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You Don't Have It So Bad

May 27, 2003

Rock-like opposition to any tax increases to help balance the faltering state budget is largely rooted in the claim that Californians are overtaxed, with the implication that taxes keep going up. No one likes taxes, but the fact is that California's state and local tax load is about average among the 50 states and less than average in several important categories. Over the last 10 years, tax rates in California have repeatedly been cut, not raised, saving individuals and businesses at least $16 billion just since 1999.

Yes, taxes might be even lower if the state got back in services all that it paid to the federal government, or if Washington shouldered a fair share of costs traceable to illegal immigration. But until that happens, the debate over taxes needs more honesty.

Even California's progressive personal income tax, with a top rate of 9.3%, is notably easy on the middle class. Families must earn $45,000 a year before they pay any income tax. The rate for all income is 3% on average, says former Finance Department chief economist Ted Gibson. In 2000, during the stock market boom, 44,000 of the wealthiest taxpayers, accounting for only about one-third of 1% of all tax returns, paid one-third of all income taxes the state took in.

The sales tax? It's high enough at 7.25% to 8.25%, depending on county surtaxes. But even at 8.25%, California ranked behind at least nine other states in a 2001 survey by tax administrators. New York City and New York state each have sales and income taxes, and they are going up. Several other states have raised or will raise rates.

A December 2002 survey by the Tax Foundation ranks the state gasoline tax as 33rd in the nation. Only five states charge a lower levy on wine than California's 20 cents per gallon, a testament to the wine lobby. Even with the 50-cent-per-pack hike imposed by voter initiative in 1998, the state's 87-cent cigarette tax ranks 13th. New Jersey and New York are at $1.50.

Business and industry are particularly sensitive to taxes, and the state Chamber of Commerce constantly campaigns against "job killer" bills. At 8.84%, the state's bank and corporation tax is ninth in the nation. But California has so many credits and exemptions that the tax will raise only about $6.5 billion this year on a $1-trillion economy. And businesses especially benefit from Proposition 13, which gives them one of the lowest property tax rates nationally. In one recent year, the state and local property tax amounted to $23 for each $1,000 of property value, 36th in the nation. Business property taxes tend to be even lower since there are many ways to structure a property transfer that do not trigger reassessment.

As for the notion that California is always raising taxes, it's not so. Of eight major tax actions in the last 10 years, six cut taxes, including the corporate tax rate from 9.3% to 8.84%, repeal of the 1991 temporary income tax increase, reduction of the Chapter S corporate tax rate and passage of the corporate research and development tax credit and the two-thirds cut in the "car tax." The only increases were the cigarette tax and a quarter-cent of sales tax triggered automatically by declining revenue.

Of course the Legislature needs to keep pushing for more cuts to nonvital programs, for instance the huge salary increases given to prison guards. But temporary new taxes cannot be avoided without risking the state's fiscal stability.

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