COLUMN ONE : State Tax Facts--and Fiction : Contrary to popular belief, Californians do not face unusually heavy levies, compared to other Americans. In fact, our antiquated system is seen as extraordinarily generous in its credits, loopholes.

The message has been driven home for so long and with such fervor that most Californians have come to believe it: They are overtaxed compared to people in other states. The government keeps taking more and more from them. And soaring taxes are making business flee.

These notions have become so embedded in the public psyche that they drive the rhetoric of California politics and the mechanics of government.

But a five-month Times analysis of the state and local tax system shows these popular beliefs are based largely on myth.

In fact, compared to other states, the California tax burden is about average as a proportion of total personal income. And the few studies that exist belie the perception that business bears an especially onerous tax load.

In its analysis, The Times did find a tax system that is antiquated and complex, riddled with peculiar rules and inequities from decades of piecemeal changes without any comprehensive review.

It is also a system extraordinary in its generosity. Billions of tax dollars are given away annually--to individuals and corporations--through various forms of relief, credits, incentives and outright loopholes.

For decades, special interests have manipulated the cumbersome and unwieldy system to their benefit.

California is the only major petroleum-producing state without a severance tax on oil pumped from the ground. And it is among the minority of states that do not impose a tax on tickets to professional sports events and tourist attractions, which could raise as much as $1 billion a year.

Those exceptions and credits have a distorting effect on the system. By exempting so much wealth from taxation, they narrow the state’s tax base. With a smaller base, the state has to impose higher rates on those people and items it does tax to get the revenue it needs to fund its operations.

Over the years, many of the special benefits were designed to encourage particular economic or social activities, such as tax credits to help the solar power industry, to encourage employees to ride-share and to help pay workers for child care.

The Legislature and Gov. Pete Wilson continued this trend in 1993 by providing business with an estimated $400 million annually in exemptions and credits in hopes of overcoming California’s anti-business image.

Economists generally are skeptical of the value of such breaks. But many supported the key portion of the legislation because it had the effect of exempting equipment used in manufacturing from the state sales tax. California has been one of a few large industrial states that charged the sales levy on such equipment, thus putting the state at a disadvantage, they said.

By most measures, The Times found, the rich do pay their fair share of taxes. The top 1% of income earners pay more than one-third of all state personal income taxes.

Yet that steep rate structure is one of the factors that keeps California from having a stable and reliable tax base. The system is “wildly cyclical,” one expert said--especially responsive to salary reductions and layoffs during recessions, including the current one.

A result of generous exemptions and cyclical collections is that since 1959 every new governor but one has faced a budget crisis and demands for raising taxes.

The tax system was largely patched together during the Depression, when California was a mercantile and agrarian state of fewer than 7 million people. The major levies created from 1933 to 1937 are still on the books in the same basic form.

California’s tax structure has lagged behind its transformation to a financial and service economy that has emerged as the world leader in computer and aerospace technology, experts say. California flunks half of the 10 key points that experts say make for a good tax system.

The cumulative result is that the system fails a most fundamental task: to generate the money needed to finance the levels of basic state and local services that people demand.

Yet the last time the state studied the tax structure in depth was 1964, when then-Gov. Edmund G. (Pat) Brown told an Assembly committee: “Much of our present tax structure at the various levels of state and local government is archaic, based on conditions existing decades ago but no longer valid.”

Now, 29 years after Brown’s testimony, the way California raises its money is basically unchanged. Says his daughter, state Treasurer Kathleen Brown: “The whole tax system of the state of California needs a good look.”

The Democrat-dominated Legislature and Republican Wilson did take a look during the 1993 legislative session, considered by some the most productive in years. But it was a narrow examination, prompted by pressure to do something that could be perceived as helping the struggling business economy.

The resulting tax bill granted reductions to business without designating how they were to be financed--not the kind of action experts regard as a step toward tax reform. Other actions went directly against the grain of tax reform: in particular, the shifting of more property tax revenues from local government to the state treasury.

Although few politicians have taken the political risk of advocating comprehensive tax reform, the issue could be a key one in the 1994 campaign for governor. Democrats Kathleen Brown and John Garamendi, the state insurance commissioner and former chairman of the state Senate’s taxation committee, are expected to compete for the nomination to challenge Wilson.

One reason California’s tax system has been so resistant to reform is that its structural weaknesses are overshadowed in the public mind by myths that have taken firm root during decades of ill-informed civic debate:

Myth: California is a high-tax state, perhaps one of the highest in the nation.

Fact: Overall, the state’s tax burden ranks about average among all states as a proportion of personal income. Some California tax collections rank as high as sixth in the nation--for the corporate income tax--but these are offset by others that come in far lower, including property taxes, which are 29th.

Myth: Taxes keep going up.

Fact: Some rates have been raised, primarily the sales tax in recent years and a variety of levies in the budget crisis of 1991--many of them temporarily. On the whole, the state and local tax burden has held steady since the 1960s, partly because of Proposition 13 property tax cuts, but also because of other rate reductions, tax relief and loopholes. Personal and corporate income tax rates were lowered in 1987.

Myth: The state income tax is so high it’s a killer for the average Californian.

Fact: California does have some of the steepest personal income tax rates in the nation--but only in the highest brackets. The wealthiest 4% of Californians--those with taxable income of $100,000 and more--paid half of all state personal income taxes, even before new top 10% and 11% brackets were added temporarily in 1991.

At the $35,000 taxable income level, California ranks 40th out of 42 states with income taxes. Nearly half of all Californians filing returns pay $20 or less a year. The average rate paid by all filers is 3.4% of taxable income.

Myth: Taxes are driving business from California.

Fact: Experts call this an exaggeration, not an actual myth. Some economists challenge the premise that there is a huge exodus of companies from the state. But business executives who have moved, or launched new operations in other states, generally blame a variety of factors, of which taxation is just one, and not necessarily the most important. State and local taxes make up roughly 1% to 2% of a firm’s overall cost of doing business--not enough to trigger major corporate decisions such as a move out of the state, they say. This summer’s business tax cuts will amount to an estimated $400 million annually out of a total corporate tax bill that runs in the tens of billions of dollars.

Myth: Although Proposition 13 cut the property tax, most of those savings have been eaten up by all the hidden fees local governments have enacted since 1978.

Fact: Fees, parcel taxes, benefit assessments and other non-tax charges levied by counties, cities and special districts have increased steadily over the years as local governments have tried to cope with the loss of property tax revenue. But savings still far outweigh such costs--by at least 3 to 1, according to statistics from the state legislative analyst’s office.

These myths are important because, beginning with Ronald Reagan’s campaign for governor in 1966, they set the political mood on taxes and spending. Republicans led the charge, but Democrats quickly learned that they bucked the trend at their political peril.

Reagan rhetoric of a quarter century ago is paraphrased routinely today--by some Democrats as well as Republicans--as political truism: The problem isn’t that we’re not taxed enough; it’s that we’re spending too much.

In the 1970s and 1980s, a frustrated public, convinced it was overtaxed, seized control of California tax policy from the politicians and technocrats. Anti-tax groups and others forced a series of yes-or-no votes on complicated initiative measures aimed either at reducing taxes, earmarking new levies for specific programs or restricting spending.

Proposition 13 swept to victory in 1978 on a tide of taxpayer rage over soaring property taxes. Written and promoted by self-proclaimed tax patriots Howard Jarvis and Paul Gann, the measure slashed property taxes and presaged a national tax rebellion, foreshadowed the election of Reagan as President, and dramatically altered the structure of local government financing in California.

Now seemingly untouchable as Article XIII-A of the California Constitution, Proposition 13 continues to yield homeowners and businesses billions of dollars a year in tax savings. Proposition 13 also continues to raise barriers to tax reform, establishing a political mood that makes it risky for politicians to talk about major changes.

The chairman of the state Assembly Revenue and Taxation Committee, Johan M. Klehs (D-San Leandro), said: “I think most politicians are afraid to even begin to look at any tax policy that takes a dollar out of anyone’s pocket, whether it is a special interest, a corporation or a broad interest group out there.”

Yet the public may not be as taxophobic as the politicians believe. Los Angeles Times Poll Director John Brennan said opinion surveys indicate that Californians are not uniformly angry about levels of taxation.

“A majority of state residents seem to have accepted the idea that some kind of tax increases remain necessary to solve the state’s budget woes,” Brennan said.

“With the economy mired down so badly,” he added, “issues like unemployment, layoffs and the sluggish business climate rise to compete with taxes for public attention. It’s a luxury to worry about taxes when you don’t have a job.”

Indeed, there was no mass public revolt when Wilson and the Legislature boosted a variety of taxes--some of them temporarily--by a total of $7 billion in the budget crisis of 1991.

But Californians can lash out in unexpected ways. There was a mini-revolt over the taxation of junk food in the 1991 budget agreement, even though those levies accounted for only a fraction of the $7 billion. The snack tax was overwhelmingly repealed in a 1992 ballot referendum.

And Brennan noted that polls only measure general opinions. They cannot be used to forecast political actions.

“As with issues like abortion and gun control, a small number of committed anti-tax activists often have influence on the political landscape far beyond their numbers,” he said.

Wilson felt the lash of this fury in 1991 from conservative Republicans, who argued that the tax hike was a drag on the state’s economy during a recession. They forced him to acknowledge that the hike was a mistake he would not make again. Thus, in 1992 and 1993, Wilson switched strategies: Rather than take more money directly from the people, he took it from local government.

Wilson and the Legislature shifted billions of dollars in property tax revenues from local governments to the state.

The transfer allowed the state to weather its latest budget crisis, but was a major setback for tax reform, experts said. It forces counties, cities and special districts to further cut their budgets and raise taxes where they can.

If voters approve Proposition 172 in November, local governments will pick up an additional $1.5 billion annually in sales tax revenues. Still, that amounts to less than half the $3.9 billion in property taxes taken over by the state.

Public policy experts argue that the property tax, the traditional source of revenue for local government, should be returned to the cities and counties.

A major flaw in the tax system today, experts say, is that local government officials have little control over their own revenue sources, but get political heat from constituents when they cut services or are forced to look for other ways to finance them, often the sort of back-door gimmicks that anger taxpayers.

Assemblywoman Valerie Brown (D-Sonoma), a former Sonoma mayor, said city and county residents “will be nickeled-and-dimed to death” through a variety of new local levies in the wake of the 1993 budget deal.

“I think the end result will be far more onerous than a revised tax structure,” she said.

Kevin Scott, former director of the Commission on State Finance and now a Los Angeles investment banker, said: “I would argue that most people have little idea in the state what tax levels are because it’s so unclear how taxes and fees are collected.”

“We have to get a handle on where the governmental entities collect monies, and where does it go,” Scott said. “We have to set up a system that is consistent and streamlined.”