CALIFORNIA TAX SYSTEM: AN EVALUATION

An important educational issue is the California tax system.  One of the reasons is that to determine the best financial formula is complex.  It has to benefit and provide equity for school districts and the taxpayers.  The purpose of this blog is to illustrate the following:

  • A description of criteria evaluating the California tax system
  • The highest tax and why
  • The best tax for education

Description of criteria evaluating the California tax system

Mac Taylor, Legislative Analyst (2012), has five common economic criteria for evaluating tax system which I shall use.

  • Growth–Does revenue raised by the tax grow along with the economy of the program responsibilities it is expected to fund?
  • Stability–Is the revenue raised by the tax relatively stable over time?
  • Simplicity–Is the tax simple and inexpensive for taxpayers to pay and for government to collect?
  • Neutrality–Does the tax have little or no impact on people’s decisions about how much to buy, sell, and invest?
  • Equity–Do taxpayers with similar incomes pay similar amounts and do tax liabilities rise with income? (p.26).

Growth and stability

According to Rueben (2014), the last year that comprehensive data was available for California’s annual fiscal system was in 2003-04.  $54 billion was generated from the federal government while the remaining $214 million was financed through state and local government revenues.  Taxes accounted for 80 percent of the state’s share and about 45 percent of the local share.  The personal income tax (PIT),  the sales and use tax (SUT), corporation tax, (CT), and major motor vehicle-related levies are also part of California’s tax system.  Included among other state taxes are the insurance tax, alcoholic beverage tax, insurance, cigarette, lottery tax, fuel-related levies, disability and unemployment.  Some taxes are directed into trust funds and do not become part of the state revenues (Rueben, 2014).

Rueben (2014) further emphasizes that economic cycles that can and has influenced the growth and stability of state taxes.

The basic California current state tax system has been in place since the late 1920’s and the early 1930’s.  The depression led to the        adoption  of both PIT and the state  SUT…With the adoption of  Proposition 13, in 1978, the result was a significant reduction in                property  taxes and altered state-local fiscal relations.  The sales and use tax (SUT) is the second largest tax levied in California.         The SUT rates vary by county and locality.  California SUT revenues have increased at a healthy rate over the few years in 2005-           06.  For example, revenues increased 7 percent.  However, the tax performed poorly in the 2000’s during the recession.  These                   results have led to the following policy issues of the base-erosion.

Taxation is a system of transferring money from the private sector to the public sector of the economy (Brimley, Verstegen, and Garfield, 2012, p.136).  Furthermore, taxation is fairer and more dependable for financing education than the previously used rate bills, tuition charges, and student fees.  However, property tax is becoming less and less fair as people increasingly invest their surplus monies in other forms of wealth.  Personal property taxes are difficult to collect, and their use has proven to be somewhat ineffective.  Income taxes are probably the most equitable of all taxes, but their use at the local level is limited for two major reasons: (1) They are already used to a high degree by the federal government.  (2) It may be relatively easy for resisting taxpayers to find loopholes to avoid income tax (Brimley, Verstegen, and Garfield, 2012, p. 139).

Simplicity

There are five sources of funding for school district.  McLellan (2012) confirms that they are the lottery (1%), local miscellaneous (6%), federal (12%), and other (81%).  The other is composed from the State (59%; and local property tax 22%).  These five sources are not simple at all.  Not all people participate in the lottery.  Wiggins (2013) confirms that the one percent that is received from the lotteries must be divided among all of the school districts.  Even if more people play the lottery than others in one region, it does no matter.  Each school district receives the same funds.  Sales and property taxes vary in their amounts.  Each city differs in the taxes for its residents.  In addition, as mentioned before, there are vehicle and fuel taxes.  There are also the bank and corporation tax and insurance taxes.  California also receives federal funds to pass through for education (Leave no Child Behind; Rise to the Top).  McLellan (2012) further reminds us that with the new Local Control Funding (LDFF) 2014-15, that all districts in California receive the same amount per student, but with adjustments for demographics (low income, English learners, and/or foster youth), there’s additional income.

When all of the logistics are considered, California’s tax system is complex, far from simple!

Highest tax and why

Theoretically, taxes should be paid according to the ability of taxpayers to pay or according to the burden imposes on them.  Consider the question of taxpayer equity.  Local taxes for public education are determined by a fixed tax rate levied on the assessed value of real property.  Assessed value ranges from actual market value to a percentage of market value established by a taxing entity.  Consequently, a home and property with a certain market value would have an assessed value.  Individuals would pay the same amounts.  That at face value would seem fair, but this does take into consideration the complete or lack of ownership, the varying amounts on loans or mortgages that affect their abilities to pay taxes (Brimley, Verstegen, and Garfield, p. 62).  Thus, it is the taxpayer who pays property taxes that shoulders the responsibility of paying the highest taxes!

Lowest tax and why

California Tax Reform Association (2012) reports “many of the richest corporations in the world are paying extremely low property taxes on their land, taxes far below anywhere else in the country.  Proposition 13 was designed to keep property taxes from rising faster than the incomes of homeowners.  For Silicon Valley companies it has been the reverse: Prop. 13 has kept property taxes at a trivial level for many companies whose incomes and revenues have exploded since their land was last assessed.  One significant finding:  By far the largest disparities in assessment value are in land values.  Many hundreds of acres of prime commercial land are assessed at rates from a generation ago.  Change of ownership allows loopholes by which property never changes ownership.  Under Proposition 13, property is re-assessed upon “a change in ownership.”  When property is purchased outright or re-constructed, it is reassessed.  Initial public offerings (IPOs) by which closely-held companies sell the vast majority of their ownership interests do not legally generate re-assessment upon change of ownership.  Once public-traded, they will never be reassessed. CTRA (2012, p.3-4).

Comparing who pays the highest or the lpowest taxes, is it fair?  Tax Foundation economist Scott Drenkard put it in layman terms: “those states in the top 10 are states where they’re not really capable of exporting their tax burden–they don’t have mineral resources, but they ‘re also high-tax states in general.”  Of the ten states with highest tax burden, seven were among the largest tax collectors relative to population size (Sauter,B., Weigley,S. & Hess, E.M., 2012).

Neutrality and equity

The key component is the impact on people when they are taxed.  It is difficult to assume neutrality for various reasons. Brimley, Vertegen, and Garfield (2012) provide excellent reasons why neutrality should be considered only after analyzing the benefits of education.  The benefits vary with the amount of education.  Early elementary education–basic reading, writing, and math skills–aids society enormously.

Through elementary education, society acquires voters who are better informed, patients who are better able to take advantage             of  health services, and individuals who more readily communicate.  Marketable skills are acquired later, in secondary and                    higher education.  In college and graduate and professional schools, the individual benefits by acquiring marketable skills and            captures the larger share of the returns from education. (Brimley, Vertegen, and Garfield, 2012, p. 17).

The best tax for education

The best tax for education is still not an easy solution to come by.  Kozol (2010) emphasizes that “we ought to finance the education of every child in America equitably with adjustments made only for the greater or lesser needs of certain children.  And the following should all come from the collective wealth of our society.”  Linda Darling-Hammond (2007) portrayed the problem in these terms:

Throughout two centuries of slavery, a century of court-sanctioned discrimination based on race, and half century of                                    differential access to education by race, class, language background, and geographical location, we have become accustomed in            the United States to education inequality.  While we bemoan the dramatically unequal educational outcomes announced on the              achievement gap, as a nation we often behave as though we were unaware of–or insensitive to–the equally substantial                                inequalities in access to educational opportunity that occur from preschool through elementary and secondary education, into              college and beyond.

Linda J. Stiles (1974) makes the compelling argument that equity in support of the education program does provide equal opportunities but does not always produce equal learning.

Many factors bear upon how well any individual student will take advantage of educational opportunities that it is almost                      impossible to prove that equalizing school expenditures will make a difference, particularly for those who need help most.  We               know that the qulity of education a school provides is not always related on a one-to-one ratio to per-pupil costs.  Some school                districts with modest means–because of such factors as geographical location, community attitudes, philosophy of education,               leadership, or personal policies–are able to attract and retain good teachers and administrators.  The curriculum instructional           resources and strategies, as well as disciplinary standards of a school all contribute to educational productivity.

After having this compelling discussion on this blog, consequently, the equity question is still an issue.  More data needs to be assessed.  Unless mandated, there appears to be limited interest in collecting and providing local-level finance information.  Taxes are classified into three general types:  proportional (the same percentage of income spent for taxes for all levels of income), progressive (a higher percent of income spent for taxes from higher income individual, and regressive (a lower percent of income spent for taxes from higher income individuals).  It is generally thought that progressive is the most equitable and regressive taxes the least equitable (Brimley, Vertegen, and Garfield, p. 80).  I still believe that the tax issue is complex.

Court decisions further enhances the discussion that continues in funding our schools.  Wesley Smith, Executive Director of Ed Cal (2014) states after the following excerpt from Ed Cal (2014) was published:

In the Vergara decision, Treu ruled current states on permanent employment, dismissal procedures and “last-in, first-out” layoffs are unconstitutional and deprive students taught by inadequate teachers of a quality education.  The ruling continues a progression of ground-breaking educational decisions: Brown v. Board of Education guaranteed education regardless of race; Serrano v. Priest guaranteed equal funding; and Butt v. State of California provided for equal educational opportunities.  Now Vergara has take up the mantle for quality,  which Smith said is an issue that must be focused on.

“The decision in this case is a wake-up call that can’t be ignored,” he said.  “It puts everyone in education on notice that we need to work together to develop a system that works for our current and future students.”

This is yet another education issue that does relate to financial stability when it comes to educating our children.  And yet, let us not give up hope.  There are potentially new equitable ways of raising taxes for our school district.  E-Commerce and internet sales could generate monies for the schools.  The value-added tax in which a tax is put on the value of goods at each transaction level,  from production to consumption, would also be beneficial.  The severance tax is used to put taxes on removal of natural products from land.  Districts are also being given more local control with the new Local Control Funding Formula (LCFF).

I conclude with a statement that is the focus of  financing our educational system in California.  “A new vision is needed of finance systems that create patterns of justice and fairness for all children and youths.  State finance systems have not changed appreciably in almost a century (Devorah A. Verstegen and Vern Brimly, Jr., 2010).

Our democratic society depends on it!

References:

Brimly, V., Garfield, R. & Verstegen, D. (2012). Financing education in a climate of change.  Boston: Pearson, Inc.

Education California (Ed Cal). (2014, June). Vergara ruling breaks ground on quality:  ACSA efforts on future.  Vol. 44, (32) p.1.

Goldberg, L.  Kersten, D. (2012).  High tech-low tax:  How the richest Silicon Valley corporations pay incredibly low taxes on their                land.

McLellan, T. (2013, June). Dollars & sense: New Local Control Funding Formula proposal:  Major reform of school finance system is        likely. Vol. 2 (2).

McLellan, T. (2014). Overview:  Current system for funding public education in California. Notes from EDD 705 sustained fiscal                  leadership for organization reform.

Rueben, Kim. (2014).  Recent changes in educational finance. Urban Institute.  State and local finance initiative.

States with the highest and lowest taxes. Retrieved from                                             http://www.usatoday.com/story/money/personalfinances/2012/10/28/states-taxes-stateshigher

Taylor,M. (2012, November).  Understanding California’s property taxes. Legislative analyst’s office (LAO).

 

 

 

 

 

 

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