A Look at Californias Tax System: What Does It Do for Us and How - PowerPoint PPT Presentation

A Look at California’s Tax System: What Does It Do for Us and How Can It Work Better? ALISSA ANDERSON SENIOR POLICY ANALYST JULY 21, 2016 FAMILY ECONOMIC SECURITY PARTNERSHIP COORDINATING COUNCIL MEETING calbudgetcenter.org

The State Budget Directs Dollars to Communities Across California Through Three Funding Categories Total Enacted 2016-17 Expenditures 1.3% Local Assistance: Schools, Community Colleges, CalWORKs Families, Medi-Cal Doctors, and Child Care Providers, "State Operations,” Among Others 21.1% Including: State Operations: CSU and UC, CSU, and UC, State Prisons, and Other State Prisons Recipients 25.7% Capital Outlay: Highways, Water Supply, Flood Control, and Other Infrastructure Projects “Local Assistance,” Including: Public Schools, Community Colleges, CalWORKs Families, Medi-Cal Doctors, 77.6% and Child Care Providers 74.2% Note: Reflects federal funds as well as state General Fund, special fund, and bond fund dollars. | 2 Source: Department of Finance

More Than 7 in 10 State Dollars Support Health and Human Services or Education Proposed 2016-17 General Fund and Special Fund Expenditures = $167.6 Billion Health and 31.3% Human Services K-12 Education 30.6% Higher Education 8.7% Corrections 7.9% Other 6.3% Transportation 6.1% Environment and 4.7% Natural Resources Legislative, Executive, 4.4% and Judicial $0 $5 $10 $15 $20 $25 $30 $35 | 3 Source: Department of Finance

Our tax system is a means to an end. Taxes generate resources that allow us to strengthen our communities and economy. | 4

California’s tax system as a whole is regressive. | 5

California’s Lowest-Income Families Pay the Largest Share of Their Incomes in State and Local Taxes Average Percentage of Family Income Paid in State and Local Taxes 12% 10.5% 10 9.0% 8.7% 8.7% 8.2% 7.7% 8 7.4% 6 4 2 Bottom Second Fourth Next 15 Next 4 Top 1 Middle Fifth Fifth Fifth Percent Percent Fifth Percent Note: Data are for nonelderly taxpayers only and include the impact of Proposition 30 temporary tax rates and the offset for federal deductibility of state and local taxes. | 6 Source: Institute on Taxation and Economic Policy

Our Tax System Will Become More Regressive When the Proposition 30 Taxes Expire Average Percentage of Family Income Paid in State and Local Taxes 12% 10.4% 10 8.9% 8.6% 8.1% -0.9% 7.6% 8 7.4% 7.8% 6 4 2 Bottom Second Middle Fourth Next Next Top Fifth Fifth Fifth Fifth 15 Percent 4 Percent 1 Percent Note: Data are for nonelderly taxpayers only and include the offset for federal deductibility | 7 of state and local taxes. Source: Institute on Taxation and Economic Policy

Why should we be concerned that California’s tax system is regressive? | 8

Only California’s Wealthiest Households Saw Substantial Increases in Average Income Between 1987 and 2014 Percent Change in Average Adjusted Gross Income, 1987-2014, Inflation-Adjusted 150% 121.7% 120 90 60 48.1% 30 0 -6.1% -16.0% -16.2% -18.3% -30 Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Top Fifth Top 1 Percent | 9 Source: Franchise Tax Board

On Average, the Top 1 Percent Earns in About One Week What Middle-Income Residents Earn in One Year Californians’ Average Adjusted Gross Income, 2014 $1,895,000 $2.0M ($36,000 per week) 1.5 1.0 0.5 $38,000 Middle Fifth Top 1 Percent Note: Figures are in 2014 dollars and are rounded to the nearest hundred. | 10 Source: Franchise Tax Board

California’s Top 1 Percent Holds Nearly One-Quarter of State Income About 160,000 Households Had Roughly 24 Percent of Total Income in 2014 | 11

California’s Top 1 Percent Holds More Income Than the Bottom 60 Percent About 160,000 Households Had Roughly 24 Percent of Total Income in 2014 | 12

California’s tax system is not meeting the needs of our growing, changing population. | 13

California Faced Significant Budget Shortfalls in Nine of the Past 17 Years State Budget Shortfalls or Surpluses Economic recovery and Proposition 30 revenues Source: Department of Finance | 14

California made deep cuts to core public systems during and after the Great Recession. | 15

Spending Per Student Declined by 20 Percent Between 2007-08 and 2011-12 K-12 Proposition 98 Spending Per Pupil, Inflation-Adjusted $12,000 $10,328 10,000 $9,436 $7,537 8,000 6,000 4,000 2,000 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16* 16-17* * 2015-16 estimated and 2016-17 proposed. Note: Figures reflect 2016-17 dollars and exclude adult education, preschool spending, and child care. Proposition 98 spending reflects both state General Fund and local | 16 property tax dollars. Source: Legislative Analyst’s Office

State Spending Per Student at CSU and UC Dropped Between 2005-06 and 2011-12 Direct General Fund Expenditures Per Full-Time Student, Inflation-Adjusted $20,000 University of California $16,864 California State University 16,000 12,000 $12,019 $9,473 $10,280 8,000 $7,193 $6,034 4,000 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16* * Estimated. Note: Figures are in 2015-16 dollars and reflect "full-time equivalent" enrollment, which accounts for credits taken by each student relative to a full-time course load. Data exclude indirect state funding for CSU and UC attributable to Cal Grant tuition and fee payments. | 17 Source: California State University, Department of Finance, and University of California

California’s population will continue to grow and age, increasing the need for public services. | 18

The Number of Seniors Living in California Will Nearly Double by 2030 Projected Percent Change in Population, 2010 to 2030 100% 95.9% 80 60 40 20 0 to 4 5 to 19 20 to 24 25 to 64 65 or Older | 19 Source: Department of Finance

How can we make our tax system work better for us? | 20

Proposition 30 helped California begin reinvesting in education and other critical services. The expiration of Proposition 30 tax rates will leave a permanent gap in state revenues. | 21

Due to Higher Revenues, 2016-17 Spending Per Student Would Be Nearly $900 Above 2007-08 K-12 Proposition 98 Spending Per Pupil, Inflation-Adjusted $12,000 $10,328 10,000 $9,436 $7,537 8,000 6,000 4,000 2,000 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16* 16-17* * 2015-16 estimated and 2016-17 proposed. Note: Figures reflect 2016-17 dollars and exclude adult education, preschool spending, and child care. Proposition 98 spending reflects both state General Fund and local | 22 property tax dollars. Source: Legislative Analyst’s Office

Expiration of Proposition 30’s Personal Income Tax Rate Increases Would Leave Permanent Gap in State Revenues General Fund Revenues Before Transfers to the Budget Stabilization Account, in Billions $140B $7.7 Potential Additional General Fund Revenues if Proposition 30 Were Extended $4.5 $133.3 130 Projected General Fund $129.0 Revenues Assuming $127.9 Proposition 30 Expires $123.4 120 $118.8 110 100 2015-16 2016-17 2017-18 2018-19 2019-20 Note: 2015-16 is estimated; 2016-17 onward are projected. Additional revenues for 2018-19 and 2019-20 assume that personal income tax (PIT) revenue growth under an extended Prop. 30 would reflect the Administration’s projected underlying PIT growth rate absent Prop. 30 taxes. | 23 Source: Department of Finance (DOF) and Budget Center calculations based on DOF data

The CalEITC significantly boosts the incomes of low-earning workers. Expanding the CalEITC would further reduce economic hardship, encourage work, and help make the tax system more progressive. | 24

The California and Federal EITCs Significantly Boost the Incomes of Working Families With Children Maximum Increase in Income From the State and Federal Earned Income Tax Credits, 2015 $15,000 California EITC 83% increase 74% increase Federal EITC $12,000 Earnings From Work 63% increase $9,000 $6,000 $3,000 No Children One Child Two Children Three or More Children Source: Budget Center analysis of the California and federal Earned Income Tax Credits | 25

Major tax breaks will cost the state over $48 billion in 2016-17. Tax expenditures reduce revenues for other purposes and are often not subject to annual review. | 26

California Spends 45 Times as Much on One Tax Break for Homeowners as It Does on a Credit for Renters Projected Revenue Loss, 2016-17 $6B $5.0 Billion 5 4 3 2 1 $0.1 Billion Mortgage Interest Deduction Renter's Credit Note: Renter’s tax credit is nonrefundable and only available to low-income households. | 27 Source: Department of Finance

Improving Our Tax System Would Allow Us to Strengthen Our Communities � Our tax system is a means to an end. – Taxes generate resources that improve the quality of life for all people. – Most state tax dollars return to our communities, benefiting all of us. – We can create a stronger California by improving our tax system. � Improving our tax system requires: – Making it more equitable (progressive), so that people contribute based on their ability to pay. – Making sure that it produces enough resources to meet the needs of our communities. | 28

1107 9th Street, Suite 310 Sacramento, California 95814 916.444.0500 aanderson@calbudgetcenter.org @alissa_brie @CalBudgetCenter calbudgetcenter.org