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Sunday, January 10, 2010

Income tax for California Cities?

One of the bills on the agenda for the January 11, 2010 hearing of the California Revenue & Taxation Committee is AB 1342 which includes a law change to allow local governments to impose a personal income tax. Currently, R&T Section 17041.5 prohibits local governments from imposing an income tax. The personal income tax to be allowed under AB 1342 would be based on a percentage of the state personal income tax a person owes and administered by the Franchise Tax Board. A vote of residents would be needed to create the tax.

Is this a good idea? Well, there are a few cities outside of California that impose income taxes, such as New York City and Philadelphia. It would enable cities to have a progressive tax (sales tax is regressive) and would enable cities to generate additional revenues without having to try to get voters to increase an already too high sales tax rate or attract a big-box retailer into the city.

A city income tax would better align state and city goals. Today, the state would like to have high wage jobs in the state. However, local governments are not as eager because high wage workers are more likely to live in their own home and have higher infrastructure needs than would someone who works for a big-box retailer. Local government revenue bases are not adequate to attract high earners because their high income does not necessarily turn into high sales tax collections.

So, wouldn't it be better to find a way for all cities to be aligned with state interests in attracting and creating high wage jobs? If yes, why not have a tax system where the state government shares a portion of its personal income tax base (and perhaps the corporate income tax base as well) with local governments?

What do you think?


Anonymous said...

I know this is an old post, but I'm curious about the origin of California's prohibition on local income taxes. Do you happen to know when & why it was imposed?

Professor Nellen said...

I have a bit on the history of R&T 17041.5 here -