“California’s fiscal problems go well beyond the design of its tax system, but its tax system has certainly contributed to these problems” (Auerbach, 2010). It is a very complex system. There are 6 different taxes: Corporate Income, Sales and Use, Property, Personal Income, Unemployment Insurance, Disability Insurance and Workers Compensation Insurance.
Corporate Income Tax: California’s tax system uses a method known as unitary.
It determines the portion of income reasonably attributable to the state and thus subject to the Bank and Corporation Franchise Tax. The Appointment Formula equals the percentage of unitary income subject to California’s corporate tax:
California Payroll California Property California Sales California Sales
(percent) + (percent) + (percent) + (percent)
Shasta EDC’s website disclosed, “… January 1, 2011 California businesses will have the option to select a Single Sales Factor. This allows companies to choose to weigh only sales made in the state- not property or payroll- to determine corporate taxes owed” (http://www.shastaedc.org).
Sales and Use Tax: According to Shasta EDC’s website, California sales and use tax has 3 parts: state tax rate, local tax rate and a district tax rate. “Sales tax is imposed at the point of sale. It is the responsibility of the retailer, but paid by the purchaser. Use tax is paid on items purchased for the intent of use in California. Intent of use is defined as used in California within 90 days of purchase” (http://www.shastaedc.org).
Property Tax: Auerbach (2010) states “…property taxes raise a smaller share of income in California than they do for the United States as a whole. This is more remarkable given the very high property values in California; if taxes were levied at the same effective rates in California and the United States as a whole, then the property tax-income ratio would be higher in California than in the United States.” California’s average property tax rate is 1.1%, but uses a parcel basis varies.
Personal Income Tax: “In summary, California’s individual income tax contributes to the volatility of California’s revenues both because the income tax is procyclical to begin with, ad also because of its progressivity and its heavy reliance of particularly volatile sources of income” (Auerbach, 2010).
Unemployment Insurance: “All employers are required to pay into the Unemployment Insurance Fund… new employers are required to pay a rate of 3.4% on the first $7,000 in wages for up to three years. There is a maximum of $434 per employee, per year”(http://www.shastaedc.org).
Disability Insurance: “The State Disability Insurance withholding rate for 2014 is 1.0%. The taxable wage limit is $101,636 for each employee per calendar year. The maximum to withhold for each employee is $1,016.36” (http://www.shastaedc.org).
Workers Compensation Insurance: In 2005, landmark reform legislation known as SB 899 overhauled the system and required primary medical reviews for individuals, establish employer selected doctor networks and introduced uniform standards. “As a result, insurance capital has flowed into the state and new insurers have entered the market. According to the Department of Insurance, base rates have fallen over 35% since January 2004” (http://www.shastaedc.org).
In summary, California has a complex tax system and all citizens owe taxes in some form or fashion. “Most states still use the income tax, sales tax and property tax as their most reliable and lucrative sources of revenue. A combination of these state and local taxes ultimately define the overall tax burden for an individual. The tax burden expresses the relationship between an individual’s income and taxes paid in percentage terms” (Brimley, Verstegen & Garfield, 2012). This is not equitable for taxpayers and in order to achieve adequacy, nuisance taxes that provide a minimum amount of revenue should be avoided. The lowest (varying) tax rate is property taxes at 1.1%. Personal Income Tax is the highest tax ranging from 1.25-10.55% (http://www.shastaedc.org). Auerbach (2010) confirms, “Individual income taxes are more important and property taxes less important in California than the typical state (p. 11). “Overall, 30.1% of state- local taxes come from property taxes, 23.5% from general sales taxes, 10.9% from selective sale taxes, 22.65% from individual income taxes, 4.7% from corporate income taxes, and 8.2% from licenses and other fees, often referred to as privilege taxes” (Brimley, Verstegen & Garfield, 2012).
Auerbach, A. J., 2010. California’s future tax system. Presented at “Too Big to Fail? Reforming California’s
Constitution for the 21st Century” conference held at USC, February 16-17, 2010.
Brimley, V., Verstegen, D. A., Garfield, R. (2012). Financing education in a climate of
change, 11th edition.