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Thursday, May 17, 2007

CA Tax Oddities

As mentioned in an earlier entry, the California tax system has some weaknesses. Here is some data supporting some of these oddities.

Volatile personal income tax

The Legislative Analyst Office (LAO) reports that in 2004: "Taxpayers earning annual incomes of $200,000 or more accounted for about 5 percent of returns but more than 55 percent of liabilities. In contrast, taxpayers with AGI of less than $50,000 accounted for over 45 percent of returns but less than 6 percent of liabilities." []

And, the personal income tax provides over half of CA's general fund revenues. Thus, the state is really very dependent on the continued high incomes of a few of its citizens. These high income individuals though, often have types of income which are not steady or predictible (like salaries are). For example, they may have capital gains from stock sales or income from stock options. These amounts will not be steady from year to year and in tough economic times, like the dotcom bust of a few years ago, the state tax collections go down. Basically, when the income of CA's top individual income generators goes down, the entire state feels it.

And, it is important to note that, particularly in the mobile knowledge era, some of these high income individuals can leave CA - they can work elsewhere (although depending on how the move and new work arrangment are structured, some of the income could still be taxed in CA).

High Sales & Use Tax Rate

Compared to other states, the CA sales tax rate is high (it is 8.25% in San Jose). Per the LAO (same report as above): "Compared to other states, California has the highest combined state-local SUT [sales and use tax] rate. However, because it also has many SUT exemptions and exclusions, its SUT revenues per $100 of personal income are more in line with other states."

But as discussed previously, the exemptions and exclusions (such as for digital downloads and services), adds to the regressivity of the sales tax in that such excluded items tend to be larger expenditures for higher income individuals thus further reducing their tax on consumption.

more later ...

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