PREVIEW. California Tax Facts. An Overview of the Golden State s Tax Structure

Transcription

1 PREVIEW California Tax Facts An Overview of the Golden State s Tax Structure 1

2 PREVIEW California Tax Facts An Overview of the Golden State s Tax Structure 3

3 ABOUT THE CALIFORNIA TAX FOUNDATION The California Taxpayers Association (CalTax) established the California Tax Foundation as its research and education arm more than 30 years ago. The foundation has won several national research excellence awards, and impacted the development of public policy, while developing a reputation for factual, objective research, advancing discussions on important public policy issues. The California Tax Foundation is a 501(c) (3), not-for-profit organization, dedicated to promoting sound tax policy through independent, objective, nonpartisan research and thoughtprovoking policy work. This report was prepared by Robert Gutierrez, director of the California Tax Foundation. To purchase copies of this report or other publications, call , foundation@caltax.org or visit the California Tax Foundation s website at The California Tax Foundation is located at 1215 K Street, Suite 1250, Sacramento, California California Tax Foundation. All Rights Reserved. Printed in the United States of America. ISBN: CALIFORNIA TAX FACTS

4 Contents The American River, Sacramento County CHAPTER ONE Principles of Sound Tax Policy Page 1 CHAPTER TWO California s Tax Structure Page 3 CHAPTER THREE Personal Income Tax Page 10 CHAPTER FOUR Corporate Franchise and Income Tax Page 17 CHAPTER FIVE Property Taxes Page 22 CHAPTER SIX Sales and Use Tax Page 33 CHAPTER SEVEN Excise Taxes Page 40 CHAPTER EIGHT Employment Taxes Page 49 CHAPTER NINE Other State and Local Taxes Page 51 CHAPTER TEN Tax Administration Page 59 7

5 Chapter 1 Principles of Sound Tax Policy Tax experts continue to argue over measurements of tax equity, and what can be done to improve the economy. However, policymakers, scholars and think tanks overwhelmingly agree on a number of overarching principles of sound tax policy. In practice, the principles below may be difficult to achieve, but nonetheless, they are worth pursuing, as sound tax policies are the foundation for relevant tax discussions. Certainty Changes within a tax structure should be kept to a minimum. Frequent changes in rates or bases disrupt taxpayers behavior and their ability to make long-range investment and business decisions. Arbitrary application of taxes also creates unpredictability, making it more difficult for taxpayers to comply with tax laws. Neutrality The primary purpose of a tax should be to collect revenue. Market distortions should be minimized or avoided altogether. Tax neutrality ensures that policymakers are not discriminating against certain industries, activities or products. Stability Governments should strive toward a revenue and spending system that is balanced and not prone to unpredictable fluctuations. Volatile revenue and expenditures result in less certainty for taxpayers and government programs, and often produce budgetary deficits. Equity and Fairness Equity generally is measured by a taxpayer s ability to pay a particular tax. Tax fairness can be evaluated by horizontal equity (comparing tax burdens of taxpayers in similar circumstances) and vertical equity (the distribution of tax burdens for taxpayers in different circumstances). Transparency Taxpayers should understand how taxes are assessed and collected. Taxpayers should be able to identify the tax associated with a purchase or transaction. Open government meetings also are important, so taxpayers can be part of the legislative and regulatory processes. Chapter One: Principles of Sound Tax Policy 1

6 Principles of Sound Tax Policy Simplicity Layer upon layer of taxes, multiple tax forms and intricate filing requirements make a tax structure complex, and compliance difficult. Simplified tax systems reduce the cost of compliance for taxpayers, and reduce the need for enforcement tools for government. Taxpayers who do business in multiple jurisdictions often face major burdens complying with complex reporting requirements. State governments can reduce the complexity by developing more uniform state and local tax policies that complement each other. Broad Bases and Low Rates A revenue structure with broad bases and low rates can help mitigate volatility. Low rates minimize the impact of the tax on taxpayers behavior, and improve economic competitiveness. However, in some cases, narrowing a tax base through exemptions or other tax policies may improve the equity or neutrality of a tax. Sufficient Revenue A stable tax structure should be able to generate a revenue stream to support effective and efficient government. In instances where revenue is insufficient to support existing programs, fiscal policies should be restructured in a manner that does not require policymakers to make frequent spending cuts or tax increases. Complementary Tax Bases A tax structure should address the relationships between state and local governments. State government can limit or expand taxing authority for local government. State policymakers must understand the division of power between state and local governments with regard to developing sound tax policy. Local taxes should be uniform in their application and collection, with similar bases. Taxes levied at the state and local levels of government should share similar bases and application to the greatest extent possible. No Retroactivity There should be no retroactive tax increases. Taxpayers need to be aware of their potential tax liabilities. Retroactive taxes can create financial hardship for taxpayers, and hinder investment planning, savings and economic growth by introducing changes that were not accounted for in taxpayers budgets or planning. 2 CALIFORNIA TAX FACTS

7 Chapter 2 California s Tax Structure I n 2010, voters clarified the definition of state and local taxes by approving Proposition 26, building upon prior legal interpretations of taxes under Proposition 13 and Proposition 218. To increase an existing tax or impose a new tax, a two-thirds vote of the Legislature is required for state taxes. At the local level of government, a vote of the electorate is required to impose a tax. Local taxes earmarked for a specific government program require a two-thirds vote of the electorate. Local taxes that are not earmarked require approval by the majority of the electorate. Under Proposition 26, a tax is any charge, exaction and other levy, with some exceptions (as seen on the following page). Three types of impositions are identified by Proposition 26: Asilomar State Beach, Pacific Grove Levy. Includes any tax increase or new tax. Also includes repeal of an existing exemption, deduction, exclusion or credit that results in a taxpayer paying a higher tax. Charge. A monetary demand imposed on an individual or entity for a service, an intangible benefit, or a product provided to the payer for the charge. A charge will not necessarily be compulsory, since not all individuals or entities desire or need a particular service, benefit or product. Exaction. A monetary demand by the government, with no benefit to the payer. An exaction is more forceful than a 3 levy or charge.

8 Volatility of Capital Gains Capital gains and losses fluctuate with the economy creating significant cyclical swings in personal income tax revenue. The chart below shows the net gains and losses reported by personal income taxpayers. $140 Billion $140 FIGURE 4: NET CAPITAL GAINS $120 Billion $120 $100 Billion $100 Net Capital Gains Net Capital Gains (in billions) $80 Billion $80 $60 Billion $60 $40 Billion $40 $20 Billion $20 $0 $0 -$20 Billion -$ Tax Year Source: Franchise Tax Board. Year Source: Franchise Tax Board Chapter Two: California s Tax Structure 7

9 Major Taxes and Fees in California General fund and special fund budget revenue comes from a number of sources. Below are the key sources of state tax revenue for fiscal year Sales and Use Tax, $34.9 Billion, 23.9% Investment Income, Unclaimed Property and Other Funds, $19.8 Billion, 13.5% Alcohol Tax, $351 Million, 0.2% Cigarette and Tobacco Tax, $812 Million, 0.6% 3.8% Insurance Gross Premium Tax, $2.3 Billion, 1.6% Personal Income Tax, $68 Billion, 46.5% Source: Legislative Analyst s Office. Corporate Franchise and Income Tax, $8.1 Billion, 5.5% Motor Vehicle Fuel Tax, $6 Billion, Motor Vehicle 4.1% Registration Fee, $4 Billion, 2.7% Motor Vehicle License Fee (Car Tax), $2.1 Billion, 1.4% 8 CALIFORNIA TAX FACTS

10 Where Do Our Tax Dollars Go? In fiscal year , general and special fund expenditures totaled $140.2 billion. Government Operations, $967.8 Million, 0.7% Fund Fiscal Year Labor and Workforce Development, Sum of Amount $750.7 Million, 0.5% Corrections and Rehabilitation, $11.5 Billion, 8.2% Natural Resources, $3.7 Billion, 2.6% Environmental Protection, $2.6 Billion, 1.8% Business, Consumer Services and Housing, $1.4 Billion, 1.0% Transportation, $8.2 Billion, 5.9% General Government, $6.5 Billion, 4.7% Health and Human Services, $45 Billion, 32.1% Legislative, Judicial, and Executive, $5.3 Billion, 3.8% K-12 Education, $43 Billion, 30.6% Source: Legislative Analyst s Office. Higher Education, $11.4 Billion, 8.1% DOF Agency General Government Health and Human Services Higher Education K-12 Education Legislative, Judicial and Executive Natural Resources Chapter Two: California s Tax Structure 9

11 Chapter 3 Personal Income Tax C alifornia first imposed a personal income tax in At that time, the base of the tax generally conformed to federal tax laws, but with some key differences, including personal and dependent exemptions that were different from federal law. Thus, from the tax s inception, California adopted a policy of selective conformity. Today, the personal income tax is the state government s largest source of revenue, generating $68 billion annually. How the Tax Works California s personal income tax is levied on residents and nonresidents. Sole proprietorships, partnerships, estates, trusts and certain Subchapter S corporations also must comply with personal income tax law. For residents, the tax is applied to worldwide income, including, but not limited to, wages, salaries, interest, dividends, business income and capital gains. For nonresidents, the tax is applied to sources of income derived from California (California-source income). Taxpayers utilize an index to calculate their personal income tax liability. An index is used to avoid increasing taxes on taxpayers whose taxable income rises due to inflation. Personal income taxes are withheld from a taxpayer s pay based on the employee s withholding allowance Form W-4 or DE-4. State and federal law require employers to withhold from employee s TAX wages. While the personal income tax is CALIFORNIA FACTS 10 an Joshua Tree National Park

12 administered by the Franchise Tax Board, withholding is administered by the Employment Development Department. Personal income tax appeals are heard by the State Board of Equalization. A taxpayer who loses an appeal may take the matter to court, but, in most cases, must pay the tax that is in dispute before initiating litigation (a requirement described by tax administrators as a pay to play provision). Taxpayers subject to California s personal income tax first must compute their federal adjusted gross income. Federal AGI is a taxpayer s total gross income, reduced by allowable deductions, such as alimony, trade or business expenses, and deductible contributions to an IRA. Taxpayers then subtract any itemized deductions (such as home mortgage interest and charitable contributions) or the standard deduction from their AGI to determine their taxable income. Taxpayers then may subtract from their tax liability any credits, such as the dependent exemption credit and the renter s credit. Due to the lack of federal tax conformity (discussed below), differences exist between federal and state income and deduction determinations and credits. California voters have approved various changes to the tax, adding certain provisions, as well as surcharges. Passage of Proposition 30 in 2012 added three additional brackets, bringing the top tax rate to 13.3 percent (which includes a mental health surcharge approved in 2004). Proposition 30 sunsets in California s personal income tax return has the same due date as the federal tax return (April 15 for calendar-year filers), and similar penalties apply for late returns and payments. Federal Tax Conformity There are two conformity methods used throughout the United States: automatic conformity with federal law and selective conformity (the current policy used in California). Some states don t conform at all, but use a totally separate, different state income tax (such as a flat tax). Under the selective conformity method, California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the California Legislature and governor must affirmatively conform to federal changes. Despite the many changes that Congress makes to federal tax law every year, California lets years go by without a conformity bill. Currently, for example, California generally conforms to federal income tax laws as they read on January 1, 2009, for taxable years beginning on or after January 1, Policy Considerations The progressive nature of the personal income tax reflects the ability-to-pay theory. The tax achieves equity by distributing the tax burden to those who can best afford to pay the tax. The most significant problem with the personal income tax is that the revenue obtained from the tax is unstable. The cyclical nature of the economy creates a volatile revenue stream. When markets perform well, PIT revenue increases. When economic growth slows or the economy enters a recession, revenue decreases. Volatility of the PIT, and revenue obtained from capital gains in particular, adds to the volatility of the state budget. Recent changes to the state s rainy day fund may mitigate some of this volatility. Under Proposition 2 of 2014, revenue from capital gains in excess of a certain amount may be deposited into the state s reserve account (some conditions apply). Other challenges arise in the areas of transparency and simplicity. The personal income tax is a complex tax. Nonconformity to federal tax laws adds to the complexity, and taxpayers have to grapple with many differences between state and federal tax provisions. Chapter Three: Personal Income Tax 11

13 Who Pays the Personal Income Tax? Since the 1990s, the share of the personal income tax paid by the top 5 percent of income earners has increased. In fiscal year , the top 5 percent paid 70 percent of the personal income tax. Income Distribution Among PIT Filers 2012 for Fiscal Year % 70% Top 5% of Resident Returns All Other Resident Returns Concentration of Resident Returns 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Franchise Tax Board. Chart Title Top 5% All Other Taxpayers Tax Year 12 CALIFORNIA TAX FACTS

14 Published by California Tax Foundation 1215 K Street, Suite 1250 Sacramento, California Phone: California Tax Foundation. All Rights Reserved. Printed 62 in CALIFORNIA the United States TAX of FACTS America. ISBN:

15 $15.00 ISBN > CALIFORNIA TAX FACTS

16 ORDER FORM California Tax Facts: An Overview of the Golden State s Tax Structure (Second Edition) may be purchased online at If purchasing through (foundation@caltax.org), fax ( ), U.S. mail or in person (at the address listed below), please use this order form. California Tax Foundation 1215 K Street, Suite 1250 Sacramento, CA Phone Fax Shipping Address: Name: Street Address: City: State: Zip Code: Billing Address: Check here, if same as shipping address. Name: Street Address: City: State: Zip Code: Payment Type: Cash Check (Make Payable to California Tax Foundation) Credit Card Card Information: Name on Card: Card Number: Security Code: Expiration Date: Circle One: American Express / MasterCard / VISA QTY UNIT DESCRIPTION UNIT PRICE TOTAL California Tax Facts: An Overview of the Golden State s Tax Structure (Second Edition) $15.00 SUBTOTAL SALES TAX (x 8.5%) SHIPPING & HANDLING (NO CHARGE IF PICKED-UP IN PERSON) $3.00 TOTAL Authorized by: Date: