Budget Woes Caused in Part By Reliance on State Income Tax

One reason for the volatility in California’s budget is its increasing reliance on personal income tax over other types of revenue.

Ina publication released January 5, 2011 Cal Facts, the Legislative analyst presents two pie charts – one from the fiscal year ending June 30, 1970 and one for the fiscal year that ended June 30, 2010.

Over the 40-year period, state income taxes climbed from 27 percent of the budget to 51 percent.

Sales and use tax collections shrunk over the same period, partly because of the growth in the state’s services economy, which are not taxed.

As the analyst and others have noted, compounding the sharp peaks and troughs in state income tax collections is that 40 percent comes from the state’s highest earners.

“Compared to other taxpayers, this group reports proportionately much more business income and capital gains which are far more volatile than wage and salary income,” the analyst’s most recent report says.

For example, 117,897 Californians with taxable income of $500,000 or more paid $16.8 billion of the $41.6 billion collected in 2008, according to the Franchise Tax Board’s 2009 annual report.

That’s 40 percent of total collections.

The 4,765 filers with taxable income of $5 million or more paid $6.9 billion in taxes – almost 17 percent of collections.

Here’s the breakdown:

TOP EARNER STATE INCOME TAX COLLECTIONS 2008

$5 million and over…………4,765 filers………$6.9 billion

$4 million to $4,999,999……1,620 filers…………$663 million

$3 million to 43,999,999……2,894 filers…………$900 million

$2 million to $2,999,999……6,860 filers………$1.5 billion

$1 million to $1,999,999…..26,256 filers………$2.9 billion

$500,000 to $999,999……..75,502 filers………$3.9 billion

Total: $16.8 billion

TOTAL COLLECTIONS: $41.6 billion