Fall 2003

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Cal-Tax Commentary 

Larry McCarthy is president of the California Taxpayers’ Association.

The Golden State ranks substantially higher in tax burden especially when compared to western states with which we compete for jobs and economic investments.

California’s tax burden compared to other states is so high that it is a factor in making California noncompetitive, making it harder to attract employers and jobs to crank up the state’s sputtering economic engine.

Raising taxes is not the solution to the state’s budget deficit.  Raising taxes in California, where the tax burden is already much heavier than in most states, is a tried-and-failed response to a California spending crisis. What California needs is a huge dose of improved management of the $130 billion in state and local taxes Californians pay each year. This extraordinary level of taxation in California can provide more than enough in tax revenue to fund police and fire services, education for our children, and public works projects and health and welfare services for Californian’s poor.

I. U.S. Department of Commerce data reveal California has the 8^th highest tax burden. According to the latest data (1999-2000) from the U.S. Department of Commerce’s Bureau of the Census, California is eighth highest among the states nationwide when tax burden is compared on the basis of personal income and is higher than all other Western competing states (Table 1).

II. The Tax Foundation ranks California 6^th highest in the nation on a per capita basis.  A Washington, D.C.-based think tank – The Tax Foundation – reporting on tax issues for the last 65 years, released national tax burden rankings for 2003 listing California sixth highest in state/local taxes per capita (Table 2). It is critical to note that none of the western states with which California competes is even close to California’s ranking. States with a higher burden than California are thousands of miles away.

III. California’s tax burden is 24 percent above the national average. According to a Milken Institute study released last year by the California Manufacturers and Technology Association, not only is our general tax burden 24 percent above the national average, our corporate income tax burden is nearly 40 percent above the national average, with only Massachusetts and New Jersey higher.

And these figures do not consider billions of dollars in local fees that have been imposed as surrogates for reduced property tax revenue (although property tax revenues have enjoyed healthy annual growth due to new construction and change-of-ownership reappraisals).

Common threads of the lowest performing states are complex tax codes imposing above-average rates on levels of income, above-average sales tax rates exempting few business input items; high overall state tax burdens and revenues that have grown faster than personal income. Another factor common to the worst states is a tax code that imposes considerable compliance costs on business. Here is a link to The State Business Tax Climate Index, which was issued on May 22: http://www.taxfoundation.org/businesstaxclimate.html.

IV. California’s Business Tax Climate: California ranks 49^th – only Mississippi is worse. The figures ranking California’s general tax burden do not tell the whole story. Consider a recent report from the Tax Foundation (2003) showing that California ranks 49^th among the 50 states using a State Business Tax Climate Index (Table 3.) Not only does this consider amounts of taxes collected, but it gauges what the foundation sees as economic damage caused by the ways each state extracts tax revenue. Only Mississippi ranked worse than California. Common threads of the lowest performing states are complex tax codes imposing above-average rates on levels of income, above-average sales tax rates exempting few business input items; high overall state tax burdens and revenues that have grown faster than personal income. Another factor common to the worst states is a tax code that imposes considerable compliance costs on business.

V. Conclusion

Different analysts use different numbers to calculate the state’s tax burden. Any way you measure it, we bear one of the heaviest burdens in the country. Making it easier for the legislature to place a heavier burden on California taxpayers will clearly only cause more damage to a struggling economy. California can’t tax its way out of this budget mess, nor should it. 

Raising taxes during a budget crisis is a tried-and-failed concept. In the early 1990s, Sacramento raised the income tax and applied the sales tax to candy and snack food, and bunker fuel (which ships took on in a California port and used after leaving California waters). These tax increases were embarrassingly ineffective. The revenue did not materialize or the ill-advised tax was rescinded because of its damaging effects. As history demonstrates, tax increases will only retard recovery that will produce revenue growth for public programs.

To raise taxes would be to underwrite incredible amounts of fraud and waste devouring billions of tax dollars – at least $10 billion over the past four years – according to various newspaper reports, mostly based on official government audits. Medi-Cal fraud alone is costing taxpayers about $2.5 billion a year, according to investigators quoted in newspaper reports. The media in California is ringing the alarm about fraud and reckless spending habits. Many of these reports have been listed at Cal-Tax Online (http://caltax.org/Fraud.htm).

Instead of forcing consumers and business in California to underwrite out-of-control spending, the Legislature needs to exercise greater care and do a better job managing spending to insure that crucial priorities are met.