Fiscal Illusion in California

November 5, 2012

My former colleague Josh Barro, now with Bloomberg, muses about the tax picture in my home state of California after a trip there. Running the numbers, he comes to a key insight: high-income individuals in California are heavily taxed, but middle-income individuals less so relative to other high-service states:

When the Institute on Taxation and Economic Policy last estimated the distributional impact of state tax codes (in 2009, using 2007 data), they found that California had a somewhat lighter middle-class tax burden than the average state, and a much lighter one than politically comparable blue states like Illinois, New York and Massachusetts.

I live in New York, where the fourth quintile of non-elderly taxpayers (that is, those with incomes from the 60th to 79th percentiles, with an average income of $73,100) paid 3.8 percent of their income in property tax and 4.7 percent in income tax. In California, the fourth quintile was slightly wealthier (averaging $75,700) but paid just 3.1 percent in property tax and 2.0 percent in income tax.

Overall, California's fourth-quintile families paid 7.7 percent of their incomes in state and local taxes in 2007. That compares to a national average of 8.5 percent, 8.8 percent in Massachusetts, 9.2 percent in Illinois (since which time Illinois has enacted a major middle-class tax increase) and 11.0 percent in New York.

Numbers are similar for the cohort of taxpayers from the 80th to 94th percentiles of income.

Californians support large and active government, Barro writes, as evidenced by the legislature's makeup, but are resistant to taxing the middle class to pay for it. I agree with him on the facts but quibble that he might have causation backwards: people are willing to vote for more government services precisely because they're being told that someone else will pay for it. (The term for this, "fiscal illusion," is what Barro is wordplaying with in his title so he's obviously aware of the concept.) But I do agree with Barro's frightening realization:

What worries me most about California’s fiscal delusion — the idea that you can have a big, active government without making the middle and upper-middle classes pay for it — is that it is increasingly America’s fiscal delusion, too. Both Mitt Romney and Barack Obama have committed to the idea that we can fix America’s vast fiscal gap without a middle-class tax increase.

I would have added "or major changes to middle-class entitlement programs" to that last sentence, but the sentiment is the same.

Read the full piece here.

More on California here.



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