California's Tax System: a Visual Guide

C A L I F O R N I A ’ S T A X S Y S T E M L E G I S L A T I V E A N A L Y S T ’ S O F F I C E 2 I N T R O D U C T I O N California’s state and local governments rely on three main taxes. The personal income tax is the state’s main revenue source, the property tax is the major local tax, and the state and local governments both receive revenue from the sales and use tax. In addition, many smaller taxes raise revenue for state and local government operations. In 2015-16, taxes in California raised a total of $220 billion—equal to nearly 10 percent of the state economy. The chart to the right summarizes this tax system. The inner black pie chart shows that roughly two-thirds of tax revenues in California go to the state government with the other one-third collected by local governments. The middle ring shows each tax as a share of the whole system. (Note that the line from the inner black pie chart intersects with the sales and use tax segment to show the shares of sales tax revenue that go to the state and to local governments.) The outer ring breaks out each major tax by source. For example, the biggest source of personal income tax revenue is wage and salary income. In addition to taxes, the state and local governments rely on federal funds, fees, and other sources of revenue to fund government operations. This publication, however, focuses solely on taxes levied in California. LAO California’s Tax System | Overview 3 OVERVIEW OF CALIFORNIA’S TAX SYSTEM 2015-16 O w R e s O w R n e e s r i - d O e c n c ti u a p l ied n e r-O c c u i p d i e e n d tia l N o t Wa ges an d Salaries Commercial/Industrial Property Tax P I e n r c s o o m na e l Tax Retirement Income Local D In i t v e id re e s n t d , s a , n d Rent Vehicle License Fee Other Other Local Taxes State Business Income C Property B T u U r P H s a t a i i n o n l y i s t t e r e i f o e s e ls s s l r l Construction an O d B t h R u e e s a r in l N E e o s s t n s a W e - te R s h e o M t le a an s il u a f l a e c r t s u O r t i h n e g r R et a B i a l e r s r R s a e n s d t a C u l ot r hi a n g G n a e n t n d s e A r c a c M e l s e s o r c ri e h s a S n t o d r i e s s e S S t o a r e l e s s U a n s e d T a x G a s oli n e St ati o n s F o o d a n d B e v er a g e St or e s g M at eri al s a n d G ar d e n S u p pli e s e c n a ilp p A O d n a ,s t c in h o rtc e e lE ,s g r n ih F S u e t l a c e i t h e e l V s r T r e T o l a a to e a x M D e x s s tr o e a P s d r n a p o ratio n D ie T s a e G l x , a a so n d lin O e , th e r C o rp o ratio O T I A n n th s o l C e s c r b u a o E a n p r h t a c i i t t o ie n c a s l l c o i c G e T a B T a in e a x s O v x e e t s h r e a r ge Tax n s di in B uil ru F e m o H ,e ru tin ru F LAO California’s Tax System | Overview 4 C H A P T E R 1 LAO California’s Tax System | Personal Income Tax (PIT) 5 P E R S O N A L I N C O M E TA X The personal income tax (PIT) is a broad-based tax that the state levies on most types of income, such as wages and capital gains. The PIT is an important revenue source for the state government, generating over two-thirds of the revenue for the General Fund— the state’s main operating account. In recent years, the PIT has generated more revenue than any other tax in California’s tax system. LAO California’s Tax System | Personal Income Tax (PIT) 6 ABOUT TWO-THIRDS OF INCOME COMES FROM WAGES AND SALARIES 2015 Capital Gains $118 Billion Wages and Salaries Pensions, Business Annuities, Income and IRA (Multiple $898 Billion Distributions Owners) $102 Billion $88 Billion Dividends, Business Interest, Income and Rent (Sole Owner) $56 Billion $53 Billion HOW DO PIT RATES WORK? Marginal and Effective Tax Rates, Single Filer, 2017 Personal income tax rates are marginal, meaning that higher income increments are taxed at higher rates. For example, a single filer with taxable income of $300,000 is taxed at 1 percent on the first $8,000 of their income, but 10.3 percent on the last $31,000 of their income. A taxpayer’s highest marginal rate is higher than their effective rate (the average rate at which their income is taxed). For example, a single filer with $100,000 in taxable income is taxed at 9.3 percent on their last dollar of income but their effective tax rate (before tax credits) is 6.7 percent. 14% Marginal Income 12 Rate Between Marginal Rate 1% $0K - $8K 10 2% $8K - $19K Effective Rate 4% $19K - $30K 8 6% $30K - $42K 8% $42K - $53K 6 9.3% $53K - $269K 4 10.3% $269K - $322K 11.3% $322K - $537K 2 12.3% $537K - $1M 13.3% $1M and Over 100,000 200,000 300,000 400,000 500,000 600,000 700,000 $800,000 LAO California’s Tax System | Personal Income Tax (PIT) 7 CALCULATING THE Step 1 Add up Income PERSONAL INCOME TAX BILL $60K in Wages $30K in Business Income $90K Adjusted Gross Income Married Couple With One Dependent Filing Jointly, 2017 Step 2 Add up Deductions Almost two-thirds of all filers take the standard deduction $8K in Mortgage Interest Do itemized $5K in Local Property Taxes deductions exceed $2K in Student Loan Interest $8,472 standard deduction? $15K Itemized Deductions Marignal Income Rate Between 1% $0-$16K Yes: take No: take 2% $16K-$39K itemized standard 4% $39K-$62K 6% $62K-$85K Step 3 Step 4 Calculate Taxable Income Apply Tax Rates in Table Above Step 5 Add up Tax Credits $90K Adjusted Gross Income First $16K Taxed at 1% = $164 $400 Child Care Tax Credit $15K Itemized Deductions Next $23K Taxed at 2% = $451 $114 X 2 Personal Exemption Credit Next $23K Taxed at 4% = $902 $353 Dependent Exemption Credit $75K Taxable Income Next $23K Taxed at 6% = $808 $981 Total Tax Credits Tax Liability Before Credits $2,325 Step 6 Calculate Tax Liability Tax Liability Before Credits $2,325 Filers Itemizing Deductions Tend to Be Higher-Income Taxpayers Minus Credits -$981 Standard Itemized Final Tax Bill = $1,344 100% 75 50 25 0-50K 50K-100K 100K-200K 200K-500K 500K-1M 1M-5M Over $5M LAO California’s Tax System | Personal Income Tax (PIT) 8 BREAKDOWN OF DEDUCTIONS In Billions, 2015 PIT deductions reduce taxpayers’ taxable incomes. In total, deductions reduced taxable income by about $200 billion in 2015. About $7 billion of the deductions shown here went unused because itemized deductions are phased out for high-income taxpayers. Standard $60.7 Deduction Mortgage $52.9 Interest Property $30.1 Taxes Charitable $30.0 Contributions Business and $20.4 Other Expenses Medical $10.6 Expenses Other $4.3 50% 25 LAO California’s Tax System | Personal Income Tax (PIT) K02$ - K0$ K05$ - K02$ K001$ - K05$ K002$ - K001$ K005$ - K002$ M1$ - K005$ revO dna M1$ WHO USES DEDUCTIONS? Share of Deduction Value by Income Group, 2015 Standard Deduction Mortgage Interest Charitable Contributions Property Taxes Medical Expenses Business and Other Expenses 9 BREAKDOWN OF CREDITS In Billions, 2015 Dependent Credit $4.0 Personal Credit $2.3 Blind and Senior $0.4 Credit Enterprise Zones $0.3 EITC $0.2 Renter's Credit $0.1 Other $1.1 EITC 100 WHO USES CREDITS? Dependent Credit Personal Credit 50% 25 Enterprise Zones 66 Renter’s Credit Blind and Senior Credit 55 LAO California’s Tax System | Personal Income Tax (PIT) K02$ - K0$ K05$ - K02$ K001$ - K05$ K002$ - K001$ K005$ - K002$ M1$ - K005$ revo dna M1$ PIT credits reduce tax liabilities dollar for dollar, resulting in a dollar-for-dollar reduction in state revenue. With the exception of the Earned Income Tax Credit (EITC), credits cannot reduce a taxpayer’s liability below zero. For this reason, the amount of credits shown in the chart is about double the amount of credits actually used by taxpayers to reduce liability. Share of Credit Value by Income Group, 2015 10 PIT LIABILITY CONCENTRATED AMONG TOP EARNERS Tax Statistics by Income Group, 2015 Share of Tax Returns Share of Adjusted Gross Income Share of Tax Liability $0 to $20K 27.7% 3.7% 0.1% $20K to $50K 31.0% 13.0% 2.0% $50K to $100K 21.2% 19.1% 8.6% $100K to $200K 12.9% 22.4% 18.0% $200K to $300K 3.2% 9.8% 10.7% $300K to $500K 1.7% 8.3% 10.6% $500K to $1M 0.8% 6.9% 10.3% Over $1M 0.4% 19.4% 39.6% Over Half of PIT Liability for Over $1 Million Group Paid by Filers With Adjusted Gross Income Over $5 Million 21% 10% 7% 5% 57% $1M $2M $3M $4M Over to 2M to 3M to 4M to 5M $5M LAO California’s Tax System | Personal Income Tax (PIT) 11 INCOME MAKEUP DIFFERENT FOR LOW- AND HIGH-INCOME TAXPAYERS 2015 The graphic below shows how taxpayers in different income groups derive their income. Some types of income, including wages and salaries and retirement income (pensions, annuities, and IRA distributions) make up the majority of low- and middle-income taxpayers’ incomes. These sources, however, account for a minority of the total incomes of the highest-income taxpayers, whose incomes are derived mostly from capital gains, partnership income, and dividends, interest, and rent. (All other income—mostly proprietors’ income—is shown in grey.) 100% 75 50 25 0-40K 40K-70K 70K-100K 100K-150K 150K-200K 200K-300K 300K-400K 400K-500K 500K-1M 1M-2M 2M-3M 3M-4M 4M-5M Over $5M HIGH-INCOME TAXPAYERS RELY MORE ON VOLATILE INCOME SOURCES Total Percent Change, 2015 Dollars 250% 250% Partnership Capital Gains 200 200 Income 150 150 100 100 Retirement Income 50 50 Wages and Salaries Dividends, Interest, and Rent -50 -50 1996 2001 2006 2011 2015 1996 2001 2006 2011 2015 LAO California’s Tax System | Personal Income Tax (PIT) 12 PIT MORE VOLATILE THAN PERSONAL INCOME Annual Percent Change As the state’s main revenue source, the highly volatile PIT results in revenue uncertainty, thus complicating state budgeting. (Personal income is an overall measure of the economy that includes individuals’ wages, business income, and various other types of income, but that excludes capital gains income.) 40% 30 Personal Income Tax 20 10 Personal Income -10 -20 -30 1997 2002 2007 2012 CAUSES OF PIT VOLATILITY Average Deviation, 1990 to 2014 Average deviation (AD) is a measure of revenue volatility. With an AD of 12.2, the PIT is over five times more volatile than personal income (2.3). About 40% of the higher volatility is due to the state’s choices about which types of income to tax. Another 40% is due to taxing higher income at higher rates. The last 20% comes from PIT credits and deductions, which mostly reduce the relatively stable part of the tax base. 15 10 5 Volatility of Definition of Graduated Credits Volatility of PIT Personal Income PIT Base Rate Structure and Deductions LAO California’s Tax System | Personal Income Tax (PIT) 13 WITH VOLATILITY COMES GREATER REVENUE GROWTH The top 1% of taxpayers typically pay between 40% and 50% of the PIT. Their incomes are highly volatile, which has contributed to PIT volatility. On the other hand, their incomes also have grown more than any other group of taxpayers. This has contributed to PIT growth. Bulk of Income Growth Has Gone to High-Income Taxpayers... Adjusted Gross Income Per Return by Income Range, Total Percent Change, 2015 Dollars 125% 100 75 Top 1 Percentile 50 95th to 99th 25 90th to 95th 80th to 90th Bottom Four Quintiles -25 1996 2001 2006 2011 2015 ...Which Has Contributed to PIT Revenues Growing Much Faster Than Revenues From Other State Taxes Total Percent Change, 2015-16 Dollars 150% 125 100 Personal Income Tax 75 50 Sales and Use Tax 25 Corporation Tax -25 1996-97 2001-02 2006-07 2011-12 2015-16 LAO California’s Tax System | Personal Income Tax (PIT) 14 VOLATILITY OF THE PIT BASE State law specifies which types of income are subject to the personal income tax. In general, California has chosen to tax relatively volatile types of income, as illustrated by the chart on the next page. The boxes are shaded by their volatility measure (average deviation). An item with a measure of 6 is twice as volatile as an item with a measure of 3. Personal income is an economic statistic that includes most types of income. Different portions of personal income are subject to tax. Some portions of personal income are more volatile than others. For example, the portion of dividends, interest, and rent flowing to the PIT base is more volatile (darker) than the portion not in the PIT base. California also chooses to tax some types of income not included in personal income. In particular, capital gains income, with a volatility measure of 35, is more than twice as volatile as any other part of the PIT base. Overall, the PIT base is almost three times as volatile as personal income. LAO California’s Tax System | Personal Income Tax (PIT) 15 PIT BASE MORE VOLATILE THAN PERSONAL INCOME Average Deviation, 1990-2014 Average Deviation Items Not in Under 3 Personal Income 3.1 - 6 Capital Gains Personal Income 6.1 - 9 Pensions and IRA Distributions Tax Base 9.1 - 12 Over 12 Capital Gains Pensions and IRA Distributions Components of Personal Income Wages and Salaries Wages and Dividends, Interest, and Rent Salaries Proprietor and Partnership Items Not Included in Dividends, PIT Base Interest, Wages and Salaries and Rent Proprietor and Dividends, Interest, and Rent Partnership Proprietor and Partnership Transfer Payments Transfer Payments Employer-Paid Benefits Employer-Paid Benefits Within these broad categories, some components of personal income are in the tax base and others are untaxed. For example, interest earned from corporate bonds is taxed but interest earned from municipal bonds is untaxed. LAO California’s Tax System | Personal Income Tax (PIT) 16 HIGHER INCOMES CONCENTRATED IN BAY AREA 2013 The graphic below shows how incomes by county compare to the statewide average. A blue shade indicates that a county has fewer taxpayers in that income range, a yellow shade indicates the county is near the statewide average, and an orange shade indicates they have more taxpayers in that range. Compared to the statewide average, Marin county has 4.6 times more taxpayers in the over $1 million range, the most of any county. Legend 12.5 Times Less Frequent Equal to State Average 4.6 Times More Frequent Than Statewide Average Than State Average Region County $0 to $15K $15K to $30K $30K to $50K $50K to $80K $80K to $150K $150K to $300K $300K to $500K $500K to $1M Over $1M Alameda Contra Costa Marin Napa Bay Area San Benito San Francisco San Mateo Santa Clara Solano Sonoma Los Los Angeles Angeles Orange Ventura San Diego San Diego Monterey Central San Luis Obispo Coast Santa Cruz Santa Barbara El Dorado Sacramento Placer Sacramento Yolo Fresno Kern San Kings Joaquin Madera Valley Mariposa Merced San Joaquin Stanislaus Amador Butte Calaveras Colusa Del Norte Glenn Humboldt Imperial Inyo Lake Lassen Mendocino Rest of State Modoc Mono Nevada Plumas Shasta Sierra Siskiyou Sutter Tehama Trinity Tulare Tuolumne Yuba Inland Riverside Empire San Bernardino LAO California’s Tax System | Personal Income Tax (PIT) 17 BAY AREA CONTRIBUTES DISPROPORTIONATELY TO PIT 2014 50% 40 30 20 10 10 20 30 40 50 60 70 80 90 100% PIT PAID BY BAY AREA MORE VOLATILE THAN REST OF STATE Average Deviation, 1996-2014 Average deviation (AD) is a measure of revenue volatility. With an AD of 16.3, personal income tax paid by Bay Area residents from 1996-2014 was over 40 percent more volatile than for tax paid statewide (11.4). LAO California’s Tax System | Personal Income Tax (PIT) diaP xaT emocnI lanosreP fo tnecreP Per Capita Taxes Paid by Region The Bay Area pays nearly 40% of the PIT but only makes up 20% of population. Bay Area By contrast, Los Angeles’ tax paid (34%) Los Angeles is closer to its share of the population (36%). Bay Area San Diego Central Coast Los Angeles Sacramento Central Valley Rest of State Inland Empire 500 1,500 2,500 $3,500 San Diego San Sacramento E In m la p n ir d e J V o a a l q le u y in C C e o n a t s ra t l S R t o e a f s te t Percent of Population Bay Area 16.3 Central Coast 12.0 Statewide 11.4 San Diego 10.0 Los Angeles 9.2 Rest of State 7.5 Sacramento 7.4 San Joaquin Valley 7.0 Inland Empire 6.9 18 C H A P T E R 2 LAO California’s Tax System | Property Tax 19 P R O P E R T Y TA X For many California taxpayers, the property tax bill is one of the largest tax payments they make each year. For thousands of California local governments—K–12 schools, community colleges, cities, counties, and special districts— revenue from property tax bills represents the foundation of their budgets. Cities, counties, and special districts use property tax revenues to support municipal services like police, fire, and parks. Property tax revenue remains in the county in which it is raised. Property taxes are levied by local governments on real property (principally land and buildings), as well as some types of personal property, which includes business property (like manufacturing equipment), aircrafts, and vessels. Proposition 13 (1978) limits the property tax on real property to 1 percent of assessed value. Under Proposition 13, assessed value for real property is limited to the price paid for the property increased each year by 2 percent or inflation, whichever is lower. In contrast, personal property is taxed based on its market value. In 2016-17, statewide property tax revenues were about $60 billion. LAO California’s Tax System | Property Tax 20 WHAT IS SUBJECT TO THE PROPERTY TAX? 2016-17 This figure shows the assessed value of each type of property subject to the property tax. In most cases, county assessors determine the value of property within the county. For a subset of property—like natural gas pipelines—the state determines the value of the property. Statewide, the assessed value of taxable property is over $5.7 trillion. Single Family Homes $2.9 Trillion Personal Property $203 Billion Watercraft $6 Billion Vacant Land $115 Billion Multifamily State Assessed $103 Billion and Condos Commercial $939 Billion and Industrial $1.1 Trillion Agricultural and Rural Land $101 Billion Aircraft $19 Billion Oil, Minerals, and Gas $22 Billion LAO California’s Tax System | Property Tax 21 SAMPLE ANNUAL PROPERTY TAX BILL Secured Property Tax for Fiscal Year July 1, 2016 to June 30, 2017 Property Owner Information Detail of Taxes Due Property ID: 1234567 Agency Rate Amount Mailing Address: General Tax Levy 1.0000 $3,500.00 Doe, Jane 1234 ABC Street Voter-Approved Debt Rates Sacramento, CA 00000 City 0.0201 $70.35 Water District 0.0018 6.30 School District 0.1010 353.50 Community College District 0.0102 35.70 Property Valuation on Jan 1, 2012 Direct Levies Sidewalk District Assessment $9.36 Flood Control District Assessment 64.39 2016-17 Roll Assessed Value Street Lighting District Assessment 12.71 Mello-Roos District 86.51 Land $115,000.00 School District Parcel Tax 125.00 Improvements $242,000.00 Total Taxes Due $4,263.82 Total $357,000.00 Less Exemptions $7,000.00 1st Installment $2,131.91 Net Assessed Value $350,000.00 2nd Installment 2,131.91 Exemptions Total Payment Certain exemptions can reduce County tax collectors divide a property’s assessed value. The properties’ total tax bill into two most common is the homeowner’s payments. The first payment is exemption, which reduces an due by December 10th and owner-occupied home’s assessed the second payment is due by value by $7,000. April 10th. Many homeowners pay their property taxes as part of their monthly mortgage and their mortgage servicer pays the county Taxable Value on the homeowners’ behalf. Each year, county assessors determine each property’s assessed value, Other Taxes and Charges which includes the value of both land Local governments may levy and buildings. Assessed value typically other charges on property that is based on a property’s purchase are not ad valorem taxes. Often, price. In the year a property is these charges are based on purchased, it is taxed at its purchase the benefits the propertyowner price. Each year thereafter, its assessed receives from the service value is increased by inflation or or improvement. 2 percent, whichever is lower. Upon resale, it is again taxed at its purchase price. If a property’s market value dips Ad Valorem Taxes below its inflation-adjusted purchase Taxes based on the value of price, it is typically taxed on its market property are known as ad valorem value instead. taxes. Proposition 13 capped the ad valorem property tax rate at 1 percent plus voter-approved add-on rates to for certain debt repayments. LAO California’s Tax System | Property Tax 22 THE LIFE OF A HOUSE This graphic shows the value of a hypothetical home over time to demonstrate how different transactions and changes to a property affect a property owner’s tax bill. Market Value The price the home could be sold for. Assessed Value The basis of the property owner's tax bill. 2008: Decline in Value The home's market value dips below its inflation-adjusted purchase price. Proposition 8 (1978) allows the home to be temporarily assessed based on its market value instead. 1988: Transfer to Child 1978: Proposition 13 A property transfer typically Proposition 13 (1978) requires a triggers a reassessment. However, home's assessed value to be based Proposition 58 (1986) allows the on its purchase price, increased by home to transfer from the owner to up to 2 percent per year for inflation. the child without a reassessment Whenever it is sold, it is again taxed to market value. at its purchase price. Proposition 13 also rolled back assessed values to their 1975 levels. 2014: Recovery The home's market value recovers and it is again taxed at its inflation-adjusted purchase price. SSOOLLDD 2005: Home Sold 1985: Bedroom Added The home is sold and The addition of a bedroom 1970: Home Purchased reassessed to market value, increases the home's assessed From 1970 to 1977 the significantly increasing the value to reflect the added market home is taxed based on tax bill. value of the bedroom but not that its market value. original home. LAO California’s Tax System | Property Tax 23 NEIGHBORS OFTEN FACE DIFFERENT TAX BURDENS This map shows the property taxes paid per $100,000 of market value for homes in a Los Angeles zip code in 2015. Property taxes are based on the assessed value, which typically grows more slowly than market value. Because of this, significant differences arise among property owners solely because they purchased their properties at different times. Property Taxes Per $100,000 of Market Value Greater Than $800 $600 to $800 $400 to $600 $200 to $400 Less Than $200 LAO California’s Tax System | Property Tax 24 TWO FACTORS DRIVE FUNDING FOR MUNICIPAL SERVICES Per Capita Assessed Value, 2016-17 Del Norte Property tax funding for municipal services— Tulare such as police, fire, and parks—generally is Imperial higher in counties with higher assessed values. Yuba Municipal services funding also depends on Fresno the share of property tax revenue allocated to Kings Tehama municipal services relative to schools. While Merced schools’ shares vary across counties, the state Stanislaus allocates funding to schools to equalize these Madera differences. Lassen Butte Assessed Value of Property San Joaquin Humboldt Municipal Services Schools Sutter Shasta San Bernardino Sacramento Kern Lake Siskiyou Glenn Riverside Trinity Solano Modoc Yolo Mariposa Mendocino San Benito Tuolumne Los Angeles Calaveras Monterey Ventura Amador San Diego Santa Cruz Alameda El Dorado Sonoma While Contra Costa and Orange have Contra Costa similar property tax bases, Orange has Orange less available for municipal services. Santa Barbara Colusa Nevada Placer Sierra San Luis Obispo Plumas Santa Clara Inyo San Francisco Napa San Mateo Marin 50,000 100,000 150,000 200,000 250,000 $300,000 LAO California’s Tax System | Property Tax 25 REVENUE FOR MUNICIPAL SERVICES VARIES WIDELY North Counties This graphic shows the per-person property Trinity taxes available within each county in 2015-16 Del Norte Siskiyou for counties, cities, and special districts. The Humoldt Modoc Shasta Lassen amount of funding available in each county Plumas Mendocino reflects the level of municipal services that Tehama Lake Sierra Sacramento Area residents can expect to receive from their local Glenn Butte Colusa Nevada governments. Sutter Yuba Placer Yolo Sacramento El Dorado Sonoma Solano Amador Napa Marin San Joaquin Valley Contra Bay Area Costa San San Joaquin Francisco Alpine Calaveras Stanislaus San Alameda Tuolumne Mateo Mariposa Mono Merced Madera Inyo Santa Clara Fresno Tulare Inland Empire Kings San Benito Kern Santa San Bernardino Cruz Central Coast Riverside Monterey Per-Capita Revenue Less Than $410 San Santa Luis $410 - $520 Obispo Barbara $520 - $640 $640 - $890 Ventura Orange Over $890 Los Angeles Los Angeles Area Population 50,000 250,000 San Diego Area 1,000,000 San Diego Imperial LAO California’s Tax System | Property Tax 26 PROPERTY TAX MORE STABLE THAN PERSONAL INCOME TAX Annual Percent Change Stable—or predictable—revenues allow governments to provide consistent levels of service. The property tax— the largest single source of local government revenue—is a stable revenue source compared to the personal income tax, which is the state’s largest single source of revenue. 30% Personal Income Tax 20 10 -10 Property Tax -20 -30 1980 1985 1990 1995 2000 2005 2010 2015 PROPERTY TAX HAS GROWN SINCE PROPOSITION 13 Governments ideally rely on revenue sources that grow sufficiently to cover any increases in the costs of providing services. Some argue that the property tax has not grown sufficiently to cover local government costs since the passage of Proposition 13 in 1978. Others argue property tax revenues have grown substantially since 1978. Below, we present two ways of measuring property tax revenue growth. Per Person Inflation-Adjusted (2015-16) Dollars As Share of California Economy (Personal Income) Proposition 13 Proposition 13 $2,000 7% 6 1,600 5 1,200 4 3 800 2 400 1 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 LAO California’s Tax System | Property Tax 27 PROPERTY TAXES ON VEHICLES STOP California levies a variety of charges on vehicles. Two of the larger ones—the vehicle license fee (VLF) and the transportation improvement fee (TIF)—effectively are property taxes on vehicles Total Tax = $187 (but exempt from Proposition 13). Both taxes are levied on the car’s depreciated value. Revenue from the VLF ($2.6 billion in 2016-17) goes to cities and counties for health and human services and law enforcement programs. Revenue from the TIF ($1.5 billion projected in 2018-19) goes to state and local agencies for transportation programs. VLF TIF Vehicle Transportation License Fee Improvement Fee TIF Schedule Value of Vehicle Annual Fee $0 to $5k $25 $5k to $25k $50 Determine the TIF owed. $25k to $35k $100 $35k to $60k $150 Apply the 0.65% VLF rate Find the fee in the chart to Over $60k $175 the right that corresponds $21,070 X 0.65 = $137 to the vehicle value ($21,070) = $50 SSTTAARRTT DDEETTEERRMMIINNEE VVEEHHIICCLLEE''SS VVAALLUUEE Depreciation Schedule IInn tthhee ffiirrsstt yyeeaarr aa vveehhiiccllee iiss oowwnneedd,, iittss vvaalluuee iiss rroouugghhllyy tthhee Years Owned Depreciation Rate ppuurrcchhaassee pprriiccee.. IInn ssuubbsseeqquueenntt yyeeaarrss,, tthhiiss vvaalluuee iiss 1 100% 2 90 ddeepprreecciiaatteedd bbaasseedd oonn tthhee sscchheedduullee ttoo tthhee rriigghhtt.. FFoorr tthhiiss 3 80 eexxaammppllee,, wwee aassssuummee aa ffoouurr yyeeaarr--oolldd ccaarr wwiitthh aann iinniittiiaall 4 70 5 60 ppuurrcchhaassee pprriiccee ooff $$3300,,110000.. 6 50 7 40 8 30 TThhee ccaarr''ss vvaalluuee iinn yyeeaarr ffoouurr iiss:: $$3300,,110000 xx 7700%% == $$2211,,007700.. 9 25 10 20 11 and After 15 LAO California’s Tax System | Property Tax 28 C H A P T E R 3 LAO California’s Tax System | Sales Tax 29 S A L E S A N D U S E TA X California’s state and local governments levy a tax on retail sales of tangible personal property. This tax—called the sales and use tax (hereafter, sales tax)—is a significant source of state and local revenue. In this chapter, we draw distinctions between the products that are subject to this tax and those that are not. We also provide information on the variation in tax rates across the state and the distribution of revenue among state and local programs. LAO California’s Tax System | Sales Tax 30 WHAT THE SALES TAX IS The sales tax is levied on the retail sale of tangible personal property. (“Tangible” refers to physical materials. “Personal property” is movable from one place to another.) The graphic below compares the amount of taxable sales (spending on items subject to the sales tax) in 2015 with the amount of taxable sales that would be subject to the tax if not for exemptions. The icons show major categories of taxable sales and exemptions. Taxable Sales: $636 Billion Exemptions: $221 Billion Clothing Furniture Vehicles Groceries Utilities Prescription Personal Care Products Office Supplies Appliances Prepared Foods Medicines Clothing Furniture Vehicles Groceries Utilities WHAT THE SALES TAX IS NOT Households and businesses spend money on many services and other itemsP trehsactr ipatiroen not subject to the sales tax, Personal Cgaeren Perroadlulyc tsbecauOsffeic et hSousppel ieitsems aArpep linanocte tsangibleP rpeeparsreodn Faolo pdsroperty. Instead, thesMee diticeinmess are services (such as a hair cut), intangible property (such as an e-book), and real property (such as land). For example, a consumer having their car repaired would pay sales tax on parts like brake pads but would not pay sales tax on the labor associated with the repair. Spending on these items is sevEedraucl attiimoneasl Stthuedy size of the saTlreasn stpaoxr tbataiosne S. ervices Medical Services Items Not Subject to Sales Tax Telecommunications Maintenance Housing Personal Care Services and Repairs Educational Study Transportation Services Medical Services Telecommunications Maintenance Housing Personal Care Services and Repairs LAO California’s Tax System | Sales Tax 31 WHERE IS SALES TAX COLLECTED? Share of Statewide Taxable Sales by Business Type, 2015 Motor Vehicle and Parts Dealers Bars and Restaurants Wholesalers General Merchandise Stores Gasoline Stations Manufacturing Clothing and Accessories Stores Rentals, Real Estate, and Construction Building Materials and Garden Supplies Furniture, Home Furnishings, Electronics, and Appliance Stores Food and Beverage Stores Other Retailers Other Non-Retail Businesses 2 4 6 8 10 12 14% LAO California’s Tax System | Sales Tax 32 IN SOME REGIONS, CONSUMERS FACE SEVERAL DIFFERENT RATES Rates as of April 1, 2018 California’s sales tax rates vary across cities and counties, ranging from 7.25 percent to 10.25 percent. These rate differences result from optional sales taxes levied by local governments. (The minimum rate in the two regions shown below is 7.75 percent.) Pittsburg Hercules Pinole Martinez San Pablo Concord Antioch Richmond Pleasant Hill El Cerrito Orinda Albany Contra Costa County Moraga 7.75% 8.25 San Leandro 8.75 Hayward Alameda County 9.25 Union City 9.5 Newark 9.75 10.0 10.25 Los Angeles County El Monte South El Monte Santa Monica Culver City Commerce Pico Rivera Inglewood South Gate Downey Hawthorne Lynwood La Habra Compton La Palma Long Beach Stanton Orange County Westminster Fountain Valley LAO California’s Tax System | Sales Tax 33 SALES TAX RATES IN CALIFORNIA COUNTIES Rates as of April 1, 2018 Population-Weighted Minimum Average Maximum Legend Alpine Half of Californians Live Where Rate Is 7.75% or 9.5% Calaveras Percent of Population as of January 1, 2017 Lassen 40% Modoc Plumas Sierra 30 Sutter Trinity Placer 20 Shasta Tuolumne Butte 10 Tehama 5 El Dorado Colusa Below 7.75 7.75 7.75-9.5 9.5 Above 9.5% Glenn Siskiyou Kern Kings Yuba Ventura Del Norte San Luis Obispo Mono Lake Amador Inyo Mariposa Napa San Bernardino Orange San Diego Nevada San Benito Sacramento Yolo Madera Imperial Santa Barbara Fresno Merced Stanislaus Humboldt Riverside Mendocino Tulare Solano Sonoma San Joaquin San Francisco Marin Contra Costa Monterey Santa Cruz San Mateo Santa Clara Alameda Los Angeles 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5% LAO California’s Tax System | Sales Tax 34 DISTRIBUTION OF SALES TAX REVENUE This graphic shows how sales and use tax revenues were distributed to the state, state-funded local programs, and local governments in 2016-17. 2011 Realignment: $6.7 Billion Behavioral health programs and child welfare services: $3.6 Billion Law enforcement activities: $2 Billion Mental health programs: $1.1 Billion State General Fund: $24.9 Billion The General Fund—the state's main operating account—provides funding primarily for education, health and social services, and criminal justice programs. Social services programs: Local Public Safety: $1.9 Billion $3.3 Billion Total sales and use tax revenue: $53 Billion Cash assistance to participants in the state's welfare-to-work program: $1.2 Billion Bradley-Burns Transportation: 1991 Realignment: $1.7 Billion $3.2 Billion Other programs: $100 Million Other: $1.1 Billion Transactions Transportation programs: $5.2 Billion and Use Taxes: Bradley-Burns $6.3 Billion General Purpose: $6.6 Billion General funding for city and county programs. LAO California’s Tax System | Sales Tax 35 PER CAPITA SALES TAX COLLECTIONS BY COUNTY 2015-16 DEL NORTE SISKIYOU MODOC Range of Per Capita Tax Collections by County For Major California Taxes Excludes Alpine and Mono Counties HUMBOLDT TRINITY TEHAMA SHASTA LASSEN Personal $338 $5,462 Income Tax MENDOCINO GLENN BUTTE PLUMAS SIERRA Property $297 $1,834 Tax LAKE COLUSA YUBA NEVADA Sales and SONOMA $433 $1,890 Use Tax NAPA YOLO SUTTER PLACER MARIN EL SOLANO SACRAMENTO DORADO SAN CONTRA SAN AMADOR ALPINE FRANCISCO COSTA JOAQUIN SAN MATEO ALAMEDA STANISLAUSCALAVERAS TUOLUMNE SANTA SANTA MERCED MARIPOSA MONO CRUZ CLARA Number of Counties in Each Group Less Than $700 8 MONTEREY SAN FRESNO MADERA BENITO $700-1000 13 $1001-$1225 19 KINGS TULARE INYO $1226-$1400 8 SAN LUIS Over $1400 10 OBISPO KERN SANTA VENTURA LOS SAN BARBARA ANGELES BERNARDINO ORANGE RIVERSIDE SAN DIEGO IMPERIAL LAO California’s Tax System | Sales Tax 36 SALES TAX GROWTH SLOWER THAN PROPERTY AND INCOME TAXES Total Percent Change, 2015-16 Dollars 400% 300 Personal Income Tax Property Tax 200 100 Sales and Use Tax 1980-81 1990-91 2000-01 2010-11 2015-16 One Reason: Taxable Sales Have Shrunk ...Because Prices of Goods Have Grown as a Share of the Economy... More Slowly Than Prices of Services Taxable Sales as Share of Personal Income Total Percent Change 60% 300% 250 50 200 Prices of Services 40 150 100 30 50 Prices of Goods 20 1980 1990 2000 2010 1980 1990 2000 2010 LAO California’s Tax System | Sales Tax 37 LAO California’s Tax System | Sales Tax 38 C H A P T E R 4 LAO California’s Tax System | Other Taxes 39 O T H E R TA X E S Beyond the three main taxes covered earlier in this report, the state and local governments levy a variety of smaller taxes that collectively sum to just over 10 percent of all tax revenue collected in the state. These include taxes on corporations, tobacco, alcohol, diesel and gasoline, insurance, and hotels. (Tobacco, alcohol, and fuels are also subject to the sales tax covered in Chapter 3.) LAO California’s Tax System | Other Taxes 25% Manufacturing Retail 20 15 Holding Companies Financial Other Services 10 Communication, Transportation, 100k Construction and Utilities 50k 10k Real Estate 5 Hospitality and Food Services Professional, Scientific, and Technical Services Agriculture 10 15 20 25% and Mining emocnI etaroproC ainrofilaC latoT fo tnecreP 40 WHO PAYS CORPORATION TAX? California levies a tax on net corporate income. For most corporations, the tax rate is 8.84 percent. California only taxes the portion of income that was earned in California. 25% Manufacturing Retail Companies in these four industries make up 24% 20 of corporate taxpayers but pay 68% of the tax. 15 Number of Taxpayers Holding Companies Financial Other Services 10 Communication, Transportation, A relatively large 1n0u0mkber of Construction and Utilities corporations in th5is0 kindustry had no net income or a net loss. 10k Real Estate 5 Hospitality and Food Services ProfesPseiorncael,n t of Total Tax Liability Scientific, and Technical Services Agriculture 10 15 20 25% and Mining 2 Percent of Corporate Taxpayers Pay 85 Percent of the Tax Tax Statistics by Income Group, 2015 Share of Tax Returns Share of Positive Corporate Income Share of Tax Liability No Net Income 40.1% 2.8% or Net Loss Less Than 57.9% 21.0% 12.4% $1 Million $1 Million to 1.8% 19.7% 13.5% $10 Million $10 Million 0.2% 59.3% 71.3% or More LAO California’s Tax System | Other Taxes emocnI etaroproC ainrofilaC latoT fo tnecreP 2015 Companies in these four industries make up 24% of corporate taxpayers but pay 68% of the tax. Number of Taxpayers A relatively large number of corporations in this industry had no net income or a net loss. Percent of Total Tax Liability Net corporate income is all revenues less most of the costs of doing business. These deductions may include the cost of raw materials, rent, interest payments, and employee compensation. Many companies have more deductions than their gross revenue, resulting in a net loss. Share of Tax Returns Share of Positive Corporate Income Share of Tax Liability No Net Income 40.1% 2.8% or Net Loss Less Than 57.9% 21.0% 12.4% $1 Million $1 Million to 1.8% 19.7% 13.5% $10 Million $10 Million 0.2% 59.3% 71.3% or More 41 CORPORATION TAX CREDITS BY INDUSTRY 2015 Corporations may apply a credit against their taxes for investing money in ways that further certain policy goals. In the figure below, the darker, inner pie shows a breakdown of credits in 2015. The lighter, outer segments show the distribution of the two largest credits among various types of corporations. The state began phasing out enterprise zone credits in 2013. Retail The state began phasing out enterprise zone credits in 2013. Other Retail Electrical and Electronic Equipment Manufacturing Other Electrical and Electronic Equipment Holding Companies Enterprise Zones Manufacturing$450 Million Finance Professions and Technical Holding Companies Enterprise ZonesResearch and Transportation and Utilities $450 Million Development OFthinearn $c5e7 Million $1.3 Billion ProLfoewss-Iinocnos maned H Toeucshinngic a$3l6 Million Other Research and TransportatiMono taionnd PUitciltiutieres $53 Million Developmen M t anufacturing Other $57 Million $1.3 Billion Low-Income Housing $36 Million Other Manufacturing Motion Picture $53 Million Pharmaceuticals Food Products Other Information Chemicals Industrial Sectors Sector Pharmaceuticals Food Products Other Information Chemicals Industrial Sectors Sector 30%Corporate Profits More Volatile Than State Economy Annual Percent Change Corporate Profits 20 30% 10 Corporate Profits 20 Gross State Product 10 -10 Gross State Product -20 1998 2003 2008 2013 -10 -20 1998 2003 2008 2013 LAO California’s Tax System | Other Taxes 42 FUEL TAXES California levies several taxes that specifically apply to transportation fuel. These taxes include gasoline and diesel excise taxes, which are collected from distributors when they remove the fuel from terminals or refineries. They also include diesel sales taxes, which are collected at the point of retail sale, just like other sales taxes. Fuel Taxes Raise About $9 Billion Annually 2018-19 Projections Gasoline $7.1 Excise Tax Billion Diesel $1.2 Excise Tax Billion Diesel $0.8 Sales Tax Billion Over 18 Billion Gallons of Fuel Sold Annually 2018-19 Projections 2.8 Billion Diesel Gallons Gasoline 15.8 Billion Gallons Over Half of Fuel Tax Revenues Spent on State Highways 2018-19 Projections Public Transportation Local Streets State Highways and Roads Other LAO California’s Tax System | Other Taxes 43 INSURANCE TAX The state levies a 2.35 percent tax on insurance premiums. Insurance companies pay the insurance tax instead of the corporate income tax. Insurance Tax Base: $137 Billion in Premiums 2016 Life Insurers Commercial Auto $3 Billion Other $12 Billion Life Homeowners Personal Auto $16 Billion $8 Billion $25 Billion Medical Professional Liability $450 Million Marine $3 Billion Annuity Workers' Fire $24 Billion Compensation $948 Million $13 Billion Accident and Health Mortgage Guarantee $16 Billion $459 Million Other $12 Billion $2 Billion Property and Casualty Earthquake Title Insurers $1 Billion Insurance Tax Generates $2.3 Billion Trends in Insurance Tax Base State General Fund, 2016 Annual Premiums, In Billions $80 Property & $1,518 Casualty Million Life 60 $802 Life Million Property & Casualty 40 Title $13 Million Special rules apply to title and ocean 20 marine insurers Ocean $1 Million Marine Title 1991 1996 2001 2006 2011 2016 LAO California’s Tax System | Other Taxes 44 ALCOHOLIC BEVERAGE TAX The state levies an excise tax on alcoholic beverages. The tax is levied on distributors (such as wholesalers) based on the volume and type of beverage sold. Revenue from this tax is deposited into the state General Fund, which provides funding primarily for education, health and social services, and criminal justice programs. Revenues from the tax totaled $363 million in 2015-16. $4 Million $26 Million $136 Million $198 Million Alcohol Consumption Trends Annual Drinks Per Capita 300 250 Beer 200 150 Spirits 100 Wine 50 1960 1970 1980 1990 2000 2010 LAO California’s Tax System | Other Taxes 45 TOBACCO TAXES The state levies excise taxes on tobacco products. The taxes are levied on distributors (such as wholesalers). The tobacco tax is levied on cigarettes on a per-cigarette basis. Currently, the tax rate is equivalent to $2.87 per pack. The tobacco tax on other tobacco products—such as chewing tobacco and electronic cigarettes—is levied as a percent of the wholesale price. The current rate is equivalent to $3.37 per pack of cigarettes. Breakdown of Tobacco Tax Rates and Spending Cigarettes Other Tobacco Products Proposition 56 rate: Medi-Cal and various other purposes $2 $2 Proposition 10 rate: early childhood development programs $.50 $.50 $0.02 for breast cancer research Proposition 99 rate: tobacco-related programs, other health programs, environmental protection, $0.25 $0.87 and recreational purposes $0.10 deposited into state General Fund Tobacco Tax Revenues Have Increased Annual Per Capita Consumption of Cigarettes Due to Rate Increases Has Decreased Dramatically 2018-19 Dollars, In Billions Packs Per Year $2.5 150 Proposition 56 2.0 Proposition 10 100 1.5 Proposition 99 Legislative Increase 1.0 50 0.5 1959-60 1979-80 1999-00 2018-19 1959-60 1979-80 1999-00 2017-18 LAO California’s Tax System | Other Taxes 46 HOTEL TAXES Hotel Taxes as a Share of Total Tax Revenues Transient occupancy taxes are imposed on stays at hotels, motels, and similar accommodations. As such, the tax typically is paid by visitors from outside of the city or county in which the tax is levied. While some cities rely heavily on the hotel tax, statewide the tax makes up less than 10 percent of city tax revenues. 10 20 30 40 50 60 70% Mammoth Lakes Yountville Calistoga Solvang Avalon Pismo Beach Angels Anaheim Indian Wells Big Bear Lake Rancho Mirage Burlingame South Lake Tahoe Bishop Half Moon Bay Ojai Hotel Tax Revenues Have Doubled Since Great Recession 2015-16 Dollars, In Billions Monterey $3 Dana Point Hotel taxes make up Morro Bay more than 25 percent Goleta of general purpose tax revenues in 39 cities. Millbrae 2 Counties Fort Bragg West Hollywood Crescent City 1 Palm Springs Cities Carmel-by-the-Sea Plymouth Carpinteria 2002-03 2015-16 Westlake Village Coronado Most Hotel Spending Is Where Rate is 10% or 14% Pacific Grove In Billions, 2015-16 Point Arena $8 Needles 7 Sonoma 6 Palm Desert 5 Napa Healdsburg 4 Garden Grove 3 Buellton By contrast, hotel tax 2 revenues in these four San Diego 1 cities make up a lower San Francisco share of city budgets, but make up about Los Angeles <7% 7-8 8-9 9-10 10-11 11-12 12-13 13-14 14-15 >15% 40 percent of all hotel San Jose taxes collected in the state. Statewide Average LAO California’s Tax System | Other Taxes 47 ADDITIONAL LAO RESOURCES GENERAL RESOURCES LAO Economy & Taxes Blog (www.lao.ca.gov/LAOEconTax) and Twitter (@LAOEconTax) PERSONAL INCOME TAX Volatility of the Personal Income Tax Base (Report) Volatility of California’s Personal Income Tax Structure (Report) PROPERTY TAX Understanding California’s Property Taxes (Report) Understanding Your Property Tax Bill (Blog Series) Calculating Your 1 Percent Tax (Video) The 1 Percent Tax—Where Does Your Money Go? (Video) Common Claims About Proposition 13 (Report) The Property Tax Inheritance Exclusion (Report) SALES AND USE TAX Understanding California’s Sales Tax (Report) Why Have Sales Taxes Grown Slower Than the Economy (Report) TAX EXPENDITURES Review of the California Competes Tax Credit (Report) California’s First Film Tax Credit Program (Report) Community Development Financial Institution Tax Credit (Report) Options for Modifying the State Child Care Tax Credit (Report) LAO California’s Tax System 48 LAO PUBLICATIONS This report was prepared by Ryan Miller and Vu Chu, with assistance from Carolyn Chu, Justin Garosi, Seth Kerstein, Brian Uhler, and Brian Weatherford. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. LAO California’s Tax System