California Has the Nation's #1, #2, #3, #5, and #9 Highest State Income Tax Rates

Examining Governor Jerry Brown's Proposed Tax Increases

(Updated 27-MAR-2012)

NOTE:  This analysis is for Governor Brown's initial tax hike proposal.  Due to political infighting with the California Federation of Teachers (CFT), Governor Brown has modified his proposal to be more like the CFT's so-called "Millionaires Tax."  Essentially, the new plan has a smaller increase on sales tax revenues, has significant additional income tax increases on upper-income taxpayers, and extends the "temporary" increase to seven years.  A new analysis is in the works but all of the arguments against the increase still hold true. 

It looks like California Governor Jerry Brown is out with his proposed "fix" for California's budget shortfall.  Turning to his exhaustive play book of--how shall I say this politely?--one play, the Governor proposes tax hikes.  And this is from a Governor who sold the electorate on his vast political experience.

First, some background information.  California already has the nation's second-highest marginal tax rate of 10.3%, second only to Hawaii, at 11%.  Even California's 2nd top income tax rate is the nation's 4th highest, after Hawaii, California's top bracket, and Oregon.  California's 2nd top bracket starts at $48,000 in income for single taxpayers.

To fix the multi-billion dollar shortfall, Governor Brown proposes creating new state tax brackets and to increase taxes on those brackets by up to 21.5%.  The Governor's proposal would add the following new brackets.  The dollar brackets shown are for single tax filers; brackets for married filing jointly are doubled.

• Tax rates for those making less than $250,000 remain the same.  California would keep it's current 9.3% rate for those making more than $47,000.
• Income between $250,000 and $300,000 are taxed at 10.3%, which is the same rate currently charged for those making more than $1,000,000.
• Income between $300,000 and $500,000 are taxed at 10.8%.
• Income between $500,000 and $1,000,000 are taxed at 11.3%, which exceeds the highest marginal tax rate from any other state in the nation.
• Thanks to California's Proposition 63, those earning more than $1,000,000 are charged an extra 1% to fund mental health services--proving I guess that you must be INSANE to be a millionaire and have your tax residence in California.
• Unlike the federal government and many of its economic competitors, California treats capital gains exactly like ordinary income and taxes capital gains at the maximum applicable tax rate.  This means that California's budget greatly depends on stock market and real-estate returns on upper-income taxpayers.  The result is a watershed of revenue in good times and a drought during downturns.

The following chart helps to better compare the increased tax rates against those of other states.  (NOTE:  Oregon dropped their top rate from 11% to 9.9%)

The Governor purposely did not increase tax rates on lower incomes, perhaps in a nod to tax fairness.  After all, those making more than $300,000 only currently pay more than eight times more total tax and have an eight times higher average effective tax rate than the vast majority of other Californians.  The only thing lacking from the 1.9% of taxpayers is the votes at the ballot box to prevent more exploitation by the majority.

Those in upper brackets not only pay a higher effective tax rate, they also obvious pay far more in absolute dollars.  Those fortunate 42,517 taxpayers with incomes of $1 million or more paid an average of $304,553 in California income taxes with an effective tax rate of 8.97%.

In all fairness, all taxpayers, especially those at the lower-end of the income spectrum, will be hit by Governor Brown's proposed sales tax increase.  California ALREADY has the nation's highest sales tax rate.  Governor Brown will enshrine our first place finish by adding another 0.5% on top, not including the additional taxes charged by various California counties and cities.  This amounts to a 6% increase over current tax law.

Governor Brown's tax increase proposal will likely be popular with the two biggest spenders in California politics, the California Teachers Association (CTA) and the California State Council of Service Employees (SEIU).  Both are significant donors to the Governor's political party.  Furthermore, even fellow Democrats acknowledge that Governor Brown must kowtow to the teacher's union.

The bulk of any tax revenues is earmarked for education, which is already one of the biggest recipients of taxpayer dollars.

The big questions remain.  How will these proposed tax increases affect California's already damaged business climate--you know, the source for all that tax revenue.  California currently ranks at or near the bottom of various surveys, from multiple independent sources, for multiple years.

California's poor business climate and high taxation resulted in a net migration out of California.  According to the L.A. Times, the percentage of people from other U.S. states is the lowest it has been in a hundred years!  Because California's tax revenues are so dependent on very few, high-income taxpayers, small changes in taxpayer population can have dramatic effects on tax revenues.  Over 50% of income taxes come from less than 2% of the population.

Political columnist Dan Walters has a great summary message for those that oppose the tax increases.

Why should we pay more ...

• when we already have one of the nation's highest tax burdens,

• when the Legislature is handing out raises to its staff,

• when politicians haven't curbed rapidly increasing pension costs,

• when they're wasting billions on prisons, 

• when they've shunned a spending limit,

• when they've squandered money on a hapless bullet train project and unworkable computer systems, 

• when they're spending tens of millions on illegal immigrants' college educations, and 

• most importantly – when the state is mired in recession and 2 million-plus are jobless?

Well said, Mr. Walters!

Who's bankrolling the initiative?


Brown, Teachers, Business And Public Safety, Californians To Protect Schools, Universities And Public Safety, A Ballot Measure Committee Supported by Governor Jerry
www.electiontrack.com/lookup.php?committee=1343257

(as of 13-FEB-2012)

See also ...

• Governor Jerry Brown:  An Open Letter to the People of California (5-DEC-2011)
  www.jerrybrown.org/sites/default/files/GovernorsLetter12_5_11-1.pdf
• Governor Jerry Brown: The Schools and Local Public Safety Protection Act of 2012www.jerrybrown.org/sites/default/files/TheSchoolsandLocalPublicSafetyProtectionActof2012.pdf
• Sacramento Bee: California's high-income taxpayers dropped sharply
  http://blogs.sacbee.com/capitolalertlatest/2012/02/californias-high-income-taxpayers-have-dropped-sharply.html
• Dan Walters: Jerry Brown's tax plan tries easy political routewww.sacbee.com/2011/12/07/4104882/dan-walters-jerry-browns-tax-plan.html
• Soquel by the Creek: Who Pays Their "Fair Share" in California?soquelbythecreek.blogspot.com/2011/10/who-pays-their-fair-share-in-california.html
• Soquel by the Creek: American Federation of Teachers: Part of the Solution or Part of the Problem?
  soquelbythecreek.blogspot.com/2011/10/american-federation-of-teachers-part-of.html

American Federation of Teachers: Part of the Solution or Part of the Problem?

According to a recent article in the San Jose Mercury News, the American Federation of Teachers (AFT) is pursuing  a possible ballot initiative to raise taxes YET AGAIN on California's millionaires. I certainly wish that the members of the American Federation of Teachers (AFT) would actually apply their math, economics, history, and critical reasoning skills. AFT is right. We do have a problem, but the problem is NOT that California's taxes are too low for upper-income earners.


First, a caveat: I am not now, nor have I ever been a "millionaire."  However, in 2007, 2008, and 2010, I spent more on federal, state, and payroll taxes than all my other family living expenses COMBINED!

California ALREADY has the second highest marginal tax rate (10.3%) in the nation. Only Hawaii has higher marginal rates (11%).  California's 2nd highest tax rate of 9.3% is the fourth highest in the nation behind Hawaii, California's top tax rate, and Oregon.  California's 2nd highest tax bracket starts at 48,000 in income.
http://www.taxfoundation.org/taxdata/show/228.html

California's millionaires ALREADY pay a surtax supposedly to fund mental health services proving, I guess, that you must be crazy to be a millionaire and officially live in California.

California ALREADY implements President Obama's so-called "Buffett Test."  Capital gains in California are ALREADY taxed EXACTLY like ordinary income.

California's wealthy ALREADY pay the bulk of the state's income taxes.  The top 2% pay roughly HALF OF ALL PERSONAL INCOME TAXES (PIT).
http://soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html

The top 33% minority ALREADY pays 94% of the entire Personal Income Tax load.  Meanwhile, the bottom two-thirds supermajority contributes JUST 6%. But who has more voting power to raise taxes on the minority?

Similarly, the 33% minority contributes more than half of California's General Fund revenue.

California's upper-income taxpayers ALREADY pay a much higher effective tax rate than do the majority of Californians.  I ask you, looking at the chart in the article below, who isn't paying their fair share?
http://soquelbythecreek.blogspot.com/2011/10/who-pays-their-fair-share-in-california.html

Even though a majority of Californians pay a lower state income tax rate than do a small minority, California's overall state tax burden is ALREADY one of the highest in the nation.

California's high taxes ALREADY places the state at or near the bottom on a variety of business climate surveys.  On one survey of 500 CEOs from around the country, California has ranked DEAD LAST as a place to do business since at least 2005!  In another survey, 70.5% of respondents ranked California as the least favorable business climate in the U.S.!
http://chiefexecutive.net/best-worst-states-for-business
http://www.taxfoundation.org/research/topic/15.html
http://www.aboutdci.com/wp-content/themes/dci/docs/Winning-Strategies-2011.pdf (See Appendix C).

Is it any surprise then that California also has the nation's second-worst unemployment rate?
http://www.bls.gov/web/laus/laumstrk.htm

Of course, as part of the AFL-CIO, the American Federation of Teachers (AFT) enjoys tremendous clout both in Sacramento and Washington, as does its cousin organization, the California Teachers Association (CTA).  The California Teachers Association (CTA) is the #1 top spender in California politics according to the California Fair Political Practices Commission (FPPC).  CTA outspends the #2 top spender, SEIU, by almost double!
http://soquelbythecreek.blogspot.com/2011/02/do-public-employee-unions-have-major.html
http://www.fppc.ca.gov/reports/Report31110.pdf

AFT is #11 on the list of top all-time national political donors, giving 91% of their member's state-mandated contributions to Democrats, 0% to Republicans. Hmmm.
http://www.opensecrets.org/orgs/list.php?order=A

California's politicians kowtow to the unions.  Even fellow career Democrats like former Assembly Speaker Willie Brown recognize this.  As he stated in his article, "Jerry Brown won't challenge teachers union," ...
http://articles.sfgate.com/2011-02-27/bay-area/28635640_1_teachers-union-pensions-union-leaders

"No one knows the power of such unions in California better than Gov. Jerry Brown.

"You'll notice that even as he's proposed draconian cuts to health and welfare programs and the state's universities, and asked taxpayers to pony up extra for several more years, BROWN HAS BEEN CAREFUL NOT TO TOUCH TEACHERS.

"HE KNOWS GOOD AND WELL WHAT THE CALIFORNIA TEACHERS ASSOCIATION CAN DO FOR HIM - OR AGAINST HIM - IN AN ELECTION."

Here's the ironic part of the story.

• BOTH the American Federation of Teachers (AFT) and the California Teachers Association (CTA) are tax-exempt 501(c)(5) organizations, according to Form 990 disclosures on file with the U.S. Government and with Guidestar.org.
• BOTH the American Federation of Teachers (AFT) and the California Teachers Association (CTA) derive the majority of their revenues from state-mandated union dues, paid by hard-working public school teachers.
• This begs the next obvious question:  Who pays teachers' salaries?  Naturally, these come from the taxpayer.

Instead of using their political clout on REAL solutions, the American Federation of Teachers (AFT) is wasting their member's dues and our time on yet more non-solutions.  AFT, how about using your political clout on tax reform, spending reform, or pension reform?  For too long, organizations like AFT have blocked prudent reforms in California and in Washington.  Consequently, there are likely massive spending cuts coming as part of the Super Committee process, which likely means jobs cuts for AFT members and other public employees.  AFT, if you refuse to be part of the solution, then by definition, you become part of the problem.

Who Pays Their "Fair Share" in California?

See also "California Proposition 30: Jerry Brown's Big Government Tax Hike" that gave Californians the nation's highest state sales tax rate and the nation's 1st-, 2nd-, 3rd-, 5th-, and 7th-highest marginal state income tax rates.

President Obama is fond of saying that "millionaires and billionaires" are not paying their "fair share" of taxes.  Of course, the President never explicitly defines what someone's "fair share" should be.

Here is a chart showing the average effective tax rate for California taxpayers, paying the state's highly income-progressive Personal Income Tax (PIT).  The effective rate is the tax paid divided by the Adjusted Gross Income (AGI).  The effective tax rate for the supermajority (66.67%) of Californian taxpayer's was between 0% and 1.5% in 2008--the latest tax data available. Meanwhile, the superminority (33.33%) paid between 1.5% and 8.97%.  Why is this important?  California requires a two-thirds majority to pass a tax increase.  Effectively, the supermajority of Californian's impose excess taxes on the one-third majority.

Revenues from Personal Income Tax (PIT) contributed over half (58%) of the state's General Fund (see Figure SUM-04), ...

... which pays for the majority of California's governmental services, including K-12 and secondary education, corrections, health and human services, etc. (see Figure SUM-05).

The General Fund also pays off California's General Obligation Bonds. In 2011-12, about 5.57% of the General Fund is allocated to paying off California's debt-financed projects.  An October 2011 report from the California Treasurer indicates that debt service is over 7% and will spike at over 9%, even without new borrowing.

The 33.33% superminority pays roughly 94% of all California Personal Income Taxes (PIT), effectively contributing over half of the entire General Fund. The 66.67% supermajority contributes just the remaining 6% of PIT, and roughly 3% of the General Fund.  Those with an Adjusted Gross Income (AGI) of $50,000 or less were in the bottom 66.67% in 2008.

At the ballot box, however, every taxpayer has the equivalent voice.  Consequently, the supermajority decides the projects and programs for which the superminority shall pay and how much the superminority will be charged for the privilege. 

The Occupy Wall Street movement employs divisive "us-versus-them" class-warfare rhetoric when it talks of "The 99%" and "The 1%."  Maybe the "The 1%" in California aren't pulling their weight.  Let's look at the data.  Despite being only 1% of the taxpaying population, "The 1%" paid 42% of all California Personal Income Tax (PIT) in 2008--the latest data available.  On average, the tax rate paid by "The 1%"  was over three times higher than the average rate paid by "The 99%."  At the ballot box, "The 1%" represents about 0.86% of all registered voters.  Want to understand why there is so much money distorting our political process?  It's because one set of voters decides how to spend the money raised by a minority of wealthy voters, who cannot prevail at the ballot box.

Again, 58% of California's General Fund revenues comes from Personal Income Tax (PIT) revenues.  Consequently, due to California's highly income-progressive tax system, "The 1%" pays 24% of the entire General Fund while the remaining 99% pay 34%.

It should be noted that California ALREADY implements President Obama's "Buffett Test."

• California ALREADY imposes significantly higher marginal tax rates on upper-income taxpayers.  Consequently, California has one of the most income-progressive tax systems in the United States.
• California taxes capital gains exactly like it does ordinary income.  There is NO capital gains tax preference in California.

If the "Buffett Test" really provided a solution, then California wouldn't have significant budget shortfalls.

Also, in honor of Governor Brown's tax increase proposal, the following chart cuts the day by those making over $300,000 (the target of most of the increases) and the 2/3rds majority of taxpayers, required to pass a tax increase (and who happen to earn $60,000 or less).

See also ...

• Soquel by the Creek: "Examining Governor Jerry Brown's Proposed Tax Increases"
  http://soquelbythecreek.blogspot.com/2011/12/examining-governor-jerry-browns.html
• Soquel by the Creek: "Average Federal Income Tax Rate by Income Group (1998-2008)"
  http://soquelbythecreek.blogspot.com/2011/08/chart-average-federal-income-tax-rate.html
• Soquel by the Creek: "The Oppressive Progressive Income Tax: California Edition"
  http://soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html
• Soquel by the Creek: "Is Warren Buffett Paying His 'Fair Share'?"
  http://soquelbythecreek.blogspot.com/2011/08/is-warren-buffet-paying-his-fair-share.html
• California Franchise Tax Board: "2009 Annual Report--Statistical Appendix Tables," Table B-3
  http://www.ftb.ca.gov/aboutFTB/Tax_Statistics/2009.shtml

The Problem with California Education Spending--It's Not Education

On March 4, 2010, students and educators around California protested against draconian cuts in education within the California state government budget. However, there are larger issues involved, namely the actual root cause of California's budget mess.

The following chart shows California's expenditures on education relative to the state's total expenditures. The education expenditures include funding for Kindergarten through 12th grade (K-12) plus funding for higher education. Note that the state's total expenditures have increased far faster than education funding.

The chart below shows the same data but this time adjusted for inflation. The expenditures are normalized to 1976 dollars (although not adjusted for California's increased population). In this chart, spending that tracks inflation appears as a flat line. Funding for higher education has essentially tracked inflation while K-12 and total education expenditures increased slightly faster than inflation.

However, notice that total state expenditures grew far faster than the inflation rate. This is the root cause of California's budget mess. While this chart is not normalized for both inflation AND population growth, spending did grow much faster than population. California's population increased by 24% from 1990 to 2009, or 29.76 million to 36.96 million. Meanwhile, inflation-adjusted spending rose 85% from 1990 to 2009 or three and half times faster than population growth!

California's budget problems do not necessarily reside within the education budget, although there is always room for improvement. Because of increased budget demands elsewhere, money is siphoned away from education. Fix the runaway state spending in other areas and the educational budget will fix itself. State spending must be reduced!

Similarly, California's overly-progressive Personal Income Tax mechanism relies too heavily on too few taxpayers and is therefore highly volatile, leading to massive swings in state revenues, depending on real estate returns and the stock market. California's tax structure must be revised to make revenues more consistent, dampening the year-to-year swings.

What is California's Legislature doing to fix these issues? Not much! Instead of focussing on balancing the budget or reforming California's out-of-control public-employee pension system, Legislators pass useless resolutions such as the Cuss-Free Week.

What can you do? Contact your California State and Assembly representatives and let them know that you want them to focus on sanely balancing the budget, cutting spending in areas besides education, and reforming the state pension system.

Find Your California Senate and Assembly Representative
http://192.234.213.69/lmapsearch/framepage.asp

Learn more on what other current and former state leaders have to say.

Former California State Assembly Leader, Willie Brown
soquelbythecreek.blogspot.com/2010/03/even-liberal-democrat-willie-brown-sees.html

California State Treasurer, Bill Lockyer
soquelbythecreek.blogspot.com/2010/02/california-treasurer-lockyer-scolds.html

See also ...

"Why The Student Protestors Are Wrong"
www.mindingthecampus.com/originals/2010/03/why_the_student_protestors_are.html

Sources:

California Program Expenditures
www.dof.ca.gov/budgeting/budget_faqs/documents/CHART-C1.pdf

Inflation Data from the Bureau of Labor Statistics (CUUR0000AA0)
data.bls.gov/cgi-bin/surveymost?cu

The Oppressive Progressive Income Tax: California Edition

I thought I would share a few charts on California’s Personal Income Tax (or PIT for short). I haven’t had time to analyze the federal IRS data yet. California’s PIT is more heavily progressive than the federal income tax and California relies on PIT for a greater share of total revenues (nearly 50% in 2006). California treats all income equally. Unlike the federal government, California taxes capital gains at the ordinary income level. Most of the taxes collected at the upper end are from stock and real-estate gains which have been devastated by the simultaneous downturns in both areas (hence the California budget disaster).

Recently, many in California pointed to the 2/3rds majority tax approval requirement as a stumbling block to patching the state government’s massive spending crater. Some argued that California needs to impose higher taxes on the rich because “we all know that the rich don’t pay their fair share.” These charts were meant to analyze these arguments.

The following charts use data freely available for download from California’s Franchise Tax Board (FTB, or California’s IRS).

I then sorted the percent of PIT taxes paid by population. I think that the chart speaks for itself, showing that the state’s need for revenues falls on a small minority of (i.e., electorally insignificant) taxpayers.


If distributed equally, the “average” state tax bill would be $3,100. By population, 85% of taxpayers paid below the average while just 15% paid above the average. Amazingly, half of the entire PIT tax bill is paid by just 2% of taxpayers. The other 98% of taxpayers pay the other half. The 2/3 majority requirement is the ONLY real check against runaway spending, and admittedly not a very good one.

Back to the 2/3rds discussion for a second. The majority of Californian’s already pay less than the “average”, even at the 66.7% population level. In fact, that electorally-strong 2/3rds contributed just 6% to the entire PIT tax bill. The electorally-weak 1/3 contributed the other 94%. Remember the 2% that pays 50% of the PIT bill? Well, because PIT is half of California’s revenues, those 2% provided a full quarter of the entire state’s revenues (thank you, my beloved fellow Californian). That 2% of taxpayers equates to a city the size of Riverside, CA or about 280,000 people. Remember, the state’s entire population is roughly 37 million, so we’re talking less that 0.8% of the entire population. But this is fair, right (he writes with fingers dripped in sarcasm)?

Let's look at it another way. Would you agree that all California residents benefit from state government? Do all state residents benefit equally? Sure, some argue that the rich benefit more because they have more to lose while others point to the costs of welfare and social programs at the low end. So let's look at the effective cost of state government by population. This following chart shows the effective cost of $1 of state government. Those taxpayers that pay below the “average” cost pay less than $1, those that pay above the average pay more. We won’t even discuss the estimated 7%-8% of the population that is here illegally and likely pays nothing in PIT.


Two-thirds of Californians effectively pay only 25 cents on each $1 of state service that they receive. A full half of taxpayers pay less than 12 cents. The remainder of that cost is subsidized by those at the upper end. High wage earners (we should all be so luck), effectively pay over $500 for every $1 of service.

Here is where the conflict emerges. We have two different systems when voting on spending and tax-related measures.

On one side, we have "one person, one vote". Many who vote in favor of more spending will never have to pay for the consequence of their vote.

On the other side, we have the progressive income tax system where top income earners pay more for government programs, despite having just one vote.

Politicians love to promise new spending to win votes and guarantee re-election. Voters love new services for which they do not have to pay. The progressive income tax system gives both the politicians and voters what they want without any pesky checks and balances.

Let's use an illustrative example. Say that, in order to ensure re-election, the dominant political party decides that every Californian MUST have a 50-inch HDTV on which to watch (and snicker at) the Governor's latest action flick. Due to State's buying power, the State can buy these TVs for $1,000. Just vote "Yes" on the ballot proposition and you too can have one of the beauties. The cost will be painlessly applied to your annual Personal Income Tax bill.

If you are in the bottom two-thirds of the taxpayer population, you pay just 25 cents or less on the dollar. Effectively, you are insulated from the true cost of operating the state government. This means that the $1,000 TV costs you $250 or less. If you are in the bottom 30%, the cost is only $100 or less because you effectively pay 1 cent on the dollar or less. So which way are you going to vote? I'd guess YES.

Now, let's say that you happen to be in the top 15% of taxpayers. Due to the progressive income tax, this means that you effectively pay more than $1 for every $1 of service. "That's fair," you say, "because they earn more money." Okay, let's look at the top-most 2% of taxpayers, you know, the ones that pay 50% of the entire bill. These "lucky" citizens effectively pay $4.75 and much, much more for every $1 of government service. That $1,000 TV effectively costs a minimum of $4,750 to these taxpayers. For the very top taxpayers, the bill comes to an amazing $507,000! All this, despite that these taxpayers likely already have two better-quality TVs at home. If you are in this category, I'd guess that you would vote NO. Unfortunately for you, you are electorally insignificant. It REALLY DOES NOT MATTER if you think this is a good idea or not but you WILL have to PAY FOR IT.

At the ballot box, the top 15% of taxpayers can NEVER prevail in a free and fair democratic election against the majority for popular programs. Want a low-cost 50-inch HDTV? Vote "YES" and make somebody else pay for. Want free higher education? Vote "YES" and make somebody else pay for it. Want free medical care? Vote "YES" and make somebody else pay for it.

The politicians that use these techniques appeal to the broad masses, ensuring re-election. There are no checks and balances against such abuses. While I have not found "smoking gun" evidence, it does offer an explanation for California’s constant overspending (above inflation and population growth), the lack of fiscal discipline, and the domination of one party in the California Legislature.

There is also a separate debate as to whether the excess tax money better serves society when in the hands of government, or left in the pockets of those that earned it. By California’s example, even a spoiled rich heiress might make better spending decisions.