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Are the rich paying their fair share?

Low-income residents get an income tax exemption. But they pay, proportionally, a greater share of their earnings on sales and other taxes.

October 12, 2009|MICHAEL HILTZIK

When it comes to the state budget and state taxes, everybody knows the following facts:

People earning $75,000 or less pay little or no taxes now.

The same people use 99.9% of state social programs.

Ergo, millions of residents of this state are getting something for nothing, and the rest pay for their freeloading.

Of course I'm kidding. These are popular myths (I owe the formulation above to a reader's e-mail), not facts. Yet, like a cracked windshield, they have the power to distort almost everything we see when we turn our attention to state spending and taxation.

We can quickly dispose of the notion that low-income residents pay little or no state taxes. They get an income tax exemption, it's true, but they pay, proportionally, a greater share of their earnings on sales taxes. And many also pay property taxes even if they don't own a home -- a portion of their rent goes to cover the taxes their landlord pays.

In 2007, the nonpartisan California Budget Project observed, the bottom fifth of taxpayers -- those earning less than about $18,000 -- paid about 11.7% of family income in state and local taxes. By contrast, the top 1%, earning $430,000 or more, paid only about 7.1% on average, counting the deduction of state and local taxes many could take from their federal tax bill.

The popular view of state government is that it does little beyond spooning out welfare payments and free healthcare to the poor. For the wealthy, this is a useful burlesque of the truth, for it rationalizes "flattening" state taxes, giving them a tax cut and everyone else an increase -- as was proposed by the recent state tax reform commission.

It's rare that anyone examines the assumptions about who really benefits from state government and by how much, even though the exercise might help us judge whether the wealthy really are taxed more than their fair share, as is so often claimed. Who knows? Maybe they're the freeloaders.

Indeed, the evidence is that everybody benefits from state services, and the wealthier you are the more you profit. In that light, shifting the tax burden down the income scale looks more unfair, dishonest, even -- dare we say it? -- immoral.

Let's start with public education, which this year will consume nearly 55% of the general fund, or more than $52 billion.

California's schools are often denigrated for poor average results, but these averages are deceiving. As educators well know, schools and districts tend to reflect the social and economic health of their communities. That's why affluent districts such as Irvine and Palo Alto rank higher on the state's Academic Performance Index (888 and 910 out of 1000, respectively, in 2007) than, say, Compton (608). State taxpayer funds go to all three of these districts; which residents would you say get more out of the spending?

In higher education, the University of California receives 60% of its core operating budget from the taxpayers. Last year, 23% of its undergraduates came from families with household income of more than $139,000, a group that accounts for 10% or less of all taxpaying households, according to the most recent state tax statistics. (Count on that percentage of undergrads to rise as the state jacks up student fees and cuts down on student aid.)

Families earning less than $46,000 accounted for about 28% of UC undergrads -- but that group encompassed about 60% of the state's taxpaying households. That certainly makes UC seem a service skewed to the affluent end of the scale.

We shouldn't ignore the broad economic value of public education. Somewhere on the Chamber of Commerce's membership roll there may be a business owner whose success is based 100% on his or her personal effort -- without the help of at least a few drivers, mechanics, secretaries, bookkeepers, engineers, or managers taught to read and do sums at taxpayer expense. But I've never met one, and I'd wager that neither have you.

This is no secret to the business community -- a 2006 report for the California Business Roundtable cited the "quality of the labor force" as a key to the state's future economic growth. Business leaders just forget who reaps the greatest return from that growth when they call for tax "fairness."

Education is only the start. Our transportation infrastructure is indispensable for businesses and their owners. That's why the business community constantly grouses about how the congestion and decrepitude of the freeways hamper the flow of goods to markets and ports. The Caltrans budget: $13 billion, counting money from special transportation funds.

Capitalism depends on the rule of law. Spending on state courts, the civil dockets of which are dominated by commercial actions, comes to $2.4 billion, net of income from fines, penalties and fees.

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