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April 16, 2014
Viewpoints: California can have a stronger - and fairer - tax system

tax_extensions.JPG(April 16 - By Chris Hoene and Luke Reidenbach, Special to The Bee)

With individuals and families having faced the deadline for filing their tax returns this week, it's an opportunity to look at California's tax system and its key role in helping achieve our goals as a state.

At the most basic level, taxes are our collective investment in the foundations of strong, healthy communities, good jobs and a growing economy - quality schools and preschools, affordable colleges and universities, effective transportation, water and energy networks, and other critical public systems and services.

So there's a lot at stake in having a tax system that raises revenue fairly and effectively. This depends in part on collecting tax dollars based on people's ability to pay. Yet in California, we're not currently hitting this mark.

There is an oft-repeated myth about taxes in California that those at the high end of the income ladder pay an outsize share. But in fact, it's our low-income households who pay the largest share of their incomes in state and local taxes.

Consider the average non-elderly household in California's bottom fifth in income. This household earns $13,000 a year and pays an estimated 10.6 percent of this income in state and local taxes - a greater share than any other income group. Now take the average household in the top 1 percent. Their annual income is $1.6 million, yet they pay just 8.8 percent of this income in state and local taxes - almost 2 full percentage points less than families at the opposite end of the income spectrum.

A tax system that asks the lowest-income families to contribute the most would be unfair in any case. But it's especially troubling in light of widening income inequality in our state. During the past two decades, the top 1 percent in California have had incomes rise significantly, while the bottom 80 percent have on average seen declines in income, with low-income households having the largest drop. Tax policy should help to address income inequality, not make it worse.

So what can be done to address this disconnect and - more generally - to strengthen California's system of state and local taxes?

Fortunately, voters here took a step in the right direction in 2012 by approving Proposition 30 - a ballot measure that, in addition to slightly increasing the state sales tax, raised income-tax rates on the wealthiest Californians. Proposition 30 has boosted state revenue and positioned our state to begin reinvesting in an array of essential public services that were battered by years of major cuts.

Yet as important as Proposition 30 has been, its tax-rate increases are temporary and will sunset in the next several years. This means that there is more work to do.

First, making permanent Proposition 30's higher income-tax rates for the very wealthy should be on the table, and this could be part of a broader effort to further revise the state's income tax structure so that revenue keeps up with long-term growth in income and wealth, especially at the very high end. A tax system that better reflects the underlying economy could, if coupled with other policies that support families in climbing the economic ladder, help address the persistent challenge of widening inequality.

And there's more California could do to create a fairer and more effective tax system that improves economic security for low-income households and makes possible the necessary investments in our future.

Certain steps could be taken this legislative session. For example, policymakers could create a state earned income tax credit, or EITC, building off the highly successful EITC in place at the federal level. This would give eligible workers and their families a refundable state income-tax credit that grows along with their earnings, thus providing a financial boost for low-income households.

There are also opportunities on the corporate tax front to strengthen California's revenue system by ensuring that corporations are paying their fair share. State policymakers could end corporate tax breaks that are ineffective or outdated or don't serve a clear purpose. Policymakers also could implement an oil and gas severance tax, as is currently being discussed in the Legislature.

And at the local level, taxing business property based on its current market value - rather than on the value at time of purchase, as is currently done - would increase local revenue while ending a major tax disadvantage that newer, often smaller businesses now face.

For any of these options, it would take serious deliberation to get the new policies right. But the bottom line is that California has choices in how it designs its tax system. Our state should commit to the goal of having a system of state and local taxes that is not only fair, but also allows for the kinds of investment that work for all individuals, families and communities.

Chris Hoene is executive director and Luke Reidenbach is a policy analyst at the California Budget Project.