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State Taxes Rank in U.S. Upper Tier

But as legislators debate possible increases, analyses show California below urbanized states on the East Coast.

March 30, 2003|Doug Smith | Times Staff Writer

As Sacramento wrestles with a multibillion-dollar budget gap, a heated debate between those who advocate tax increases and those who favor spending cuts is fueled by a perception, especially among Republicans, that California is one of the nation's most heavily taxed states.

Tax increases now, according to those Republicans and some Democrats, would only induce businesses and wealthy people to leave for lower-tax states.

"The question is, will raising taxes make us more or less competitive?" said state Senate minority leader Jim Brulte (R-Rancho Cucamonga). "It will make us less competitive at a time when we are already not competitive."

Although there are differing views on what makes a state economically competitive, a wealth of government data and analysis has been applied to the question of how evenly tax burdens are distributed among the 50 states.

For The Record
Los Angeles Times Friday April 04, 2003 Home Edition Main News Part A Page 2 National Desk 1 inches; 33 words Type of Material: Correction
Tax burden -- An article on state and local taxes in the California section Sunday incorrectly stated that California's per capita taxes are the 10th-highest in the nation. The correct rank is seventh.

Collectively, these data show that California, as Republicans contend, ranks at the high end in state and local taxation. But they also show that California is positioned well below the most highly taxed states in the country, a distinction that belongs to the urban East Coast and New England states, led by Connecticut, Massachusetts, New York and New Jersey.

Regionally, California is surrounded by a hodgepodge of taxation systems whose quirks almost defy comparison.

In Oregon, for example, voters have repeatedly rejected a sales tax, but the state assesses income steeply. Washington has no income tax, but it collects taxes on goods sold from business to business, a practice found by a Washington state commission to disproportionately burden some types of firms. Nevada, with no income tax and low levies on property, but high sales tax revenues, has a relatively light tax burden.

By the crudest measure, California ranked 10th nationally in 2000, collecting about $3,550 per capita in combined state and local taxes. Through the continuing effects of Proposition 13, the initiative to cut property taxes that was passed by voters in 1978, Californians paid less in property taxes than the national average, but more than made that up in personal income taxes, which ranked among the nation's highest. Sales taxes were close to the national average.

Overall, Connecticut topped the list, with assessments totaling nearly $4,600 per person in 2000, the most recent year for which the U.S. Census Bureau has data. Alabama was lowest, collecting $2,117 per person.

Tax burdens have discernible, although not rigid, regional patterns. Southern and Western states made up most of the bottom tier, typified by Arkansas, Tennessee and Alabama, whose combined taxes were only slightly more than $2,000 per capita. Arizona, at about $2,600 per capita, is in the bottom third, and Nevada, at about $2,900, is below the national average of about $3,100.

Republicans attach great significance to those disparities in arguing against Gov. Gray Davis' proposal to balance the 2003-04 budget through a combination of cuts in health and welfare spending and $8.3 billion in tax increases.

Davis has called for a one-cent increase in the sales tax and restoration of two double-digit income tax brackets, which were scrapped during the Pete Wilson administration. The increase to 10% and 11% from the current 9.3% maximum would affect about 330,000 taxpayers who earn $272,230 and up, according to the Franchise Tax Board.

While some Democrats in the Legislature are balking at the $17 billion in spending cuts contained in the Davis plan, Republicans vow to deny the votes needed for any general tax increase. California law requires that tax hikes be approved by a two-thirds majority of the state Legislature, where Democrats hold commanding advantages in both houses but where some Republican support would be needed to reach the two-thirds threshold.

According to those Republicans, tax hikes now would only hurt California, driving away individuals and businesses.

Brulte, for example, cites his conversation with the chief operating officer of a corporation who was chafing over the drain on his stock portfolio.

"He doesn't want to be a California citizen when he cashes in his options because of the tax rate," Brulte said.

His alternatives would include Florida, Texas, Washington and Tennessee -- all states that, like Nevada, have no income tax. The suggestion, according to Brulte: Executives such as that one will relocate themselves or their businesses rather than put up with California's high income taxes.

The result, he and others say, would be a drain on California's economy, one likely only to be heightened by any increase in the income tax.

But a national review of state and local taxes suggests that what a state doesn't collect with one tax, it tends to make up with another, sometimes on a state level, other times by imposing local levies. As a result, states with low income taxes generally tend to have higher taxes in other areas.

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