June 2004

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Guest Commentary

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

Fiscal lefties throughout the state are all agog over a recent release from the Tax Foundation suggesting that California’s tax burden, relative to other states, has fallen. If true, this would provide ammunition to those who believe Californians are undertaxed. The “tax and spend” lobby realizes that if California does not raise taxes during a massive budget deficit, the window of opportunity to expand government might close for several years.

Particularly heartening to these folks is the fact that the Tax Foundation has substantial credibility, especially among conservatives and the business community. This is the outfit most famous for its “Tax Freedom Day;” a calculation of when the average American – during the course of the year – stops working for government and actually starts keeping some of their hard-earned dollars. Tax Freedom Day is also calculated on a state-by-state basis.

What has taxpayer advocates so concerned – and the government types so happy – is that the Tax Foundation reports that California has fallen to 26th out of 50 in state and local tax burden as measured as a percentage of income per capita. This information undoubtedly will be used in polling to ask such loaded questions as “given that Californians are paying only average taxes, should government consider tax increases to close the budget deficit?” Moreover, look for this “fact” to preface every pro-tax hike editorial from our state’s esteemed print media. Indeed, many have already labeled California’s famous high tax environment as a “myth.”

So what is the truth? Most California taxpayers are aware intuitively that they are members of an abused class. Are they simply delusional? Well, in a word, no.

A simple example will illustrate why such figures should be used only with adult supervision. Suppose a state has a very high tax rate on high income earners. (Not a stretch of the imagination in California). Suppose also that the same state has a moderate tax on middle income and no taxes on low income citizens. If the very high tax rate forces half the high income earners to leave the state, how does this appear in the “tax burden” calculation? Guess what, total tax revenue will fall (less revenue for government programs for you lefties out there) but so will the tax burden as a percentage of income per capita. What appears to be a lessening of the tax burden is no such thing. Individuals and businesses simply change their behavior in the face of excessive taxation.

Does this mean the Tax Foundation is being deceptive? Not at all. But tax burden measured as a percentage of income per capita is but one consideration of the tax environment for any jurisdiction.

For a more complete picture, let’s look at some more observations of the Tax Foundation. (That’s right, the same organization now suddenly embraced by the left for its one statistic).

According to the Tax Foundation, California has “one of the most progressive individual income tax systems” in American. It has “six brackets and a top rate that kicks in at a relatively low $39,133 of income.”

The same report states that “California’s corporate income tax rate is the highest in the nation.” From this, the Tax Foundation concludes that corporations “looking to relocate, or even establish, a business in the West may shy away from California.”

What about sales taxes? “California’s sales tax rate is among the highest in the nation,” concludes the Tax Foundation.

Okay. But surely, with Proposition 13, California must be way below average in property tax collections, right? Wrong. “Despite Proposition 13, California ranks in the middle of the pack when the states are ranked on combined state/local [property] tax collections.”

Given the above, the evidence that California remains a high tax state is overwhelming.

Nonetheless, this is a debate well worth having and those of us who dislike taxes must be prepared to engage our opponents regarding tax and regulatory burdens in the Golden State. Not discussed here (we’ll save it for another day) are further issues such as whether local levies and so-called “fees” are counted in these calculations.

Furthermore, tax burden comparisons are merely one discussion in the broader debate over personal liberty and free enterprise. Suffice it to say that, according to a forthcoming study by Forbes and the Pacific Research Institute (PRI), California ranks 49 out of 50 states in economic freedom as measured by more than 100 variables including welfare spending/income redistribution, fiscal responsibility and regulatory burdens.

Will the average California voter be able to follow this debate in a meaningful way? We don’t know. But we do know that voters were sophisticated enough to hand the pro-taxers a stinging rebuke at the polls last March with the rejection of Proposition 56, which would have made it much easier to raise taxes. Maybe they get it after all.