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California's Tax System CALIFORNIA’S TAX SYSTEM LEGISLATIVE ANALYST’S OFFICE 2 INTRODUCTION California’s state and local governments rely on three main taxes. The personal income tax is the state’s main revenue source, the property tax is the major local tax, and the state and local governments both receive revenue from the sales and use tax. In addition, many smaller taxes raise revenue for state and local government operations. In 2015-16, taxes in California raised a total of $220 billion—equal to nearly 10 percent of the state economy. The chart to the right summarizes this tax system. The inner black pie chart shows that roughly two-thirds of tax revenues in California go to the state government with the other one-third collected by local governments. The middle ring shows each tax as a share of the whole system. (Note that the line from the inner black pie chart intersects with the sales and use tax segment to show the shares of sales tax revenue that go to the state and to local governments.) The outer ring breaks out each major tax by source. For example, the biggest source of personal income tax revenue is wage and salary income. In addition to taxes, the state and local governments rely on federal funds, fees, and other sources of revenue to fund government operations. This publication, however, focuses solely on taxes levied in California. LAO California’s Tax System | Overview 3 OVERVIEW OF CALIFORNIA’S TAX SYSTEM 2015-16 R Ow e s i n d e e r-Occupied n t i a l No s ie t r la R Sa e d Ow s n id a n e s e n e r-Occupiedti g al a W P ro p ert y Ta Co mmer x nal cial/In rso x e dustr Pe Ta Incom ial me ement Inco Retir L ividends, oc D t al Interest, and Ren Vehicle License Fee Other St ate s Taxe cal Bu her Lo siness Ot Income C o F rp Hotels Ot u e o il h ta d l ra e n e Ta r t a x io C St n Tax ap es s xe it s Ta a a s le s l Other Non-e R s t Ga in r e s le a e i u a S n B s Ta s e Us ol g Utilities h n xe W ri tu s c C fa o u rs r n e p a il o a G r M t D a a e i t Business s e s io R s e s o r n t s r e li r s O e d n o n t s l a e , e, t h n l h t r S n and e a a u o r O e i e e s a t l r t s Property Transfer i c e D a i t a Ot s d t a h t e l s B S n t h s a e R r a r e e E V a Payroll l e h r n r O a n c i P r l e e o t t R e o d h G s o n e d M a a r Entities n M a G n o ti c s e ru s e c t e r s i l n n o a t p o Stores i l C s S p p e u i e r p S g o A a s n r d s e e n e d v r c a Insurance Tax e a c , s G A B c d i d d n n n n a o a r a t d g s c l o n e a Tobacco Taxes i l o i h r t F e E , o t Alcoholic Beverage Tax l s a C g M n i g h n s i i d n l r i u u F B e m o H , e r u t i n r u F LAO California’s Tax System | Overview 4 CHAPTER 1 LAO California’s Tax System | Personal Income Tax (PIT) 5 PERSONAL INCOME TAX The personal income tax (PIT) is a broad-based tax that the state levies on most types of income, such as wages and capital gains. The PIT is an important revenue source for the state government, generating over two-thirds of the revenue for the General Fund— the state’s main operating account. In recent years, the PIT has generated more revenue than any other tax in California’s tax system. LAO California’s Tax System | Personal Income Tax (PIT) 6 ABOUT TWO-THIRDS OF INCOME COMES FROM WAGES AND SALARIES 2015 Capital Gains $118 Billion Pensions, Business Wages and Salaries Annuities, Income and IRA (Multiple Distributions Owners) $898 Billion $102 Billion $88 Billion Dividends, Business Interest, Income and Rent (Sole Owner) $56 Billion $53 Billion HOW DO PIT RATES WORK? Marginal and Effective Tax Rates, Single Filer, 2017 Personal income tax rates are marginal, meaning that higher income increments are taxed at higher rates. For example, a single filer with taxable income of $300,000 is taxed at 1 percent on the first $8,000 of their income, but 10.3 percent on the last $31,000 of their income. A taxpayer’s highest marginal rate is higher than their effective rate (the average rate at which their income is taxed). For example, a single filer with $100,000 in taxable income is taxed at 9.3 percent on their last dollar of income but their effective tax rate (before tax credits) is 6.7 percent. 14% Marginal Income 12 Rate Between Marginal Rate 1% $0K - $8K 10 2% $8K - $19K Effective Rate 4% $19K - $30K 8 6% $30K - $42K 8% $42K - $53K 6 9.3% $53K - $269K 4 10.3% $269K - $322K 11.3% $322K - $537K 2 12.3% $537K - $1M 13.3% $1M and Over 100,000 200,000 300,000 400,000 500,000 600,000 700,000 $800,000 LAO California’s Tax System | Personal Income Tax (PIT) 7 Step 1 Add up Income CALCULATING THE $60K in Wages $30K in Business Income PERSONAL INCOME TAX BILL $90K Adjusted Gross Income Married Couple With One Dependent Filing Jointly, 2017 Step 2 Add up Deductions Almost two-thirds of all filers take the standard deduction $8K in Mortgage Interest Do itemized $5K in Local Property Taxes deductions exceed $2K in Student Loan Interest $8,472 standard deduction? $15K Itemized Deductions Marignal Income Rate Between 1% $0-$16K Yes: take No: take 2% $16K-$39K itemized standard 4% $39K-$62K 6% $62K-$85K Step 3 Step 4 Calculate Taxable Income Apply Tax Rates in Table Above Step 5 Add up Tax Credits $90K Adjusted Gross Income First $16K Taxed at 1% = $164 $400 Child Care Tax Credit $15K Itemized Deductions Next $23K Taxed at 2% = $451 $114 X 2 Personal Exemption Credit Next $23K Taxed at 4% = $902 $353 Dependent Exemption Credit $75K Taxable Income Next $23K Taxed at 6% = $808 $981 Total Tax Credits Tax Liability Before Credits $2,325 Step 6 Calculate Tax Liability Tax Liability Before Credits $2,325 Filers Itemizing Deductions Tend to Be Higher-Income Taxpayers Minus Credits -$981 Standard Itemized Final Tax Bill = $1,344 100% 75 50 25 0-50K 50K-100K 100K-200K 200K-500K 500K-1M 1M-5M Over $5M LAO California’s Tax System | Personal Income Tax (PIT) 8 BREAKDOWN OF DEDUCTIONS In Billions, 2015 PIT deductions reduce taxpayers’ taxable incomes. In total, deductions reduced taxable income by about $200 billion in 2015. About $7 billion of the deductions shown here went unused because itemized deductions are phased out for high-income taxpayers. Standard $60.7 Deduction Mortgage $52.9 Interest Property $30.1 Taxes Charitable $30.0 Contributions Business and $20.4 Other Expenses Medical $10.6 Expenses Other $4.3 WHO USES DEDUCTIONS? Share of Deduction Value by Income Group, 2015 Standard Deduction Mortgage Interest Charitable Contributions 50% 25 r K K K K K e M v 0 0 0 0 0 1 0 0 0 5 2 $ O 5 2 1 $ $ - d $ $ $ - - n K - - - K K a 0 K K K 0 0 0 0 0 0 2 $ M 5 0 0 5 $ 1 $ 2 1 $ $ $ $ Property Taxes Medical Expenses Business and Other Expenses LAO California’s Tax System | Personal Income Tax (PIT) 9 BREAKDOWN OF CREDITS In Billions, 2015 PIT credits reduce tax liabilities dollar for dollar, resulting in a dollar-for-dollar reduction in state revenue. With the exception of the Earned Income Tax Credit (EITC), credits cannot reduce a taxpayer’s liability below zero. For this reason, the amount of credits shown in the chart is about double the amount of credits actually used by taxpayers to reduce liability. Dependent Credit $4.0 Personal Credit $2.3 Blind and Senior $0.4 Credit Enterprise Zones $0.3 EITC $0.2 Renter's Credit $0.1 Other $1.1 EITC 100 WHO USES CREDITS? Share of Credit Value by Income Group, 2015 Dependent Credit Personal Credit 50% 25 r K K K K K M e 0 0 0 0 0 1 v 2 5 0 0 0 $ o $ $ 1 2 5 - d $ $ $ - - n K - - - K K a 0 0 0 K K K 0 $ 2 0 0 0 M 5 Enterprise Zones $ 5 0 0 1 $ $ 1 2 $ $ $ 66 Blind and Senior Credit 55 LAO California’s Tax System | Personal Income Tax (PIT) 10 PIT LIABILITY CONCENTRATED AMONG TOP EARNERS Tax Statistics by Income Group, 2015 Share of Tax Returns Share of Adjusted Gross Income Share of Tax Liability $0 to $20K 27.7% 3.7% 0.1% $20K to $50K 31.0% 13.0% 2.0% $50K to $100K 21.2% 19.1% 8.6% $100K to $200K 12.9% 22.4% 18.0% $200K to $300K 3.2% 9.8% 10.7% $300K to $500K 1.7% 8.3% 10.6% $500K to $1M 0.8% 6.9% 10.3% Over $1M 0.4% 19.4% 39.6% Over Half of PIT Liability for Over $1 Million Group Paid by Filers With Adjusted Gross Income Over $5 Million 21% 10% 7% 5% 57% $1M $2M $3M $4M Over to 2M to 3M to 4M to 5M $5M LAO California’s Tax System | Personal Income Tax (PIT) 11 INCOME MAKEUP DIFFERENT FOR LOW- AND HIGH-INCOME TAXPAYERS 2015 The graphic below shows how taxpayers in different income groups derive their income.
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