bond measures passed.

But these overall figures, don’t tell the whole story. The key policy questions that emerge are what are the factors driving this “acceleration” in the California tax burden? And how are California state and local governments spending all this additional tax revenue?

A third question that I believe must be asked yet often is not, is who is paying all these additional state and taxes?

As an expert in state and local finance, I have extensively studied the facts and evidence on all of these questions and drawn some overarching conclusions.

First, the key factor driving the recent “acceleration” in the state’s tax burden is “unchecked” and “unsustainable” increases in the “cost of government” in California at both the state and local levels.

The state’s “public employee pension crisis” is the biggest single driver of the “cost of government,” combined with significant baseline expenditure increases in current and retired public employee health care costs.

Given that labor costs typically compose more than 80% of public sector budgets, and more than 90% of the cost increases, the “cost of government” cannot be addressed without significant mitigation of public employee compensation cost increases.

Second, how are state and local governments spending this additional tax revenue?  This issue is connected to the first question and touches on perhaps one of the most disturbing trends in California public finance—this money is primarily being squandered on “unsustainable” increases in the cost of government, not on improving government services and infrastructure.

Unfortunately, the complex nature of public budgets makes it very easy to hide the nature and extent of cost increases.  But my overall conclusion is simple, the “driving forces” behind both the underlying “need” for the tax increase as well as the actual expenditures themselves are caused primarily by “unsustainable” increases in public employee compensation costs.

In short, baseline public employee compensation costs are rising at rates that far exceed average revenue growth for public agencies.  Based on my review of local and state budgets, during economic expansions stand and local revenue growth averages about 4-7% per year, compared to increases in public employee compensation costs that average between 10-25% of total agency costs.

Thirdly, who pays this increasing state and local tax burden?  This is also a complex question, but there is no question that the heaviest tax burden falls on average Californians and small businesses, particularly the poor.

A 2015 report by the California budget project, found that California’s lowest-income families pay the largest share of their income in state and local taxes, with the bottom 1/5 of all taxpayers paying 10.5% of their income in taxes.

Incidentally, these same low-income and poor families are paying nearly 70% of their income in housing costs, according to the California Legislative Analyst.

That is why the recent tax increases approved by the California Democrat Legislature are so “offensive” because they take a bad problem and make it even worse.

The $5-6 billion increase in the “gas tax” and vehicle fees is highly regressive, and so is the “cap and tax” scheme which creates a new energy tax burden that will be the heaviest on poorer individuals and families, along with small businesses.

As for the whole slew of local taxes, those also tend to fall disproportionately on “average” taxpayers, small businesses, and homeowners, as opposed to special interests who can afford to mount major opposition campaigns, thereby preventing such proposals in the first place.

Ironically, there continues to be calls for “tax reform” in California, but if you look behind these “tax and spend” efforts such as the “Make it Fair Campaign,” they all propose billions in additional taxes, particularly on individuals and small businesses.

But to truly make the state’s tax system “more fair,” that would require limiting future tax increases and lowering taxes on “average” Californians, homeowners, and small businesses.

Unfortunately, there are very few “well heeled” interest groups in Sacramento who are willing to champion that cause.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

This article was originally published by Fox and Hounds Daily