California's Poorest Households Pay the Largest Share of Income in State and Local Taxes
Published on Apr 10, 2014 - 10:39:50 AM
SACRAMENTO April 10, 2014 - A new report released in advance of Tax Day -- April 15 -- by the California Budget Project (CBP) shows that the state's lowest-income households pay a disproportionate share of their incomes in state and local taxes -- especially compared to the wealthiest households.
Who Pays Taxes in California? shows that nonelderly California households in the bottom fifth of the state in terms of income -- who earn an average of $13,000 a year -- pay an estimated 10.6 percent of their incomes in state and local taxes. This is a greater share than is paid by any other segment of the state's households and is also notably higher than the share for the state's wealthiest residents (see graph).The top 1 percent in California, with an average income of $1.6 million a year, pay an estimated 8.8 percent of their incomes in state and local taxes -- or nearly two full percentage points less than the poorest Californians.
These figures account for the tax increases implemented by Proposition 30 of 2012, which were largely targeted to the wealthiest residents. These data were provided by the Institute on Taxation and Economic Policy.
"Having California's wealthiest contribute a smaller share of income than the poorest is a case of upside-down tax policy, " said Chris Hoene, CBP executive director. "Our state needs a tax system that raises revenues fairly and effectively -- and this means making sure that families contribute based on their ability to pay."
The CBP's new report also indicates that:
California's poorest households are paying the most in state and local taxes even as income is increasingly concentrated at the very top. Between 1987 and 2011 (the most recent year for which data are available), the average annual income of California's top 1 percent increased by more than 75 percent, after adjusting for inflation, even while the bottom four-fifths of Californians had a decline in average income. As a result, the share of income going to the top 1 percent grew by more than half between 1987 and 2011 -- going from 13 percent to 21 percent.
Targeted state policies could create a fairer tax system and foster greater economic security for California's low-income families. State policymakers could take specific steps to provide a financial boost to low-income families and ensure that contributions to state and local taxes better reflect individuals' and families' ability to pay. For example:
State policies could better target existing tax credits to low-income households by making credits that could especially benefit them (e.g., the Child and Dependent Care Expenses Credit) refundable, meaning they could be claimed even if their incomes are so low that they don't owe income tax.
California could create a state earned income tax credit (EITC) that extends the federal EITC already in place, thereby providing a financial boost for eligible low-income workers and their families.
"With the right kinds of policies, California can choose to have a tax system that truly reflects the underlying economic reality and is part of a broader effort to help families climb the income ladder," Hoene said.
Who Pays Taxes in California? is available online at the CBP's website, www.cbp.org.
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