-
High
tax rates: The state sales tax rate of 8.25% is the highest
in the U.S. (and higher when local rates are added in; 9/25% in Santa
Clara County!). The top
personal tax rate is the highest among the states at 9.3% (10.3% if
income exceeds $1 million) and some want it to be higher.
-
Equity
and fairness often missing: The sales tax applies only
to tangible goods; other consumption items such as digital goods and
services are tax-free. A consumer must pay tax on a lawn mower, but
not on lawn care services. Consumers pay tax on music CDs, but not on
songs purchased from online stores. [more]
-
Uncollected
taxes: Every year, over $1 billion of use tax owed to
California and its cities goes uncollected. Most people don't even
know what a use tax is (which makes it hard to pay it). Different
reporting techniques could make it simpler to calculate and pay. [more]
-
Some
taxes are hidden: While the law says that food (except
when eaten outside of the home) is exempt from sales tax, there is
sales tax included in the price because the grocery store,
distributors and growers/manufacturers all pay sales tax and pass it
along to buyers. [more]
-
Some
tax breaks are unfair and too costly: Some tax deductions and
exemptions don't make sense today or are too generous for some
taxpayers (usually those with high incomes). For example, federal and
state law allows for mortgage interest to be deducted on two homes and
on up to $1.1 million of debt. Why should the law encourage ownership
of two homes? Also, even in the Bay Area, the average home doesn't
cost $1.1 million. While the state struggles to figure out
how to help those without health insurance, most individuals with
employer-provided health insurance get a great tax break because the
employer contribution is tax-free income (that costs California around
$4 billion per year). We should look at (1) reducing these and other
generous tax breaks to more reasonable amounts and (2) providing tax
breaks using credits rather than deductions to make the benefits more
equitable across income groups (a $100 credit provides $100 of tax
relief to every taxpayer, but a $100 deduction provides $2 of benefit to a taxpayer in a 2% tax bracket and $10 to one in a 10% tax
bracket). [more]
-
Personal
income tax is unstable: The largest source of state
revenue - the personal income tax is too volatile. The state is too
dependent on high income individuals continuing to earn high wages,
stock options and capital gains so state revenues don't drop.
While some argue that this is a good
thing because it means that tax revenues will track the economy, the
problem is a small number of individuals contributing a significant
amount of the tax base, which is risky for revenue stability.
[more]
-
E-commerce
issues: Most of our tax rules and systems today were
not designed with the electronic-commerce model in mind. E-commerce
raises tax issues not adequately addressed by existing rules and
presents some possible technological simplifications for tax
administration. There is not enough focus at federal and state
government levels on how tax laws and systems need to be modernized to
address e-commerce taxation issues. [more]
-
City
and state conflicts: Cities don't share in the state
income tax and are very dependent on sales tax revenues. So cities
tend to want big retailers that generate sales tax (and low-wage workers who
usually already have housing - they live with someone else) while the
state would prefer employers with a high-paid workforce (who tend
to need housing which is costly for cities to support).
-
Strategy
and accountability lacking: It is not clear from looking
at California's tax system and budget what California's goals are. For
example, in February 2009, the budget act included a single sales factor
to incentivize businesses to locate here, but also increased the sales
tax rate by one percentage point making it more costly to purchase
equipment in the state. Also, despite aggressive goals for reducing GHG
emissions, the budget bill removed a proposed 12 cent gasoline excise tax
increase. Accountability is also lacking in that it is not easy to find
out exactly how much the state and local governments are spending on
economic development and whether those dollars are having a positive
effect. A unified budget for economic development and other purposes
would enable lawmakers and the public to better understand state
spending. [more]
-
Chokeholds on the tax legislative process: California has
numerous budget problems which often lead to shortfalls and delays
in getting balanced budgets passed. California is one of just a few
states that requires a supermajority (2/3) vote in the legislature
to pass a budget and to increase any taxes. This results in
stalemates and the minority party having a lot of control. Another
budget problem is that the legislature doesn't control the entire
budget due to a variety of tax and spending restrictions, many of
which are constitutional provisions made by the voter initiative
process. For example, the legislature may not subject most
food to sales tax because voters added a constitutional provision
prohibiting it. Finally, there is a tendency to earmark new taxes to
specific spending when often, it is the type of spending (such as for
education or health care) that should be from the General Fund.