About twenty-five years ago, one of my clients was going public. They were the first real estate investment trust to have operations solely in southern California that sought to go public. The investment bankers were concerned that the California regulatory and tax environment was going to adversely affect the stock pricing of the IPO.
One day, one of the New York investment bankers asked me how much it was going to cost the company to do business in “The People’s Democratic Republic of Taxifornia.’”
I always remembered that term because it captures the essence of California’s fiscal environment.
Last spring, I attended a townhall meeting hosted by State Senator Scott Wilk and Assemblyman Dante Acosta. Messrs. Wilk and Acosta did a marvelous job of discussing the new gas tax increase and how difficult it is to provide a sane fiscal perspective in Sacramento’s legislative chambers.
The real point here is that the Democratic Party now has a supermajority in both houses of the state legislature that can pass any tax increase they want. The first example of this was the gas tax hike.
Everyone wants to see our highways improved, but a significant portion of the funds previously directed toward highway improvements were reallocated to other expenditures having nothing to do with state highways. To replace that funding for needed state highway repairs, the gas tax was passed by the Democrats, increasing our gas tax to the second highest rate in the country.
That is the basis of the objections expressed by Messrs. Acosta and Will. They believe that the original funding should not have been diverted from highway repairs. The clandestine exercise of moving funding away from needed repairs and then saying we need to raise taxes to pay for those repairs is rather devious. I fail to see why Californians from both sides of the aisle are not upset about this.
This discussion reminds me of the investment banker’s comment a quarter century ago, so I think it is important to put our state tax burden in a national context.
Our gas taxes (currently at 38.3 cents per gallon) are the nation’s eighth highest, but they will soon be the second highest at 50.3 cents per gallon. The national average is 31.4 cents per gallon.
California has the highest personal income tax rates in the country. Our corporate tax rates are .16% lower than the state with the highest rate, but the way that California corporate taxes are computed makes them the highest effective rate.
California’s state sales tax rate is 7.25 percent, which is the nation’s highest. However, when municipal and county sales taxes are added, the rate in many counties is 10 percent – among the highest combined state/municipal rates in the country.
In spite of Proposition 13, property taxes in the coastal regions of California are among the highest in the country because property values are so high. Homeowners in Los Angeles County pay the sixth highest property taxes in the nation.
When you add the other taxes, such as vehicle license fees, excise taxes, etc. clearly Californians are the highest taxed people in the country.
So how did we get here? California tax policy has changed dramatically since Jerry Brown first took office in 1975.
I recently had an opportunity to chat with a retired head of Oregon’s Department of Revenue who told me that both Oregon and California rely on taxes that are economically volatile. Both place an extremely heavy reliance on personal income tax.
Personal income historically decreases during economic downturns. In California nearly 54 percent of all tax collections come from personal income tax. When the economy goes south, tax collections drop precipitously. That is precisely the time when demands for government services spike.
The politicians respond by passing “temporary” tax increases to address the budget shortfalls. History shows that these increases tend to become permanent.
The most recent example of this was Proposition 30 in 2012, officially titled “Temporary Taxes to Fund Education,” which enacted a “temporary” increase in personal income tax on income over $250,000. Last year, voters passed Proposition 55 which extended the “temporary” tax until 2030.
Part of the problem lies in the fact that when the economy recovers, tax collections increase and government spending increases commensurately. Only recently has the concept of a “rainy day fund” been considered, but one has to wonder whether California has truly saved enough to effectively deal with the next downturn.
You may be wondering about my client that went public twenty-five years ago. They completed a successful IPO. In the early 2000’s they were acquired by another company who has since concluded that California is indeed a tough place to do business. Most of their California assets have been sold.
Jim de Bree is a retired CPA who lives in Valencia.