I am pleased to testify on Assembly Bill 1369 written by Assemblyman Jim Brulte, which incorporates Governor Wilson's proposal to cut California state income taxes for individuals and businesses 15 percent across the board over three years.
This legislation reflects the recommendations of the Governor's Task Force on California Tax Reform and Reduction. The task force was created by the Governor's Council of Economic Advisers in response to Governor Wilson's request, in his January 1994 State of the State address, that the Council "advise how we can reduce income or other taxes to most effectively spur additional job creation."
George P. Shultz, Chairman of the Governor's Council of Economic Advisers, set up the task force, which included the following people:
The task force, reporting in December 1994, concluded that California's taxes are high by comparison to other states, and that reducing rates for both individuals and banks and corporations would make California more competitive with other states, thus increasing job growth in California. The task force further found that California's economy was recovering from the recession and would generate increased revenues over the next four years. We recommended that about three-fourths of this increase in revenues be devoted to increased spending on education and high priority programs, and that about one-fourth be returned to taxpayers through lower taxes.
Why Interstate Tax Competitiveness Matters
Being competitive with other states in levels of taxation matters because advances in transportation and communications have made many firms--especially manufacturing firms--footloose. Unlike services, most manufacturing plants need not be located near their customers or even near the corporate headquarters. When building a new plant, managers can shop for the best location. State taxes are not the only consideration, but they are an important one.
States vary widely in their tax structures, and there are many different kinds of data available comparing taxes among the states.
First, we can distinguish between absolute measures--the actual dollars--and relative measures, such as taxes in relation to personal income. California is a high-income state; personal income per capita is about 110 percent of the national average. California's relative tax burden will therefore be lower than its absolute tax burden.
Second, we can distinguish between average rates and marginal rates, where marginal rates are the rates paid on additional income or new investment. The marginal rate is likely to be far more important than the average rate in affecting decisions on location.
With these distinctions in mind, let us get to specifics:
Personal Income Taxes
California ranked 15th in 1993 on the relative measure of personal income tax collections per $100 of personal income and 3rd among the Western states (in which I have included Arizona, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming). [Table 1] The states of Nevada, Texas, Washington, and Wyoming have no personal income tax.
California's absolute personal income tax burden is higher than this suggests, because California's personal income per capita is 110 percent of the national average. The personal income tax is not a tax corporations pay directly, but in order to attract employees, they may need to compensate them for the income taxes they must pay. The economists on the task force who have studied such matters--Michael Boskin, Gary Becker, and John Taylor--consider it likely that personal income taxes are passed along to business enterprises in higher wages.
California's personal income tax rates are also the most steeply progressive in the nation, currently exceeded only by Massachusetts--which in fact taxes only dividends and interest at the high rate of 12 percent. These high marginal rates are a disincentive to high-income earners. [Table 2]
Bank and Corporation Incomes Taxes
On the relative measure of corporation income taxes per $100 of personal income, California ranks 5th in the nation and first among the Western states. [Table 3] Nevada, Texas, Washington, and Wyoming do not tax corporate income. California's marginal rate is the highest among the Western states and is equalled or exceeded by only seven states and the District of Columbia. [Table 4]
All Taxes and Fees
In 1993 California ranked 25th--dead center--on all state and local taxes, fees, and assessments per $100 of personal income, and lower than the Western states except for Nevada and Texas. [Table 5] It would be wrong to take too much comfort from this measure, because California's personal income is 110 percent of the national average. The consequences for absolute levels of taxation are reflected in data for 1993 on the absolute burden per household: California ranks 11th in the nation on this measure, 19 percent above the national average. Among the Western states California's burden per household is exceeded only by that of Washington. [Table 6]
California's central ranking on the state and local tax burden comes about because California's average property taxes per $100 of personal income are about average for the nation (California ranks 29th).
Average property taxes are not, however, what businesses pay when they purchase property for expansion--they pay on the basis of the current assessed market value.
The reasonableness of California's property taxes in relation to personal income help keep established firms in California, but it is the rate on current acquisitions that is the consideration for enterprises considering whether or not to expand in California or to locate here. Thus KPMG Peat Marwick's 1992-1993 Comparative Tax Report, which finds Los Angeles and San Francisco relatively low-tax cities, cannot be considered valid for new businesses.
Conclusion
In conclusion, California's taxes are high in comparison to other states and especially the Western states with which it most often competes for new business investment. The absolute burden is high and marginal rates are high. The proposal to reduce tax rates for both individuals and businesses across the board by 15 percent over three years would help to correct the disincentives of the current tax structure and encourage businesses to expand and locate in California, thus creating thousands of additional new jobs. Tax revenues will still increase substantially, allowing for increased spending on priority matters. In the longer term the ability of the state of California to provide those services that taxpayers want will depend on the economic health of the state and its attractiveness as a business location. I strongly support AB 1369.
Table 1
Personal Income Tax Collections Per $100 of Personal Income, 1993
Highest States
Oregon $4.03
Massachusetts $3.93
Hawaii $3.85
New York $3.64
Minnesota $3.61
Wisconsin $3.49
Delaware $3.45
North Carolina $3.26
Kentucky $3.06
Utah $2.95
Idaho $2.89
Iowa $2.81
Maryland $2.75
California (15th) $2.72
Avg, States with Tax $2.50
50-State Average $2.14
Western States
Oregon $4.03
Utah $2.95
California $2.72
Arizona $2.11
New Mexico $1.70
Washington None
Nevada None
Texas None
Wyoming None
Source: "Tax Incentives," California Chamber of Commerce, February 18, 1994; Assembly Revenue and Taxation Committee, California State Assembly
Table 2
Personal Income Tax--1994
Highest Marginal Rate States
Massachusetts 12.0%
California 11.0
Montana 11.0
Hawaii 10.0
Iowa 9.98
District of Columbia 9.5
Oregon 9.0
New York 8.75
Maine 8.5
New Mexico 8.5
Idaho 8.2
Personal Income Tax Rates of Western States
California 1.0-11.0
Oregon 5.0-9.0
New Mexico 1.8-8.5
Utah 2.55-7.2
Arizona 3.8-7.0
Nevada None
Washington None
Source: "Special Report," Tax Foundation, No. 27, January 1994
Table 3
Corporate Income Tax Collections Per $100 of Personal Income
Highest States
Alaska $2.12
Michigan $0.93
Delaware $0.91
West Virginia $0.78
California (5th) $0.72
Avg, States with Tax $0.48
50-State Average $0.44
Western States
California $0.72
Utah $0.34
Arizona $0.33
Oregon $0.30
New Mexico $0.23
Nevada None
Washington None
Texas None
Wyoming None
Source: "Tax Incentives," California Chamber of Commerce, February 18, 1994; Assembly Revenue and Taxation Committee, California State Assembly
Table 4
Corporate Income Tax Rates for 1994
Highest Rate States
Pennsylvania 12.3%
Iowa 12.0
Connecticut 11.5
North Dakota 10.5
District of Columbia 10.0
Minnesota 9.8
Alaska 9.4
Arizona 9.3
California 9.3
Corporate Rates of Western States
California 9.3
Arizona 9.3
New Mexico 7.6
Oregon 6.6
Utah 5.0
Washington None
Nevada None
Texas None
Wyoming None
Source: "Special Report," Tax Foundation, No. 27, January 1994
Table 5
All State and Local Taxes, Fees, and Assessments
Per $100 of Personal Income, 1993
Wyoming $18.34
New Mexico $15.65
Washington $15.54
Arizona $15.30
Utah $15.23
Oregon $15.07
California (25th) $14.21
50-State Average $13.99
Nevada $13.98
Texas $13.24
Source: "Tax Incentives," California Chamber of Commerce, February 18, 1994; Assembly Revenue and Taxation Committee
Table 6
1993 State Tax Collections--Burden Per Household
High-Burden States
Alaska $11,223
District of Columbia $10,456
Hawaii $7,559
Delaware $5,471
Connecticut $5,393
Minnesota $4,884
New York $4,750
New Jersey $4,638
Washington $4,526
Massachusetts $4,499
California (11th) $4,451
U.S. Average $3,737
Western States
Washington $4,526
California $4,451
New Mexico $4,399
Wyoming $4,241
Nevada $3,994
Utah $3,936
Arizona $3,689
Oregon $3,137
Texas $2,841
Source: "Special Report," Tax Foundation, No. 27, January 1994