Regressive Tax Burdens - Brought To You By The California Legislature

With the unemployment rate soaring to double digits and less revenue flowing to the state, it was clear that some taxes would have to be raised in the last budget. To the extent I have criticized those taxes, it's because they are flat or regressive, increasing burdens on those with the least ability to pay. Via California Budget Bites, it turns out that it's even worse than I thought:

One of the last-minute changes to the budget agreement substituted a 0.25 percentage point increase in each of the state’s basic income tax rates in place of a 5.0 percent income tax surtax. The enacted change would increase each of the tax rates for two or four years, depending on whether the spending cap that will appear on the May special election ballot is approved by the voters. For example, the 4 percent tax rate would be 4.25 percent under the new law and the 9.3 percent rate would go to 9.55 percent. As discussed in yesterday’s blog post, the increase would be cut in half - to 0.125 percentage points - if the Treasurer and Director of Finance certify that the state will receive at least $10.0 billion in “flexible” funds from the federal economic recovery bill. In contrast, the proposal under consideration until the final night of budget negotiations would have required all personal income taxpayers to add an amount equal to 5.0 percent of their tax liability for the two- or four-year period.

Because of this seemingly minor change, lower-income households will experience a much larger tax increase than under the previously considered proposal. The tax liability of a married couple with a taxable income of $40,000 will rise by 12.9 percent under the enacted policy, as opposed to 5.0 percent under the proposal previously under consideration. In contrast, the tax liability of a married couple with a taxable income of $150,000 will rise by 4.0 percent under the final agreement, instead of 5.0 percent under the original surcharge proposal. High-income earners will experience the most significant change - their tax liability will only rise by 2.9 percent under the enacted policy.

It is somewhat likely that the stimulus trigger will be reached - we will know around April 1 when the Governor's Finance Director and Treasurer Lockyer make the decision. Still, this is an outrageous undermining of the public trust. We are essentially reacting to a yawning budget gap with taxes that mostly hit the middle class and below. That's true of the penny increase in the sales tax (which will now reach close to 10% in LA County) and it's true of this income tax increase. This is the conservative veto in action, folks. And it's not going to change until it's eliminated.