I am writing this post in response to the following tweet, citing statements made in the Political Blotter:

“political consultant Genest agrees w/me: extend taxes. CA tax revenues @30yr low.”

Genest, now a political consultant advising Republican senators who are in talks with Gov. Jerry Brown, was asked if Brown’s tax extension should be placed on the ballot. He said:

“As a Republican, I kinda hate to say it but our tax burden is less now because of recession. The amount of the economy going to state government is lower than it has been for several years. Except for right at the bottom of the recession, you go back 30 years to find tax revenues at this low a level. So, there is a case to be made that we might need to keep those taxes at a higher level for a while.”

I thought it was an interesting argument, so I looked into it myself.

As far as I can tell, Mike Genest (former Director of Finance and Staff Director for the Senate Republican Caucus) was referring to “Taxes per $100 of Personal Income.” In layman’s terms, for every $100 you earn, how much of that $100 goes to paying taxes. In 2011, the amount is projected to be $5.21 per $100 of personal income. The last time this measurement was less than $5.21 (except at the bottom of the recession) was in 1973 when the amount was $5.14 per $100 of personal income. The following table shows the past 38 years (collected from the Department of Finance homepage-Schedule 2, Statewide Financial Information).

How is it possible that after increasing personal income taxes over the past two years, not to mention increases to the sales and use tax rates and the vehicle license fee, California tax revenues are at a thirty eight-year low?

You would think that increasing tax rates would result in an increasing tax burden. That would be the case, IF all other factors remained the same. But, what if the mix of dollars earned changed over the same period in which tax rates increased? We all know that not every dollar is taxed at the same rate. California has a progressive personal income tax system in which the tax rate increases as you earn more income. The following table shows how your taxes increased as your income increased in 2008.

As you can see, the first $7,168 is taxed at one percent. Every dollar after that up to $16,994 is taxed at two percent. And so on. In February 2009, the Legislature approved a 0.25 percent surcharge on each of the brackets for 2009 and 2010. The following table shows tax rates for those two years.

Now, this is where things get interesting. Since I am the techno-geek, I have run the numbers for four different income categories and created a comparison for your review. Keep in mind that this is as simplified as I can make it for demonstration purposes. These numbers reflect personal income tax only, and do not take into account sales and use tax, vehicle license taxes, and other taxes you pay every day.

For ease of comparison, in the first table I show 40 taxpayers spread evenly over four different income groups in 2008.  For example, each taxpayer in the $20,000 category paid $1.94 for each $100 they earned.  Each taxpayer in the $40,000 category paid $3.72 for each $100 they earned. And so on. The average tax paid per $100 of income was $4.95 (in this example for 2008).

The second table (2009 and 2010) shows that the taxes owed for each category went up, consistent with the added 0.25 percent surcharge, but I have also redistributed the taxpayers to show high-paying jobs lost. This is hypothetical, but reflective of the potential that high wage earners are no longer earning those high wages in wake of the recession. Now there are fewer people earning $150,000 (7 down from 10) and more people earning $40,000 (13 up from 10). This is certainly a potential scenario as high wage earners may choose to take lower paying jobs. As you can see, the average tax paid per $100 of income (in my example) is now $4.74 for 2009 and 2010.

What have we learned from this example? Given the progressive nature of California’s tax structure, even if we increase the rates of taxation, lost jobs (specifically, lost high wage jobs) effectively drive down the tax burden referenced by Mr. Genest. The upside: We can tout the lowest tax burden in nearly 40 years. The downside: That decrease came at the expense of high paying jobs.

Does it really make sense to be excited about this outcome?

Do we really want to push people into lower paying jobs?

Or, is it more beneficial to have a higher tax burden (under this measurement) if we can offer higher paying jobs to Californians?

I’ve written this piece to show you that you can’t always believe everything you hear or read. There is a reason why Sir Charles Wentworth Dilke coined the phrase “lies, damn lies, and statistics.” There’s a reason why Mark Twain popularized the same phrase. Statistics are used to make strong arguments. They are also used to bolster weak arguments, and there is a tendency of people to disparage statistics that do not support their positions.

There is always more than one side to the story.

Joe

Yesterday I was told that “vilifying unions is a diversionary tactic” and that “reg reform has nothing to do with the California budget and cutting pensions won’t fix the deficit.”

Bottom line is that if it costs money that the state can’t afford, it is part of the problem, and if it impedes the economic engine of business from hiring new employees, it is part of the problem.  We all know that there were at least five Republican members that were willing to discuss placing taxes on the June 2011 ballot…in exchange for placing pension reform and regulatory reform on the ballot as well. This is not an outlandish request by Republicans, especially when polling data show that voters would be supportive of pension and regulatory reform.  Why not put it on the ballot and let the voters decide?  Governor Brown, however, feeling pressure by unions that have a stranglehold on the Legislature, unilaterally ended budget negotiations with the Republicans. ↓ Read the rest of this entry…