Grading California’s Tax System
Every April California workers square up with the federal and state governments. This April deadline is a good time to grade the Golden State on its tax policy, which not only takes a lot of money from workers but manages to do so in a relatively counterproductive way.
On the overall tax burden, California ranks 47th out of 50 states, with state and local government spending consuming 18.3 percent of the economy, according to Taxifornia: California’s tax system, comparisons with other states, and the path to reform in the Golden State, a new study from the Pacific Research Institute. But it’s not just a matter of how much resources we take out of the economy through government revenues and spending. How we take those resources out of the economy also matters. And on this count California performs dismally when compared to other states.
Taxifornia analyzed the structure or design of five major taxes—personal income taxes, corporate income taxes, capital-based taxes, sales taxes, and property taxes. California’s personal income tax rates are decidedly “progressive,” which really means punitive. The harder one works, and the more one earns, the more money the state takes.
In personal income taxes, with the highest rate at 10.55 percent, California ranks dead last, 50th out of 50 states, with a score of 1.1 out of a possible 10.0. The situation is not much better on corporate taxes, which Nevada, Texas, Washington and Wyoming do not even impose. California does impose corporate taxes and ranks 34th, well toward the bottom of the scale, with a statutory rate of 8.8 percent.
Like 32 other states, California does not impose a tax on a company’s capital base, a levy that imposes enormous economic costs on society. Here California scores a 10 but that is not enough to make the state feel good about itself, considering the state sales tax.
Here California maintains the highest statutory rate (8.25 percent) in the entire United States. Measuring California’s sales tax receipts as a share of personal disposable income (3.2 percent) ranks the state 35th. It is worth noting that Delaware, Montana, New Hampshire and Oregon impose no sales tax at any level.
The state does better on property taxes, 17th in the nation, which means that, despite the much maligned Proposition 13, a full 16 states have lower property-tax burdens. On tax structure, overall, California is a bottom-feeder, 45th out of 50 states.
These taxes do not exhaust the ways California extracts money. The state taxes non-resident professional athletes for “duty days” in California. California also grabs money from financial accounts dormant for only three years – down from 15 years in the late 1950s. So desperate is the state for revenue that during the 1990s California considered taxing editorial cartoons as though they were works of art purchased in a gallery.
The “laugh tax” made the state a national joke, but in 2010 the tax issue is no laughing matter. At the tax deadline this April, the economy remains in recession and the unemployment rate is 12.5 percent. This state of affairs cries out for a solution, which can’t be more government spending and higher tax rates, since these are already among the highest in the nation.
As Taxifornia confirms, California is both a “high tax” and an “inefficient tax” state. That amounts to a failing grade, reflected in the state’s current economic and fiscal rut. If policy-makers want to break out of that rut, they need to dump emergency tax hikes and other revenue gimmicks.
Instead they should shrink the size and scope of the state and local government in the economy. That will allow for meaningful tax relief, the path to renewed prosperity in California.
Jason Clemens is the director of research and the coordinator of the California Prosperity project and Lloyd Billingsley is editorial director — both of the Pacific Research Institute in San Francisco, CA (http://www.pacificresearh.org/)