Tax Increases Under Wilson Exceed Cuts

Taken together, the tax cuts Gov. Pete Wilson has won in the last two years might have been the stuff of legacy.

The Republican governor pushed Democratic lawmakers into approving a significant tax cut in 1996 on corporate and banking profits. This year, he took aim at income taxes.

Business tax rates have not been so low since Ronald Reagan was governor. Only Gov. Earl Warren cut income taxes more--35% in 1943.

“We made some change . . . that could fairly be called historic,” Wilson said as he signed the latest tax package into law in October.

But although the recent cuts will be worth $2 billion a year to individuals and businesses when they fully kick in, Wilson the tax cutter has not come close to matching Wilson the tax raiser. Tax increases at the start of Wilson’s administration in 1991 hover at $3.6 billion a year above recent cuts--and that does not include many fees that have increased in the 1990s.

With the Legislature controlled by Democrats, who have blocked many of the governor’s tax cut proposals because they would reduce spending on schools, Wilson probably will leave office a year from now unable to rewrite his record for having presided over the largest tax hike in state history.

Toting up the difference between the tax hikes at the start of Wilson’s administration and the recent tax cuts, State Board of Equalization member Dean Andal concluded: “Not even close.”

“When you add up all the taxes, fees and penalties,” said Andal, who is a Republican, “and then you subtract the income tax cut--which is substantial, no doubt about it--the state is ahead billions. That does not even include all the revenue increases by local government. Citizens aren’t even close to even.”

By most measures, California is a moderate tax state, as it was when Wilson took office in 1991. It has been that way since voters approved the property tax-slashing Proposition 13 in 1978. But the way in which the state has raised revenue during the Wilson years reflects trends that trouble some tax experts:

* Although Wilson has not increased taxes significantly since 1991, policies implemented later have prompted cities and counties to find more ways to get into people’s pockets.

* While the state continues to rely on wealthier Californians to pay most taxes, Sacramento is looking more and more at lower and especially middle-income earners as its cash cows.

A Break for Families

Wilson’s latest tax cut package will ease the effect of that trend somewhat, reducing the burden of income taxes--the state’s largest source of revenue--for many middle-income earners. Aimed primarily at families, the tax cut will shave income tax bills by $50 per dependent next year and $150 per dependent in 1999. But, for many working Californians, such cuts are more than offset by hikes in other taxes and fees.

In embracing this year’s tax cuts, Wilson had in mind people like Mary and Mike Horvath. She’s 40. He’s 42. They live in Chino Hills, are parents of two teenage boys and are firmly middle-class.

Like anyone who survived the recent recession with a job, the Horvaths hoped that family finances would improve now that times are better. Wages from his work as an elevator serviceman and her part-time job as a reading aide at Glenmeade Elementary School are up by $12,000 since 1990.

Raises, however, lead to “bracket creep.”

With a yearly income now in the mid-$70,000s, their higher wages landed them in the same tax bracket as multimillionaires. Even with the tax cut, they will end up paying about $300 more in state income taxes in 1998 than they paid when Wilson took office.

“Looking back at what we were making in 1990, things should be more comfortable,” said Mary Horvath, a registered Republican. “But we don’t feel that way. I’m sure everyone feels the same.”

Income taxes are only part of the bite.

The Horvaths paid more in sales taxes on the two couches they bought this year than they would have paid in 1990. The cost of registering their cars is up. So is Mike Horvath’s fishing license. When their eldest son enters nearby Mount San Antonio Community College next fall, fees will be $360, double what they were when Mary Horvath attended a decade ago.

“They may feel like they’re giving you a lot,” Mary Horvath said. “But they’re taking it out of the other pocket.”

Numbers bear this out.

Californians pay more today to keep government operating--25% more per capita than when Wilson took office, according to revenue estimates in the state budget. At the start of the decade, the per capita state tax bill was $1,454. This year’s bill will be about $1,850.

Wilson administration officials insist that taxes have been flat during Wilson’s tenure. People paid slightly less than $7 per $100 of income in 1990 and will pay slightly more than $7 in the 1997-98 fiscal year.

“If you go to the three big taxes, the personal income tax is less, the banking and corporations tax is less, the sales tax is more,” said Craig Brown, Wilson’s finance director.

Brown notes that voters agreed to at least some of the sales tax increase, approving a 1993 ballot measure making permanent a half-cent sales tax hike to provide more money for local law enforcement and firefighting.

“The average citizen probably always feels they are always paying too much in taxes,” Brown said. “We could cut the taxes in half, and they’d probably still feel they’re paying too much.”

Recession Fueled Hikes

Wilson arrived in the governor’s corner office at the worst possible time for someone wanting to keep taxes in check.

A recession-caused budget hole totaled $14.3 billion in 1991. Wilson responded with program cuts worth $3.1 billion, plus accounting ploys and shifts of responsibility to local governments.

He also pushed through the largest tax increase in history, designed to raise $7.5 billion a year.

Everything was fair game. Sales taxes went up and were extended to newspapers and snacks, though voters overturned the snack tax the next year.

Income taxes rose for wealthy Californians. Poorer Californians lost a tax credit that had given renters an extra $60 to $120 a year. Taxes were raised on alcohol. Fees jumped for anyone registering a car, attending college, filing a lawsuit or getting a speeding ticket.

Partly because so many people lost their jobs, partly because some taxes backfired, the package fell short. It brought in an additional $5.4 billion to Sacramento, $2 billion less than expected.

Still, the reaction from Wilson’s fellow Republicans, many of whom opposed the tax hikes, was harsh. Ever since, Wilson has been trying to roll the taxes back--particularly for business.

Wilson has pushed for and won business tax credits for new manufacturing equipment, worth a combined $636 million a year. Last year, he won support for the package that cut the rate at which profits are taxed by 5%, saving banks and corporations $300 million a year. Altogether, business tax cuts will be worth $1.2 billion by 2000.

“I would advise more [cuts in] business taxes,” said Ted Gibson, chief economist for the state Department of Finance. “You get more economic bang for the buck than with any other tax cut you do.”

Income Tax Bonanza

The state’s take from business has been relatively flat in the 1990s, up to $5.9 billion this

year from $5.5 billion at the start of Wilson’s tenure. Revenue from personal income tax, by contrast, is way up, from $20 billion in 1990 to about $26 billion next year. The income tax bonanza is the big reason Sacramento has been awash in money in recent years.

It is also one reason why Wilson and Democratic leaders agreed to pare back income taxes.

The main feature of this year’s income tax cut was an increase in the credit for children and other dependents, bumping it up by $50 in 1998 and another $100 in 1999. Altogether, taxpayers will be able to lower their tax bill by $222 per dependent in 1999, rather than the current credit of $68.

Statewide, the cut will total $780 million a year by 2000. “We were determined that it would not be simply a symbolic tax cut but a real one,” Wilson said as he signed the tax cut bill.

In fact, the tax reductions of 1997 fell short of what Wilson wanted. About 3 million taxpayers will see income tax reductions, compared to 9 million in Wilson’s earlier plans.

Wilson failed three years running to win broader tax cuts. At first, he wanted across-the-board cuts of 15% spread over three years. That would have cut income taxes by almost $5 billion a year.

Then he sought an adjustment in income tax brackets. If it had been approved, the top tax rate of 9.3% would not have kicked in until a couple earned more than $74,442, rather than $67,675 now.

Democrats blocked the plans, contending that the cuts would take billions from public schools and chop the most from the tax bills of the wealthy.

Wilson did succeed with one less-noticed income tax cut, in 1996. Over Democratic opposition, he and Republican lawmakers allowed the expiration of two upper-income tax brackets that were temporarily imposed as part of the 1991 tax hikes. That represented a $1-billion tax savings for individuals who earn more than $100,000 annually and couples with earnings in excess of $200,000.

California’s income tax system is among the nation’s most “progressive,” meaning that people pay more as their income rises, while low-income people pay little or no income tax.

However, for the vast majority of people not in poverty but making less than $100,000 a year, California taxes income at one of the highest rates of any state. California’s top tax rate is higher than all but the District of Columbia and four states, according to San Francisco financial counselor Eric Tyson, coauthor of “Taxes for Dummies.”

What’s more, states with higher top income tax rates impose lower sales tax rates than does California.

“Especially in high-cost urban areas, people who are not very high-income earners are paying, by national standards, extremely high state income tax rates,” Tyson said.

A Steep Sales Levy

The single fattest source of increased tax revenue still on the books from the 1991 tax hikes is sales tax.

Imposed on almost all consumer products other than food, California’s sales tax is among the richest revenue mines for state and local governments, with the state claiming two-thirds of the bounty.

State and local sales tax revenue will be 45% more than when Wilson took office--$27.4 billion this year compared to $18.8 billion in 1991, estimates economist Brad Williams, of the legislative analyst’s office.

The main reason is that the sales tax rate is up. When Wilson took office in 1991, that rate did not exceed 7% in any single county, and only eight counties had a rate that high.

Today, using authority granted them by Sacramento, all 58 counties have a sales tax of at least 7 1/4%. Los Angeles and five other counties have a sales tax of 8 1/4%. San Francisco’s rate is 8 1/2%. Most of the local sales tax money funds public safety and mental health programs.

Although the money may go for good causes, tax experts call sales taxes “regressive.” The poor pay little or no income taxes. But anyone buying a pair of pants, a washing machine or car pays the same sales tax, regardless of their wages. Because families buy the most big-ticket items like couches and washing machines, sales taxes fall heavily on them.

“Families are most burdened with sales tax increases,” said Lenny Goldberg of the liberal California Tax Reform Assn. “There is stuff you have to buy that is durable. A washing machine breaks, you get a new one.”

Officials balk when the talk turns to cutting sales taxes. The reason is clear: A cut of even a half-cent would slash more than $1.6 billion from government.

Besides, officials like the sales tax because revenue from it does not rise or fall as much as that from personal income and corporate taxes, said finance department economist Gibson. Additionally, they note, people can avoid sales taxes by deferring purchases.

“As a matter of policy,” Gibson said, “we ought to be encouraging savings and discouraging consumption, and sales tax at the margin does discourage consumption.”

Middle Class Affected

When California raised taxes in 1991, it wasn’t alone. Nor is it blazing trails with tax cuts now that the economy is bustling. When the recession caused tax revenue to plummet, 43 states raised taxes. With tax revenue now pouring into state coffers, 25 states have cut taxes, according to the Washington-based Center on Budget and Policy Priorities.

Jean Ross of the California Budget Project, an affiliate of the Washington group, cites evidence for the view that lower- and middle-class taxpayers were hurt most by California’s tax policies in the 1990s.

She cites the fate of three major pieces of the 1991 tax package: the sales tax hike, the suspension of the tax credit given to renters, and creation of upper-income tax brackets for high earners. Of the three, only one is no longer on the books--the higher brackets for wealthier Californians.

“It’s giving relief to the people with the highest incomes,” said Ross, “and continuing to tax the broad middle of California.”

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Fees on the Rise

Officials do not consider fees to be taxes. But the money leaves your checkbook and heads to Sacramento just the same. State budget revenue estimates show that fees will account for about 21% of state revenue this year, compared to 18% when Gov. Pete Wilson took office.

Vehicle registration

What It Used to Cost: $368 (annual registration for a $20,000 car in 1990.)

What We Pay Now: $441

Notations: The higher fees bring in $849 million a year more. The money goes to local government.

*

Traffic scofflaws

What It Used to Cost: $27-$81 (base fine for going 5-15 mph over the speed limit in 1993)

What We Pay Now: $103-$270

Notations: For every $10 of base fine, violators also pay $17 in penalties. So a $100 ticket actually costs $270. In 1991, the penalty was $13.50 per $10 of base fine.

*

Higher education

What It Used to Cost:

- $1,624 (UC tuition in 1990)

- $780 (Cal State in 1990)

- $180 (full-time community college fees in 1990)

What We Pay Now:

- $3,799 (UC)

- $1,584 (Cal State)

- $390 (full-time community college fees)

Notations: Wilson and the Legislature agreed to lower fees by 5% in 1999.

*

Parks

What It Used to Cost: $12 (fee for overnight stay in a state park in 1990, not including $3.95 reservation fee)

What We Pay Now: $20 (not including $6.75 reservation fee)

Notations: Take a pay shower and buy a bundle of firewood, and the cost for a family approaches $30 a night. California park fees are among the nation’s most expensive, according to the National Assn. of State Park Directors.

*

Courts

What It Used to Cost: $8 (fee for filing a small claims suit in 1990)

What We Pay Now: $20

Notations: Democrats gained Wilson’s support for restructuring the way courts are funded, including $86 million a year in fee hikes. Lawyers will pay most of the costs, but the small claims filing fee is an example of how individuals will also be affected. And the cost of copying courthouse documents will double, to $1 a page.

*

Telephone service

What It Used to Cost: $204 million (total of surcharges statewide)

What We Pay Now: $840 million

Notations: These are estimated surcharges paid by California phone customers, according to Angela Young of the Public Utilities Commission.

*

Alcohol

What It Used to Cost: $127 million (total state taxes paid on purchases of beer, wine and hard liquor in 1990)

What We Pay Now: $262 million

Notations: The hike is 9 cents on a six-pack of beer, 4 cents on a bottle of wine, and $1.30-$2.60 for a gallon of liquor. California’s alcohol taxes are actually relatively low compared to other states.

*

Cigarettes

What It Used to Cost: 35 cents per pack

What We Pay Now: 37 cents per pack

Notations: The 2 cent tax increase to fund breast cancer research and detection won bipartisan support.

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The Balance Sheet

Taxes Raised Since 1991

Sales tax rate increase*: $4.i billion

Vehicle registration: $849 million

Renters tax credit**: $525 million

Alcohol tax: $165 million

Sales tax on newspapers: $50 million

Business meals deduction (cut to 50% from 80%): $174 million

TOTAL: $5.863 billion

*

Taxes Cut Since 1991 (Individuals)

Dependent credit: $780 million

Capital gains on homes: $70 million

Alternative minimum tax: $85 million

IRA expansion: $31 million

Other tax cuts: $10 million

TOTAL: $976 million

*

Taxes Cut Since 1991 (Business)***

Credit for purchases of manufacturing equip.: $358 million

5% cut in banking and corporate profits taxes: $300 million

Credit for firms engaged in research and development: $278 million

Reductions for Subchapter S corporations: $147 million

Other tax cuts: $135 million

TOTAL: $1.218 BILLION

*

Total Taxes Cut: $2.194 billion

Difference: $3.644 billion

Notes:

*Roughly $3.3 billion goes to local government for support of police, fire and mental health service. Voters approved half that sum in 1993 in a ballot measure supported by Wilson and legislative leaders.

**The Wilson administration contends that the suspensions of the income tax credit for renters is not a tax increase because half the money went to people who paid no income taxes. Other officials and tax experts view it as a tax increase.

***The tax credit for small businesses that provide employees with health care coverage was supposed to take effect in 1992, but it was suspended indefinitely as part of the 1991 tax package.

Figures generally apply to estimated taxes in 2000 when cuts brought about in recent years fully kick in.

Source: Department of Finance; Legislative Analysts’ Office