California’s Tax System

1107 9th Street,

Suite 310
Sacramento,
California 95814
(916) 444-0500
www.cbp.org
cbp@cbp.org THE CALIFORNIA BUDGET PROJECT
February 2009
 The Personal Income Tax Provides Nearly Half of 2009-10 General Fund Revenues
Personal Income Tax
49.1%

Other Revenues
2.7%

Insurance Tax
1.8%
Cigarette Tax
0.1%

Alcohol Tax
1.0%
Sales and Use Tax
Corporation Tax 34.6%
10.7%

Projected 2009-10 General Fund Revenues = $97.7 Billion

Note: Includes loans and transfers.
Assumes that all of the Governor's proposed 2008-09
and 2009-10 revenue changes are enacted.
Source: Legislative Analyst's Office

1
 The Personal Income Tax Provides the Largest Share of General Fund Revenues
60%
Personal
Income Tax
50% 49.1%
Percentage of General Fund Revenues

37.3%

40% Sales and

42.1% Use Tax
34.6%
30%
34.6% 28.8%

15.4% Reflects deficit bond proceeds 20.4%

20%
Corporation
Tax
10% 10.7%
8.7% 5.5%
12.6%
Other
0% Revenues
82

00

02

04

06

08

*
78

80

84

86

88

90

92

94

96

98

10
9-

1-

3-

5-

7-
7-

9-

1-

3-

5-

7-

9-

1-

3-

5-

7-

9-
0

0
7

0
20

20

20

20
19

19

19

19

19

19

19

19

19

19

19

19

20
* 2008-09 estimated and 2009-10 projected.
Note: Excludes loans and transfers. Assumes that all of the Governor's
proposed 2008-09 and 2009-10 revenue changes are enacted.
Source: Legislative Analyst's Office

2
 Personal Consumption Spending Fell in the Third Quarter of 2008 by the Largest Percentage Since 1980
5%
Annual Rate of Change in Inflation-Adjusted and Seasonally Adjusted

4%

3%
Personal Consumption Expenditures

2%

1%

0%

-1%

-2%

-3%

-4% -3.8%

-5%
Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008
Quarter
Source: US Bureau of Economic Analysis

3
 Percent Change in Taxable Sales
From Same Quarter of Previous Year
Q1

-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q3 199
1
Q1 199
1
Q3 199
2
Q1 199
2
Q3 199
3
Q1 199
3
Q3 199
4
Q1 199
4
Q3 1 9 9
5
Q1 1 9 9
5
Q3 1 9 9
6
Q1 1 9 9
6
Q3 1 9 9
7
Q1 1 9 9
7
Q3 1 9 9
8
Q1 1 9 9
8
Q3 199
9
Q1 199
9
Q3 200
0
Q1 200
0
Q3 200
1
Q1 200
1
Q3 200
2
Q1 200
2
Q3 200
3
Q1 200
3
Q3 200
4
Q1 200
4
Q3 200
5
Q1 200
California's Third Quarter 2008 Decline in Taxable Sales Was the Largest Since 1991

2 5
Q3 00
6
Q1 2 0 0
6
Q3 2 0 0
7
Q1 2 0 0
7
Q3 2 0 0
20 8
08
4
Note: 2008 data are preliminary.
Source Departmnet of Finance
 California's Median Home Price Has Plunged Since Peaking in Spring 2007
$550,000
$484,000
$500,000
Monthly Median Price for Homes Sold in California

$450,000

$400,000

$350,000

$300,000

$250,000
$173,000 $249,000
$200,000

$150,000

$100,000

$50,000

$0
88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08
c-

c-
c-

c-

c-

c-

c-

c-

c-

c-
c-

c-

c-

c-

c-

c-
c-

c-

c-

c-

c-
De

De

De

De

De

De

De

De
De

De

De

De

De

De

De
De

De

De

De

De

De
Note: Includes new and resale condominiums and single-family detached homes.
Source: MDA DataQuick

5
California’s Tax System Contributes to the Budget Gap
„ Tax policies and economic trends contribute to the state’s budget
problems:
– Corporate income taxes have declined over time as a share of General Fund
revenues and as a share of corporate profits. If corporations had paid the
same share of their profits in corporate taxes in 2006 as they did in 1981,
corporate tax collections would have been $8.4 billion higher.
– The yield of the state’s sales tax has declined over time, reflecting the shift
in economic activity from goods to services and the rise of Internet and mail-
order sales that escape taxation. If taxable purchases accounted for the
same share of personal income in 2007-08 as they did in 1966-67, the state
would have collected an additional $16.4 billion in sales tax revenues.
– The phase-out of the federal estate tax will cost the state over $1.1 billion in
2009-10. Current law reinstates the tax in 2011; however, most experts
believe that the state portion of the tax will not be restored.

6
 The Share of Corporate Income Paid in Taxes Has Fallen by Nearly Half Since 1981
10.0%
Tax rate increased
from 9.0% to 9.6%
9.5%

9.0%
Corporate Taxes as a Percentage of Income for
Corporations Reporting Net Income

8.5%
Tax rate Tax rate reduced
8.0% increased from 9.6% to 9.3%
from 7.0% to
7.5% 7.6% to 8.3%
to 9.0%
7.0%

Tax rate increased from

6.5%
5.5% to 7.0%

6.0%
Tax rate reduced
5.5% from 9.3% to
8.84%
5.0%

6
2

0
8

0
0

6
6

0
9
8

9
8

8
6

7
6

8
6

19

20

20

20
19

19

20
19

19
19

19
19

19
19

19

19

19

19

19
19

19

19

19

19

Source: Franchise Tax Board

7
 Growth in Corporate Income Far Outstripped That of
Adjusted Gross Income During the Economic Recovery
700%

600% 578.1%
Percent Change, 2001 to 2007

500%

400%

300%

200%

100%
39.7%

0%
Total State Net Income of Corporations Total Adjusted Gross Income of Personal Income Taxpayers

Note: All data are for California. Corporate and adjusted gross income reflect income reported for tax purposes.
Source: Franchise Tax Board

8
 Recent Growth in Corporate Profits Has Outpaced Growth in Corporate Tax Payments
1200%

1018.7%
1000%
Percent Change, 2001 to 2005

800%

600% 557.0%

400%

218.5%
200%

69.3%

0%
California Net Income: California Net Income: Total State Net Income of State Corporate Tax Liability
Apportioning Corporations Nonapportioning Corporations Corporations
Source: Franchise Tax Board

9
 Revenue From a 1 Percent Sales Tax Rate
as a Percentage of Personal Income
19
60
-

0.30%
0.35%
0.40%
0.45%
0.50%
0.55%
19 61
62 0.60%
-
1 9 63
64
-
0.52%
19 65
66
-
19 67
68
-
19 69
70
-
19 71
72
-
19 73
74
-
19 75
76
-
1 9 77
78
-
19 79
80
-
19 81
82
-
19 83
84
-
1 9 85
86
-
19 87
88
-
19 89
90
-
19 91
92
-
19 93
94
-
19 95
96
Sales Tax Collections Have Declined as a Share of Personal Income

-
19 97
98
-
2 0 99
00
-
20 01
02
-
20 03
04
-
20 05
06
-0
7
Source: Board of Equalization, Department of Finance,
Legislative Analyst's Office, and US Bureau of Economic Analysis

10
0.34%
 Tax Cuts Enacted Since 1993 Will Cost $11.7 Billion in 2008-09
2008-09 Drop Reflects Suspension of Net Operating Loss Deductions
Annual Cost of Tax Reductions Enacted Since 1993 (Dollars in Billions)

$14
$12.6
$11.9 $11.7
$12 $11.3
$10.4
$10
$8.9
$7.8 $7.8
$8 $7.2

$6 $5.3

$3.9
$4

$1.9 $2.1
$2 $1.3
$1.0
$0.7

$0
4

*
0

*
1

9
-9

-9

-9

-9

-9

-9

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0
93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08
19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20
*2007-08 and 2008-09 estimated.
Source: Assembly Revenue and Taxation Committee, Board of Equalization,
Department of Finance, Franchise Tax Board, and Legislative Analyst's Office

11
 2008 Tax Deal Will Lose More Than $3 Billion Over Eight Years
Losses Will Continue Permanently
$2,000

$1,545
$1,500

$1,000 $815
Dollars in Millions

$500

$0

($500)
($525)

($1,000) ($895)
($975) ($1,000) ($985) ($985)

($1,500)
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Net Cost of Net Operating Loss and Business Tax Credit Provisions in the 2008 Budget Agreement

Source: Franchise Tax Board

12
 Personal Income Tax Posts the Highest Average Annual Growth Rate Over Time
12%
10.8%

10%
Average Annual Percent Change, 1970-71 to 2008-09

8.8%
7.8% If impact of 1991 alcohol
8%
6.9% tax increase is excluded,
average annual percent
6% change would be 0.4%
4.6%
4.3%
4%

2%

0%

-2%
-1.8%

-4%
Personal Income Corporate Income Insurance Gross Sales Tax Per Motor Vehicle Fuel Alcohol Taxes Tobacco Tax Per
Tax Tax Premiums Tax 1 Percent Rate Taxes $0.10 Rate
Note: 2008-09 revenues estimated.
Source: CBP analysis of Legislative Analyst's Office data

13
 The Gains of High-Income Taxpayers Far Outpaced Those of Other Taxpayers, 1995 to 2006
120%
108.4%
Personal Income Taxpayers, 1995 to 2006 (2006 Dollars)
Percent Change in the Average Adjusted Gross Income of

100%

80%

60% 57.4%

44.9%

40%

20%
10.8% 9.5% 9.0%
8.5%

0%
Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Top Fifth Top 10 Percent Top 1 Percent

Income Category
Source: Franchise Tax Board

14
 The Share of Total Adjusted Gross Income From Capital Gains Nearly Doubled Between 1988 and 2006
35%
Capital Gains as a Percentage of Adjusted Gross Income

30%
26.5%

25%

20%
16.7%

15%
11.6%

10%
6.0%

5%

0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

All Taxpayers Top 5 Percent of Taxpayers

Source: Franchise Tax Board

15
 Lowest-Income Households Pay the Largest Share of Their Income in State and Local Taxes
14%

12% 11.7%
2007 Taxes as a Percentage of 2004 Household Income

10.5%
10% 9.5%
8.7%
8.0% 8.0%
8%
7.1%

6%

4%

2%

0%
Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Next 15 Percent Next 4 Percent Top 1 Percent

Note: Includes offset for federal deductibility of state taxes.

Source: Institute on Taxation and Economic Policy

16
 California Taxes in 2007
As Shares of Family Income for All Taxpayers, 2004 Income Levels
Income Top 20%
Group Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Next 15 Percen Next 4 Percent Top 1 Percent
Average Income in Group $11,100 $23,800 $38,000 $62,300 $113,500 $260,000 $1,587,200
Income Less than $18,000 – $30,000 – $48,000 – $81,000 – $170,000 – $430,000
Range $18,000 $30,000 $48,000 $81,000 $170,000 $430,000 or more
Sales, excise & gross receipts taxes 8.4% 7.6% 6.1% 4.7% 3.3% 1.9% 0.8%
Property taxes 3.1% 2.4% 2.4% 2.4% 2.4% 2.0% 1.0%
Property taxes on families 3.0% 2.4% 2.3% 2.3% 2.3% 1.7% 0.5%
Business property taxes 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.4%
Income taxes 0.1% 0.5% 1.3% 2.1% 3.5% 5.3% 7.6%
Personal income tax 0.0% 0.5% 1.2% 1.9% 3.3% 5.0% 7.1%
Corporate income tax 0.1% 0.1% 0.1% 0.2% 0.2% 0.3% 0.6%
Total Before Federal Offset 11.7% 10.6% 9.7% 9.2% 9.2% 9.2% 9.4%
Federal Itemized Deduction Offset –0.0% –0.1% –0.2% –0.6% –1.2% –1.2% –2.3%
Net After Federal Offset 11.7% 10.5% 9.5% 8.7% 8.0% 8.0% 7.1%
Source: Institute on Taxation and Economic Policy

17
 How Does California Compare?
Revenues as a Percentage of Personal Income
California Rank California US

Total State and Local Own Source (2005-06) 17 16.96% 16.29%

Total State and Local Taxes (2005-06) 13 11.73% 11.23%

State Taxes (2006-07) 14 7.76% 6.65%

Local Taxes (2005-06) 32 3.76% 4.52%

State and Local General Sales Taxes (2005-06) 16 2.89% 2.65%

State and Local Property Tax (2005-06) 36 2.67% 3.37%

State General Sales Tax (2006-07) 23 2.21% 2.10%

State Motor Fuels Taxes (2006-07) 45 0.23% 0.32%

State Tobacco Tax (2006-07) 44 0.07% 0.14%

State Alcoholic Beverage Sales Taxes (2006-07) 39 0.02% 0.05%

State Individual Income Tax (2006-07) 4 3.61% 2.36%

State Corporate Income Tax (2006-07) 6 0.75% 0.47%

Source: US Bureau of Economic Analysis and US Census Bureau

18
 Federal Spending on Unemployment Insurance and Food Stamp Benefits Has the Biggest “Bang for the Buck”
$2.00
Dollar Reduction in Federal Tax Revenue or Increase in Federal Spending
Annual Change in Inflation-Adjusted Gross Domestic Product for Each

$1.80 $1.73
$1.63
$1.59
$1.60
$1.38
$1.40
$1.28

$1.20
$1.03
$1.00

$0.80

$0.60 $0.49
$0.38
$0.40 $0.30 $0.31
$0.25
$0.20

$0.00
Enact Cut Corporate Make Make Extend Provide Provide a Provide Federal Increase Extend Temporarily
Accelerated Tax Rate Permanent Permanent Alternative Across-the- Payroll Tax Aid to State Infrastructure Unemployment Increase Food
Depreciation Bush Income- Dividend & Minimum Tax Board Tax Cut Holiday Governments Spending Insurance Stamp Benefits
Tax Cuts Capital Gains Patch Benefits
Tax Cuts

Source: Moody's Economy.com

19
California Is the Only State To Require a Supermajority Vote To Pass Both a Budget and Any State Tax Increase

Supermajority vote required to pass

a budget and raise any state taxes
Supermajority vote only required to
raise any state taxes
Supermajority vote only required to
pass a budget
Majority vote required to pass a
budget and raise most or all
state taxes

Note: Arkansas, Florida, and Michigan require a supermajority vote for certain taxes.
Source: National Conference of State Legislatures

20