Middle Class Would Bear Brunt of Wilson Tax Hikes : Budget: Reviving a traditional argument, GOP talks of growth as Democrats call for the wealthy to pay more.

In looking for someone to pay for most of the state’s $12.6-billion deficit, Gov. Pete Wilson has zeroed in on an old standby: Joe Sixpack.

Joe is the name commonly used in the Capitol for average middle-class types, classic breadwinners. These days, he could just as easily be a she, and Joe--or Jo--could be white, black, brown or Asian.

What counts most, in the context of the tax debate being waged in the state Capitol, is that they receive regular paychecks, are not too rich, not too poor, and earn enough money to be comfortable and to buy the kinds of things the Republican governor has targeted for new or higher taxes.

Wilson, with his nearly $7-billion tax increase plan, is counting on taxpayers to spend a lot on clothes, appliances and other durable goods (he proposes a 1.25% sales tax increase); gulp down beer, wine or liquor (alcohol taxes would go up); own a car (vehicle fees would rise significantly), make a lot of telephone calls (there would be a new 6% phone tax), be consistent readers and enjoy munchies (newspapers, magazines, candy and snack food would be taxed for the first time).

“Wilson’s sales tax, his phone tax, the tax on snack foods, are aimed squarely at the working people of California,” complained one critic, Assemblyman Tom McClintock (R-Thousand Oaks), who is among the Legislature’s most conservative members.

A lawmaker on the opposite end of the political spectrum, Chairman Johan Klehs (D-Castro Valley) of the Assembly Revenue and Taxation Committee, agreed wholeheartedly. But unlike McClintock, whose solution is to cut services rather than boost taxes, Klehs and other Democrats want to raise income taxes of the wealthy to avoid “putting the burden on the middle class and poor.”

Roughly two-thirds of the new revenue that Wilson wants to raise would come from the sales tax hike. The other third would be generated by an alcohol tax increase, eliminating some income tax deductions for people earning more than $100,000, imposing higher vehicle fees on car owners and accelerating tax collections on contractors, supplemental wages, estates and trusts. Wilson also would cut state spending by $4.8 billion to round out his plan to deal with the potential $12.6-billion budget deficit.

A precise analysis of the taxpayers who would be hurt most by Wilson’s tax proposal is difficult because of the very nature of the sales tax--it is collected from thousands of locations on numerous different items, making it impossible to track on the basis of income.

Tracking the income tax is much easier. The Franchise Tax Board, in a recent study, found that the top 10% of California income tax payers provide 75% of the money raised by the tax, while the top 1%, or people reporting income of more than $275,000, contribute 34.6% of the take.

At the same time, the report noted that the top 10% of income earners received 41% of the income, while the top 1% had 16% of the adjusted growth income.

Both sets of numbers bolster California’s distinction as having one of the nation’s most “progressive” personal income tax systems--progressive in the sense that as income increases, a proportionate share of it is paid out in taxes.

By contrast, the sales tax is considered “regressive” because everyone pays the same tax rate, regardless of income or ability to pay.

Some States More Regressive

California’s sales tax, however, is considered a lot less regressive than those in many other states because it exempts from the tax basic necessities--food, shelter, medicine and medical supplies--as well as other items, such as newspapers and magazines. Many tax experts consider the state’s sales tax “neutral”--neither progressive nor regressive--because of the exemptions.

David R. Doerr, a tax analyst for the pro-business California Taxpayers Assn., contends that all the exemptions have made the sales tax in California “fairly benign.” As evidence, he notes that when the Legislature imposed a temporary 0.25% sales tax increase to help pay the costs of California’s Loma Prieta earthquake, it caused hardly a ripple of opposition.

He also argues that it is proportional in the sense that the wealthiest taxpayers do, in fact, pay their share since major sources of the $14 billion-plus raised each year in California by the sales tax are big-ticket items such as new cars, upscale clothes, shoes, jewelry and restaurant meals.

However, since no one escapes the sales tax, a much broader segment of society is affected by it.

Democrats downplay Doerr’s analysis, arguing that despite exemptions the sales tax takes a disproportionate share of the income of the poor.

Lenny Goldberg, a lobbyist for the California Tax Reform Assn., a public interest group generally in line with the Democrats on tax questions, maintains that “every major tax study indicates that continued consumption taxes fall more heavily on the poor than the rich.”

On Wednesday, Goldberg released a study by the Washington-based Citizens for Tax Justice showing that the lowest income earners in California and other states borrow heavily to sustain their lifestyles. Using data culled from a variety of sources, Citizens for Tax Justice concluded that families of four at the lowest income levels used a variety of credit sources to spend substantially more than they earned.

Four-member families with average incomes of $12,700 would actually spend $20,450--of which $9,423, or 74% of their income, would be on taxable items. By contrast, the study shows that families of four with average incomes of $54,800 would spend $19,595-or 36% of income--on taxable expenditures including alcohol, cigarettes, gasoline and household goods.

One problem is that the study is national in scope and includes taxable items that are exempt from sales taxes in California. The California Taxpayers Assn., comparing actual California sales tax collections to collections in other states, said that in 1988 California ranked 25th among states when the standard was sales tax collections per $1,000 of personal income.

In a separate study of the California sales tax, the Citizens for Tax Justice found that the sales tax takes 6.7% of the income of a family of four in the lowest economic bracket, then moves regressively down until it takes only 1.3% of the income of the top 1% of taxpayers. Using these figures, State Board of Equalization member Brad Sherman said Wilson’s plan to extend the sales tax to candy and snack foods would take an additional three-tenths of 1% of the income of the low income group while it would have no measureable impact on the people in the highest income group.

McClintock argues that at the minimum, the governor’s nearly $7-billion tax increase program would cost a family of four $893 in out-of-pocket expenses. McClintock arrived at that number in strictly unscientific fashion by taking the size of the proposed tax hike, dividing it into California’s 30 million residents and multiplying that by four.

Some believe Wilson chose the sales tax approach because it is the easiest and least politically objectionable way to raise money fast.

Steven M. Thompson, director of the Assembly Office of Research and a top adviser to Assembly Speaker Willie Brown (D-San Francisco), said, “Polls show that if you are going to raise taxes, people like the sales tax because it is collected a little bit at a time. It’s also easier to administer, because the apparatus is in place already.”

A California Poll published in March by the Mervin D. Field organization found that 57% of the Californians surveyed said a temporary half-cent sales tax would be acceptable to them, while 40% said it would be unacceptable. On the other hand, comparable increases in the state income tax and property taxes were found to be unacceptable to most of those surveyed.

By unveiling a tax plan relying heavily on the sales tax and other consumer taxes, Wilson injected new life into a recurring debate over who should pay for government services.

Republican philosophy is grounded in a belief that excessively high taxes on the wealthy stifles economic growth, leads to stagnation of the economy and ultimately comes back to bite the middle class by eliminating jobs, for example. Wilson believes an increase in the sales tax would avoid this, because it is the state’s most broadly based tax.

Democrats, on the other hand, say their tax philosophy is rooted in the issue of fairness. They expect the wealthiest taxpayers to pay a proportionate share of their income to support government, arguing that the wealthy have profited most from their California residency.

At the core of the argument is a belief that Republican tax policies have shifted the tax burden away from the wealthy to the middle class and poor.

As an alternative, Democrats have countered Wilson’s tax plan with a proposal to raise the income tax on high wage earners--individuals with taxable incomes of $100,000 or more, couples earning more than $200,000--to 11% from the current top rate of 9.3%. The top rate was lowered in 1987 by Democrats who jumped aboard the Reagan “tax reform” bandwagon and brought state income tax laws into conformity with changes enacted on the federal level.

“The richest 1% of the taxpayers were the major beneficiaries of the federal tax reform during the 1980s. We want to make sure that those who benefited most pay their fair share now that the bills are coming due,” said Klehs, who is carrying the Democrats’ legislation to boost income taxes.

The Klehs tax bill was approved last week by the Assembly Ways and Means Committee and sent to the Assembly floor for a vote by the full house. Wilson has said he would veto the income tax bill if it reaches his desk.

At tax increase time in the Capitol, the voice of middle-class taxpayers tends to get lost while just about every other special interest group in the state calls its membership to battle, raising the decibel level of the debate to a loud scream.

Ever since Wilson came out in favor of a tax increase, lobbyists for chambers of commerce, grocers, bankers, manufacturers, newspaper publishers, candy makers, oil companies and numerous others have been besieging legislators.

The Hyatt Regency Hotel across the street from the Capitol has turned into something of a large-scale war room for “don’t tax me, tax the other guy” types. Each day, it seems, a new batch of business men and women pour out of the hotel and march across the street to do battle against tax bills. Their badges are the square, plastic-wrapped name tags they pin to their suit lapels; their armament is the hundreds of thousands of dollars they pour into lawmakers’ election campaign war chests each year.

And legislators listen. They make promises and get locked into positions that close out their options on the range of possible tax increases.

Low Impact on Business

Uppermost in Wilson’s mind when he fashioned his tax plan, he says, was a desire for a tax package that would have a minimal impact on business.

As a result, he seemed to be automatically rejecting various Democratic-backed proposals directed at business. Democrats have proposed raising by 1% or 2% the 9.3% income tax rate charged to banks and corporations. They also have proposed putting businesses on a different property assessment schedule than private residences, arguing that corporations were the big winners of the tax cuts that took effect with passage of Proposition 13 in 1978.

Wilson also shot down a proposal by Assembly Speaker Brown to enact a new levy similar to a sales tax on services supplied by accountants, lawyers and others.

Even so, businesses would not escape Wilson’s proposed sales tax increase. Tax experts say businesses now pay about 30% of the sales tax through buying equipment, supplies and other taxable goods.

If Wilson’s tax plan is successful, it would give California one of the highest overall sales taxes in the nation. Currently, the general sales tax is 6%, but goes as high as 7% in counties where voters have approved local increases. Wilson’s plan would push the sales tax up to as much as 8.25% in counties like Los Angeles, San Francisco and San Diego that now have 7% taxes.

In addition to ranking California 25th among states based on sales taxes, the California Taxpayers Assn. study ranked the state fourth in corporate tax collections per $1,000 of personal income. In other categories, the state ranked 16th among states in personal income tax collections, 30th in property tax collections, and 25th in total state and local tax collections for each $1,000 of personal income.

California Taxes

Here is a look at the percentage of annual income that Californians now pay in taxes, according to figures provided by Citizens for Tax Justice, a public interest group.

Some believe the $6.7-billion tax increase plan outlined by Gov. Pete Wilson would hit hardest at the poor and middle class, since sales tax increases make up most of it. Sales taxes tend to take a disproportionate share of income from the poor, since everyone who buys a product pays the same tax regardless of income. Wilson, however, argues that wealthier individuals pay more of the tax since they are able to purchase more taxable items .

Family Income LOWEST SECOND MIDDLE FOURTH TOP 20% 20% 20% 20% 20% Average Income $11,700 $27,000 $41,600 $59,000 $92,500 $208,300 Personal Income Tax 0.1% 0.5% 1.5% 2.4% 4.0% 5.9% Corporate Income Tax 0.1% 0.1% 0.1% 0.1% 0.2% 0.4% Property Taxes 5.6% 3.4% 2.9% 2.7% 2.5% 2.1% Sales Taxes 6.7% 4.5% 3.6% 3.1% 2.6% 2.0% Excise Taxes 1.7% 0.9% 0.7% 0.5% 0.4% 0.2% Total State Taxes 14.1% 9.5% 8.8% 8.9% 9.7% 10.7% After Federal Tax Deductions 14.1% 9.3% 8.3% 7.7% 8.1% 8.4%

Average Income $1,052,000 Personal Income Tax 7.3% Corporate Income Tax 0.7% Property Taxes 1.2% Sales Taxes 1.3% Excise Taxes 0.1% Total State Taxes 10.6% After Federal Tax Deductions 8.1%

SOURCE: Citizens for Tax Justice