October
1994

California Taxing and Spending

Introduction

Each year, Cal-Tax produces Taxing and Spending , a report that cites federal data to show how California compares to all other states in major revenues and spending categories. This year's report is published later in the year than usual, because the federal government was late releasing the data. Because of the time it takes for the Bureau of the Census to compile data for all the states, these reports always lag a few years - this report compares finances in fiscal year 1991-92. The report was prepared by Cal-Tax Research Director Stephen Kroes.

1991-92 Findings

California ranks sixth highest in the nation in total taxes, fees and assessments per worker.
State and local government spending is a greater share of California's economy than at any time in history, exceeding even the pre-Proposition 13 peak.
In per worker tax collections, California ranks 11th in personal income tax, fifth in corporate income tax, 22nd in property tax, 10th in sales tax, and 12th in fees and assessments.
Fees and assessments are 21% of the total tax and fee burden, at $1,268 per worker.
Except for public education and infrastructure, California spends above national averages in major spending categories.
California state and local governments spend about $8,500 per worker, ranking 6th in the nation.

**Tables and Graphs**
Pie Chart: Tax Burden Per Worker	Graph: Tax Burden Trend	How California Ranks in Specific Spending Categories	California vs. Western States
Personal Income Tax	Corporate Income Tax	Property Tax	Sales Tax
Total State and Local Taxes	State and Local Fees	Total Taxes and Fees	Total Government Spending

Tax Increases Had Mixed Effects

The 1991-92 state budget included major increases in sales and personal income taxes. At the time, those increases were expected to add $7 billion in revenue for the state. Because the recession continued to worsen that year, causing further declines in state revenues, the revenue from those tax increases did not greatly increase total tax collections. Relative to other states, California's rank in per capita taxes, fees and assessments actually slipped a few notches, moving from ninth in 1990-91 to 11th, at $2,896 per capita. The dollar amount is an increase, but other states increased more during that year. Per worker collections fell to 6th highest, from 5th in 1990-91. Again, the dollar amount ($5,931 per worker) increased, but less than other states. California's ranking per $1,000 of personal income moved up, from 25th in 1990-91 to 22nd, at $142.52 per $1,000 of personal income.

The dichotomy between falling per capita and per worker burdens versus an increasing burden per $1,000 of personal income is not surprising. Personal income growth slowed sharply during the recent recession, causing cutbacks in consumer spending and other economic activities that generate state and local revenues. Absent any state action, state tax revenues would have actually declined significantly. But increases in tax rates drew a larger proportion of personal income, even though the stalled economy caused actual collections to barely increase.

High Tax Burdens and Spending

As shown in Table 2, western states that have drawn many jobs out of California during the past several years have significantly lower tax burdens per worker. California's taxes and fees are largely driven by spending demands. As shown in Table 1, except for public education and infrastructure-related categories, California spends significantly above national averages in major program categories.

Figure 2 shows that total state and local spending as a percent of personal income continues expanding to a new all-time high in California. By measuring spending against personal income, the figure is automatically adjusted for growth in the economy, inflation, and population. While some observers continue to claim that California government was at its zenith in the 1970s, these figures show that combined state and local spending, as a percent of personal income, has exceeded pre-Proposition 13 levels for several years now. In 1977-78, spending was 18.5% of personal income, and in 1991-92 it had reached 20.3%. In other words, state and local government is now a larger share of the state economy than at any other time. The long-term effects of Proposition 13 have mostly led to a change in the composition of revenues, not an ongoing reduction in revenues or spending.

Note from Figure 1 that a significant percentage of state and local revenues come from fees and assessments, which comprise 21% of the total tax and fee burden. Fees and assessments provide almost as much revenue as the property tax and more than any other tax, including the personal income tax or combined state and local sales taxes. Before Proposition 13, in 1977-78 fees and assessments were 13% of the total tax and fee burden. State and local fees have been the predominant focus of revenue increases in the wake of Proposition 13.

Why 3 Measures of Tax Burden?

There are a lot of ways to look at tax burden. Some prefer per capita figures because it is easy to extrapolate the figure to represent an average household. For example, if an average household consists of four individuals, the per capita figure can be multiplied by four to represent that household. But per capita measurements have some serious flaws, such as counting children and others who generally do not pay taxes.

Last year, Cal-Tax introduced the per worker measurement of tax burden, because it is more directly related to the burden facing taxpaying individuals. Although the per worker measurement is not perfect, because some taxpayers do not work, such as retirees, it is a clearer measure than per capita measurements. One reason for this is that the demographics of a state like California lead to an artificially lower per capita tax burden compared against most states. This is because California's population base includes more children than many other states. The per worker measure corrects for the downward bias in the per capita figure by dividing tax collections by those who are working or trying to work in the state.

Some analysts prefer to measure taxes and spending per $1,000 of personal income, because incomes vary from state to state and those who make more money can afford to pay more in taxes. Per capita or per worker figures do not show how taxes relate to income.

One very important caution should be noted when comparing tax burden per $1,000 of personal income: this measure assumes that a dollar of income earned in California is worth as much as a dollar earned in any other state, which is a misleading assumption. Because of the high cost of living in California, higher incomes do not necessarily reflect an ability to pay greater taxes. In fact, the measurement of taxes and fees per $1,000 of personal income actually skews the rankings to place low-income states higher in the rankings, many of which are not considered high-tax states. Indeed, states generally accepted as high-tax rank well below California by this measure - Massachusetts is 37th, Illinois is 45th, and New Jersey is 27th.

One way to correct for the distortion in rankings per $1,000 of personal income would be to adjust income for cost of living. Cal-Tax is examining available data to see if this type of analysis can be done in the near future.

New Data on Local Collections

This year's report includes local data for sales taxes and personal income taxes. Past years' reports included only state collections for those two taxes. In some states, significant sales and income taxes are levied at the local level, so this change makes the data more complete. Because of the inclusion of California's local sales taxes, this report's figure for sales tax collections is not directly comparable to past years' reports. Local taxes have always been included in the table on total taxes and total taxes, fees and assessments, so this change does not alter those tables.

Data Sources

Revenue and spending figures were obtained from Government Finances: 1991-92 (Preliminary Report), except corporate income taxes, which were obtained from State Government Tax Collections: 1991. Both documents are published by the U.S. Department of Commerce, Bureau of the Census. July 1, 1992 population figures for calculating per capita amounts were obtained from the Census Bureau. Some of the above-cited data were provided in electronic form by the Minnesota Taxpayers Association, whose assistance is greatly appreciated.

Per worker figures were calculated using 1992 annual average labor force from the U.S. Department of Labor, Bureau of Labor Statistics.

Personal income figures differ from prior reports in using fiscal year personal income as the basis for calculations. Prior reports used calendar year income, which did not match most state and local fiscal years, which run from July to June. Fiscal year personal incomes were calculated from data supplied by the U.S. Department of Commerce, Bureau of Economic Analysis.

As in last year's report, Taxing and Spending does not include the District of Columbia in the tables or rankings.