Tax unfairness

By Frank Wells

It's failing our schools and crippling our state

In the 1960s and early ’70s, California schools were among the best funded and top rated in the country. The state’s college and university system expanded. Tuition rates were low, in many cases free. Through that period, the state also had enough money to expand its freeway system, develop needed water resources, and invest in other huge infrastructure projects.

Flash forward to 2011: Despite being the eighth-largest economy in the world, California has sunk to the bottom, or nearly so, in per-pupil funding, class size, and the number of counselors and librarians per student. Public college and university fees rocket higher and higher, and the state continues unsuccessfully to try to dig itself out of an ongoing massive budget hole.

So what happened? How did the relatively wealthy Golden State lose so much of its luster and end up making students and schools pay a large part of the price?

While the 2008 market crash and subsequent recession have aggravated California’s budget woes, they don’t explain the state’s four-decade fiscal slide. The state has had an ongoing revenue problem exacerbated by a broken tax system that unfairly benefits the few, hurts the poor and the middle class, and lets many who benefit the most from our system escape paying their fair share. An examination of just a few of the contributing factors to California’s broken tax system shows us in part how the state got into this fix and may give us some ideas on how to get out of it.

Proposition 13 cut property tax income, shifted school funding responsibilities, and strangled the ability to increase revenues.
In 1978 voters approved Proposition 13, a ballot measure that reduced property tax rates to their 1975 levels, capped future increases at 2 percent per year, and prohibited reassessing property values except in cases of ownership change or new construction. It shifted education funding responsibility largely to the state, slashing local taxes an average of 60 percent. Proposition 13 also blocked school districts from raising local property taxes for operational revenues, and it dramatically changed the requirement to pass a state budget and increase taxes from a simple majority to a nearly unobtainable two-thirds.

While many homeowners saw Proposition 13 as a good thing, upon its passage public school funding was slashed and has never really recovered. Other glaring consequences of the law have been that identical homes in the same neighborhood pay wildly different tax bills and it shifted the overall tax burden from corporations to homeowners. Because commercial property changes hands much less often than homes, many corporations have unfairly benefited from ridiculously low property tax obligations. For example, under Prop. 13, the Anheuser-Busch corporation paid just $18,000 a year in property taxes on its 3 million square foot brewery location in Van Nuys, less than a penny per square foot. (Ironically, even when the brewery was finally sold in 2008, Los Angeles County forgot to reassess the property, continuing to cost the state and county millions.) Although Proposition 13 is often considered the untouchable “third rail” of California politics, more Californians are open to changing this unfair advantage to corporations.

A widening income gap shifts the proportional tax burden to the poor.
After World War II and through the 1970s, bottom incomes were rising faster than those at the top, expanding the middle class and narrowing the gap between rich and poor. Starting in 1979, that all changed. Over the last two decades, the bottom 20 percent have seen a 19.5 percent decrease in income while the wealthiest 20 percent have seen a 21.4 percent increase. And while the poor and the middle class have seen their earning ability decline, in California the top 1 percent have seen their incomes double.

As the rich have gotten richer, the proportion of their wealth that goes to state taxes has shrunk, while the poor have ended up contributing more. Now the bottom 20 percent of wage earners in California pay 11 percent of their income in taxes, while the top 1 percent of wage earners pay under 8 percent. Aside from the fact that this starves the state of needed revenue, it simply isn’t fair that those who can least afford it have a proportionally higher tax burden than the very wealthy. Some of the wealthy, including billionaire investor Warren Buffett, have recognized this, calling for higher taxes on millionaires, while others still lobby against paying their fair share. In California, where many Republican lawmakers have signed “no tax” pledges, getting the rich to ante up has run into more than its share of obstacles.

California corporations aren’t paying their fair share.
While personal income for all but the wealthy has shrunk or stagnated, California corporations, for the most part, have had a banner decade. Between 2001 and 2008, corporate income grew by 411 percent, and many have continued to profit quite nicely even since the 2008 market crash. Yet through a myriad of tax loopholes, the proportion of state revenue paid by corporations has shrunk, while the burden on individual taxpayers has increased. An analysis of 25 major California corporations by the Orange County register shows that nearly all paid far less than the official state tax rate.

Poor leadership decisions on taxes widen the budget gap.
One of the first things Gov. Arnold Schwarzenegger did after taking office in 2003 was to rescind an order by recently recalled Gov. Gray Davis that had restored vehicle license fees to their higher 1998 levels. In doing so, Schwarzenegger blew an immediate $4 billion hole in the state budget that had passed earlier that year. Despite skyrocketing deficits, he held steadfastly to this cut throughout most of his administration, but was finally forced to relent when he and the Legislature faced fiscal reality and partially restored the fee in 2009. Unfortunately, at the same time, Schwarzenegger and leaders on both sides of the aisle cut state revenues even more through a last-minute budget deal that gave away $2 billion in new tax breaks to large corporations. (Proposition 24, a 2010 CTA-supported ballot measure to take away those breaks, was defeated after massive spending and deceptive advertising by its big-business opposition.)

So what’s the solution?
How can the state get the revenue it needs to operate and to fund its schools at an adequate level? CTA believes in bringing back tax fairness through a progressive tax system that taxes the wealthy at a higher rate than the poor. The rich have done extremely well even in the current economy, and they have done it by using a system that everyone contributes to in some way. A more equitable tax system will add billions of dollars in new revenue to a state that has been forced to slash public education and other vital services. CTA continues its efforts to bring California back to the top education funding quartile of the 50 states, but that won’t happen without fundamental change to the state’s revenue stream. All California students deserve the resources they need for a quality education. A more fair tax system can help make that happen.

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