As the economy has expanded and contracted over the past three decades, Californians have slowly, but steadily, paid more in personal income taxes to support state government. Corporations, however, are another story.
While individuals have watched their tax burden rise, corporations have seen their effective tax rate plummet even as California-based companies like Chevron, Google and Apple have posted record profits. This disparity has reinforced the state’s reliance on personal income tax and contributed to California’s chronic budget deficit.
In 2008, the last year for which numbers are available, Californians paid a little more than 4 cents in taxes on every dollar earned, up from about 3 cents in 1981. Over that same period, taxes on corporate income dropped from almost 10 cents of every dollar in 1981 to about 5 cents in 2008. The corporate tax burden fell by half while the individual taxpayer’s burden rose by a third.
Assuming the effective corporate tax rate didn’t drop and businesses wouldn’t have taken action to reduce their tax liability, California’s government would have received an additional $13 billion in revenue in 2008 — half of the $26 billion deficit the state faced at the beginning of this year.
What accounts for these divergent trends? Politicians and policy analysts offer many factors, including the concentration of wealth, which raises taxes for the rich while leaving moderate-income families untouched, as well as changes to the tax code, which have allowed large numbers of California companies to record their profits and pay their taxes under the personal income tax rather than the corporate tax.
But one critical factor over the last 30 years has been the political influence of the California business community, which has pressured the Legislature to approve numerous corporate tax credits and make other changes to help business. Unlike corporations, taxpayers as a group aren’t particularly well organized. While corporations are constantly pressing for tax breaks, few groups are doing the same for individual taxpayers.
“Inside the Capital, the system is stacked against the average taxpayer,” said Chuck DeVore, a former Republican assemblyman and candidate for the Orange County Board of Supervisors.
“It’s a huge equity problem,” said Lenny Goldberg, a liberal lobbyist and executive director of the California Tax Reform Association.
Writing for the policy magazine Tax Notes, Franchise Tax Board economist Allen Prohofsky identified in 2003 five things that have weakened California’s corporate tax. All five were policy changes enacted to make California friendlier to business.
Three arose in 1987, when state lawmakers approved major tax legislation to conform with federal law. Those changes allowed companies to elect whether their California profits would be taxed as a share of world or U.S. earnings; to subtract the losses of previous years from their current income before calculating taxes; and to operate in California as businesses that are not taxed as corporations.
A fourth major change was adopted 10 years later, when the tax rate for California corporations was lowered from 9.3 percent to 8.84 percent.
The final change was “a dramatic increase in tax credits granted to corporations.” Prohofsky writes: “In 1988, California corporations claimed only $64 million in tax credits. In 2001, they claimed $938 million in tax credits, an increase of $874 million, or 1,365 percent over 1988.”
“All of those things help business pay less in taxes,” said Pedro Morillas, consumer advocate for the California Public Interest Research Group. Did corporate influence ultimately lead to those changes? That’s hard to know, but Morillas said “It’s no secret they have the resources to fund the lobbyists to push their point of view.”
Consider the 57 Fortune 500 companies based in California. During the last legislative session, 2009 to 2010, they spent at least $81.5 million on campaign contributions and other political expenditures — more than half coming from Pacific Gas and Electric’s support of a failed ballot measure that would have required two-thirds voter approval before local governments could provide electricity service to new customers.
In addition, those Fortune 500 companies spent at least $21 million on lobbying. Those figures don’t include lobbying of the Public Utilities Commission or campaign donations made by company executives.
Compare that with the political spending of one the most prominent taxpayer advocacy groups in California, the Howard Jarvis Taxpayers Association. Howard Jarvis spent $2.26 million on political activity and another $3.8 million lobbying. The companies outspent Howard Jarvis about 17 to 1.
But taxpayer advocates don’t necessarily see themselves as corporate foils. The California Taxpayers Association, represents both corporate and individual taxpayer interest, and believes that taxpayers ultimately pay corporate taxes as well as their own income taxes. By that logic, tax relief of any kind helps all Californians.
“It’s not a battle between one side and the other,” said David Kline, CalTax spokesman. He said when voters are given all the information, they see the connection between business and the individual, as was the case in November when Californians rejected Prop. 24, which would have raised taxes on some companies. “It’s not us versus them,” Kline said.
That could be changing, however. In January, the Public Policy Institute of California conducted a poll asking residents what taxes they’d like to see raised in order to address the state budget. Sixty percent of all adults, and 55 percent of likely voters, said they supported raising taxes on California corporations. No other tax proposal got more than 38 percent support.