In theory, that sounds logical, but in reality this measure of tax burden is flawed. The conclusions drawn from this ratio are often misleading, because it skews the rankings to place high-income states very low on the list. Table 1 shows taxes, fees and assessments per $1,000 of personal income for all 50 states in 1991-92. (Newer data have not yet been released by the federal government.) California ranks 22nd - about average. Table 2 shows this same measure of tax burden for only the 10 highest-income states. Note the dramatic grouping of most high-income states at the bottom of the tax burden ranking. Some of those states have reputations as high-tax states, and their burdens are significantly lower than California's.
Massachusetts ranks 37th with this ratio, but it would be difficult to find anyone who considers it
a low-tax state. Of the 10 states with highest per-capita incomes, California's tax burden exceeds
all but Alaska, New York and Hawaii. Alaska is an aberration, since much of its tax revenue
comes from oil extraction, and residents pay very little in taxes. Hawaii may be an anomaly as
well, since much of its tax burden falls on tourists. In other words, if we look at comparable
states, California's tax burden is much higher than all but New York.
Many low-income states rank very high on the list of tax burden per $1,000 of personal income.
For example, New Mexico, North Dakota, Iowa, Utah, Arizona, Louisiana, Idaho, and South
Carolina all rank higher than California. Why? Because personal income and population density
in those states are low, and it takes a higher proportion of their incomes merely to provide a basic
level of government and infrastructure. More densely populated and higher income states, like
California, spread those costs over a greater tax base, allowing a slightly lower tax burden per
$1,000 of personal income. Why should California policy makers feel pressure to "keep up" with
states that rank higher merely because they are poorer and less populated?
Another flaw in measuring tax burden per $1,000 of personal income is that it assumes that a dollar earned in California is equal to a dollar earned in all other states. Californians earn high incomes because living expenses are very high in this state. The high costs of housing, transportation and other essentials in California leave families with less money, proportionally, for other purposes, including taxes and government fees. A more relevant figure, rather than measuring against personal income, would be a measure of taxes against discretionary income, or the income left over after the high cost of living is factored in. Unfortunately, it appears that the data currently do not exist to do that kind of analysis properly.
Figure 1 highlights the progressivity of California's income tax, showing that higher-income
Californians pay much more income tax than their share of total income. The top 10% of
California taxpayers, those earning over $70,000 in 1991, paid 67% of all the income tax
collected, while they earned 42% of all the income reported.
The point is that those who are actually shouldering most of the tax burden pay a higher ratio than reported on the lists comparing California to other states. Those lists are merely averages which are skewed downward by the number of taxpayers who pay relatively little in state and local taxes.
Many who are subject to these higher tax burdens are the same individuals making the decisions about investment in the California economy. These are often taxpayers who own small businesses or hold management or executive positions - the very people who must decide whether to keep their businesses in California or to expand in a neighboring state.
The key caution here is to carefully examine the assumptions that are used in creating the hypothetical firms used for comparison. Almost universally, these comparisons are dangerously oversimplified, and sometimes they are outright deceptive to try to make a certain locale appear attractive.
One of the primary oversimplifications lies in creating a firm that has the same costs for property and labor regardless of location. It is unrealistic to assume that a company can purchase similar property in Los Angeles for the same price as in Phoenix, Atlanta, Houston or other cities, as one recent study assumed. It is equally unreasonable to assume that a firm such as this could purchase labor for the same rate in those cities.
These factors are important, because a company's tax burden will depend on the cost of these factors, as they influence property and payroll taxes.
As an example, a report published by the Greater Washington (D.C.) Board of Trade created fictional firms that had almost no profit, and near zero utility costs, but high property costs. This skewed the report's rankings so that it was almost solely a comparison of property tax costs, which made California look like a low-tax state.
Some of these types of comparisons can be useful, but only if their assumptions are based on solid research and statistical data.