California Budget Project Annual "Who Pays Taxes" Report

Last year I wrote a long post about the 2006 California Budget Project special tax-day report, "Who Pays Taxes in California?" That was the first time I had seen the report so I wasn't yet familiar with its pattern. Apparently, the report is issued annually in nearly identical form.

Last year there was a lot of fuss about the report and a subsequent report the CBP published the following day, "California Enterprise Zones Miss The Mark," that I wrote about here.

There is a section toward the end of the report called "Who doesn't pay taxes in California?" Here is how that section read in the 2006 report:

In 2003, the most recent year for which data are available, 380,075 taxpayers reported incomes of $200,000 or more. However, 1,659 of these households paid no California personal income tax. How did they do it? The largest tax breaks claimed by “no tax” households include enterprise zone tax breaks, the Manufacturers’ Investment Credit, and miscellaneous deductions. The number of high-income, “no tax” returns more than tripled between 1996 and 2003, rising from 510 to 1,659.

Here is what I wrote about that paragraph last year:

The actual report 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.

Now here is how that section reads in the new 2007 report:

In 2004, the most recent year for which data are available, 449,277 taxpayers reported incomes of $200,000 or more. However, 1,343 of these households paid no California personal income tax. How did they do it? The largest tax breaks claimed by “no tax” households include enterprise zone tax breaks, miscellaneous deductions, and the R&D Credit. The number of high income “no tax” returns more than doubled between 1996 and 2004, rising from 510 to 1,343.

Some observations:

1. There was an 18% increase in the total number of taxpayers that reported incomes over $200,000 between 2003 and 2004. In my book, that sounds like good economic news.
2. There was an absolute drop in the number of high-income taxpayers paying no personal income tax from 1,659 in 2003 to 1,343 in 2004, a 20% drop. But as a percentage of all high income earners the difference is even more significant. In 2003 0.436% of high income earners were "no tax," but in 2004 that ration drops to 0.299% - a third of one percent. This sounds like it ought to be good news in the CPB book, but the shift escapes mention (except for the fact that they had to change from saying that the number of "no tax" returns "more than tripled" to saying that they "more than doubled").
3. Is the fact that "no tax," high-income returns have doubled or tripled since 1996 a cause for concern? My interpretation of the tone of the CBP report is that they view it as such - the number has "more than doubled." But in reality, there hasn't actually been any change since 1996. The CBP report tells us that there were 449,277 $200,000+ returns in 2004 with 1,343 of these paying no tax (0.299%). Then they tell us that the number of no tax returns in 1996 was 510. According to the FTB's 1999 Annual Report, there were 191,758 returns in 1996 with more than $200,000 in income. The CBP omits this fact. 510 is 0.267% of 191,758. So while the absolute number of "no tax" returns has "more than doubled," so has the number of high-income returns. The difference, therefore, between 1996 and 2004 is 3 one-hundredths of one percent (3 out of 100,000). But it's much more dramatic to say that the number of rich people paying no taxes has more than doubled than it is to say that the number of people making high incomes has increased significantly while the ratio of those utilizing government programs to reduce their taxes has remained unchanged.
   

In any case, I'm quite sure there will be some newspaper coverage of this report in the next few days.