Who Pays Taxes?

RecordNet.com of Stockton reports on a new report issued by The California Budget Project:

For all the complaining about corporate taxes by California businesses, it turns out small business pays a relatively small share. Stated another way, a very few California businesses pay the bulk of state corporate income taxes.

Enterprise Zones get a mention a little further down:

Who doesn't pay state income taxes? The CBP says (and it's plucking this number from an annual report of the state Franchise Tax Board) 1,659 households in California with incomes of $200,000 or more paid no personal income tax in 2003. That's triple the number of high-income households that paid no state taxes in 1996.
How did they do it? The CBP says the largest tax breaks claimed by the "no tax" households "including enterprise zone tax breaks, the Manufacturers' Investment Credit and miscellaneous deductions."

Who is the California Budget Project? The executive director is Jean Ross who has appeared, along side Lenny Goldberg, many times as a primary opponent to the Enterprise Zone program in general. The organization is funded, in part, by the ultra-liberal Barbara Streisand.

RecordNet.com's quotation above is somewhat incomplete. The actual report (page 2 of the PDF) tells us that, according to the Franchise Tax Board's 2003 annual report, 1,659 households with incomes of $200,000 or more paid no personal income tax out of 380,075 households in that category. So 0.436%, less than half of one percent, paid no income tax in a given year due to the use of "enterprise zone tax breaks, the Manufacturers' Investment Credit and miscellaneous deductions." Keep in mind that these are specifically business owners who have engaged in business growing activities and provide jobs to other California taxpayers.

A Google search located a cache of a CBP report issued 4/15/2002 titled "Who Pays Taxes in California?" -- the identical title to this year's report. Within the 2002 report I found the following:

In 1999, the most recent year for which data is available, 338,960 taxpayers reported incomes in excess of $200,000, 550 of these households paid no California personal income tax. How did they do it? The largest tax breaks claimed by "no tax" households include Los Angeles Revitalization Zone and enterprise zone tax breaks, the manufacturer’s investment credit, and miscellaneous credits and deductions.

It appears that this identical report is simply recycled year after year with a few new numbers plugged in. For 1999 0.162% of households with incomes higher than $200,000 paid no taxes due to usage of credits and deductions, this increased to 0.436% four years later, roughly tracking the time period in which some of these credits have come into increased usage. By the way, Enterprise Zone tax credits account for only 504 of the "high income" tax returns with no liability in 2004 (it is, however, the largest of the 19 reasons that enabled individuals to eliminate their liability).

On page 27 of the FTB's 2004 annual report we find the following fact:

Tax liability was unevenly spread among income groups in taxable year 2003. Based on California AGI, the top one percent of returns accounted for 38.8% of all tax liability, compared to 36.6% for 2002. The top five percent paid 61.0% of all tax.

On page 18 of the same report the FTB says that the returns for households with over $200,000 in income represent 2.8% of the total returns received; they are therefore responsible for somewhere between 40% and 61% of all taxes collected in California. So it turns out that the CBP is concerned about four tenths of one percent of the group that is anyway still ponying up about half of all the taxes collected. Taking this a step further, on page 15 of the FTB report we learn that there were 13.6 million personal tax returns filed in 2004. Households eliminating their tax liability for the year based on Enterprise Zone tax credits amounts to 0.0037%, or less than four one thousandths of one percent, of California taxpayers. Again, keep in mind that these are precisely the people who own businesses that employ other Californians who themselves pay taxes.

Another main point of the CBP report is that California is not actually a high tax state. Ross' data shows that California is 12th out of 50 for state taxes as a percentage of personal income. That means that 38 states have a lower percentage. According to Ross this makes California a "moderate" tax state. But her own table also shows California ranking as the fifth highest for individual and corporate income taxes. We noted earlier the report of The Tax Foundation that ranked California 40th for business tax climate. That just missed the "worst ten" list.

Update: Daniel Weintraub of the Sacramento Bee comments on the CBP report in his blog. I don't think he pulls out the most interesting angle.