With the threat of far less money coming out of Washington for California under the Trump Administration budget, California officials and advocates are starting to talk about the need to raise more local and state taxes as a cushion against revenue loss. This in a state in which a new Tax Foundation report states that California taxes are high and the business climate based on tax considerations is poor.
The federal budget proposal released by the Trump Administration would cut deeply into funds sent from Washington to make the California budget whole. The Trump budget is a long way from passing Congress because of skeptical Republicans and a Senate rule that requires 60 votes to advance annual appropriation bills.
However, that hasn’t stopped chatter about more tax increases in California. From San Francisco’s effort to convince the state legislature to grant local governments the power to collect income taxes, to a legislative bill to end tax deductions on second homes, to the continuing efforts to promote interest in a split roll property tax hitting commercial property, tax talk is alive and energized by actions in Washington.
Yet, the Tax Foundation report offers evidence that the tax talk should stop. California is already a high tax state and its tax policies are detrimental to business.
The Tax Foundation issued its 2017 report with facts and figures comparing the 50 states. For anyone paying attention to these sorts of things over the years, there is no real surprise with California’s standing. The Golden State ranks as one of the most heavily taxed, ranking 6th in the category of tax burdens per capita and as a percentage of income, and the State Business Tax Climate Index placed California near the bottom at 48th.
The report continues a seven-decade tradition by the Tax Foundation of unraveling the mysteries of state and local taxation.
The Tax Foundation created Tax Freedom Day, which tallies how long residents of a state must work to pay off federal, state and local taxes. In 2016, California’s Tax Freedom Day was set on April 30 coming after all but five states.
California proved better than only New York and New Jersey when the Tax Foundation calculated business climate. The assessment was based on the rankings in the categories of Corporate Tax, Individual Income Tax, Sales Tax, Unemployment Insurance Tax and Property Tax.
California’s position in these categories: Corporate Tax-33; Individual Income Tax-50 (Proposition 30, no doubt); Sales Tax-40; Unemployment Insurance Tax- 16 (but with a growing gap in the fund, potentially increasing the need for businesses to kick in more); and Property Tax-15 (imagine without Prop 13 where this ranking would stand. A split roll would change this number dramatically.)
An interesting finding in the report in light of the potential of California losing Federal funds in the state’s squabble with the president is that California ranks 43rd in federal aid as a percentage of the state’s general fund. According to the Tax Foundation, federal aid is equivalent to 26% of California’s general revenue.
One method Washington officials are considering to bring in more revenue to offset proposed budget cuts is to eliminate the state and local tax deduction on federal tax forms. That change would also have a profound effect on California, according to a second report from the Tax Foundation.
One-third of the total deductions come from just two states, New York and California. The deductions affect mostly earners making more than $100,000. The argument for ending the deductions is that high-tax, high-income states are being subsidized by lower-income states.
If this argument prevails and the deductions go, California’s highest in the nation income taxpayers will be hit harder and some may be looking for a new place to call home.