The Freedom Minute

Wrong Again, Michael Hiltzik

In his column in Thursday’s LA Times, Michael Hiltzik attempts to draw some conclusions about the voters’ rejection of Props 1A-E while again extolling the virtues of higher taxes. Unfortunately for Mr. Hiltzik, as usual, he’s wrong about virtually everything. This doesn’t particularly surprise me considering my critique of his previous column where he couldn’t keep his facts straight. This time around, Hiltzik draws the wrong conclusions and uses specious statistics to back up his argument.

Are Californians Highly Taxed?

Hiltzik claims that it’s a lie that Californians are burdened by the highest state taxes in the nation. To prove his point, he writes,

The truth, according to 2006 figures derived from the U.S. census, is that, as a percentage of all personal income, California’s tax and fee schedule ranks 18th in the country.

But that’s a misleading statistic. The reason that California comes out 18th, is that we have a few very wealthy citizens and a large percentage of our tax revenue comes from the sales tax which is a flat tax on purchases. This skews the ranking, because when you calculate taxes as a percentage of personal income (taxes divided by personal income), the incomes of our wealthy citizens increases the denominator and lowers the overall percentage. In low income, sparsely populated states, it takes a higher proportion of their incomes merely to provide a basic level of government and infrastructure. More densely populated and higher income states, like California, spread those costs over a greater tax base, allowing the appearance of a lower tax burden. So why use this one statistic to determine whether Californians pay the highest taxes in the nation? I suspect Hiltzik chose this number because it seems to prove his overall point that Californians aren’t taxed enough. However, Hiltzik ignores other, more valid statistics that prove him wrong. For example, in the same report referenced in Hiltzik’s column, California ranks 11th in per capita taxes (total taxes divided by the number of people). Again, this statistic may or may not tell us anything about our personal tax burden, for if there are a large number of people who pay little or no tax, then those that do pay taxes might pay a lot, but the per capita tax rate is lower. Furthermore, it’s unclear whether the above numbers include such things as local levies or other fees imposed on the populace. The point is, measuring the tax burden as a percentage of personal income is only one consideration of the tax environment for any jurisdiction, and not a particularly good one at that. Taking this one statistic out of many and using it as the sole evidence to prove your point is intellectually dishonest and I’m sure Michael Hiltzik knows it.

So let’s set the record straight about how heavily Californians are taxed. California has the highest state sales tax in the nation, the highest tax on motor fuels, one of the , highest corporate tax rates in the country, the second highest top income tax rate (Hawaii just jumped to #1, but not by much) and higher personal tax rates that kick in at some of the lowest income levels. For example, California imposes a 9.55% income tax on individuals earning over $47,000. No other state has such a high rate for those earning such a low salary. Finally, according to the Tax Foundation, for 2008, California ranked 6th highest in the nation in overall state tax burden. And in their 2008 report, the Pacific Research Institute ranked California 47th in overall economic freedom. Considering these numbers, Californians appear to shoulder a very high tax burden as compared to residents of other states. I leave it to the reader to decide whether we should be paying more as Hiltzik suggests.

Are Wealthy Taxpayers Paying Enough?

Elsewhere in his column Hiltzik makes another misleading assertion:

The dirty little secret, according to Citizens for Tax Justice, a left-leaning nonprofit group, is that California’s wealthiest residents shoulder the lightest burden of any income group in the state. The top 1% of California income-earners (average 2007 income: $2.3 million) paid 7.4% of their income in state taxes last year, counting the federal deduction for state taxes. The highest rate was paid by the poorest residents: Those earning $20,000 or less, with average income of $12,600, forked over 10.2% of their earnings.

Again, Hiltzik uses misleading and selective statistics from Citizens for Tax Justice to prove his point. First, the above statement is only true when you factor in the deduction taxpayers get on their federal income taxes for the state income taxes they’ve paid. But is it fair to factor this in? Wealthy taxpayers get more of a deduction on their federal taxes because they pay more state income tax than lower income taxpayers. And, since the deduction comes off their federal taxes, using this benefit as an offset to give the appearance of a lower state tax burden is intentionally misleading. Without this offset, the top 1% of California income-earners is the group that pays the second highest percentage of their income in state taxes. However, this still doesn’t tell the whole story. As we’ve seen above, these numbers incorporate flat taxes and fees such as sales and excise taxes into the calculation. Any statistical calculation that does this will, by necessity, make it appear that lower income taxpayers pay a high percentage of their income in taxes. And the larger the percentage of the tax revenue which comes from these types of taxes, the greater the overall tax burden will appear to be on the lowest income groups.

Furthermore, the author of the report from which Hiltzik draws his numbers fails to provide any reference for where he came up with his statistics. As a result, we can’t double check his facts. In addition, the author parses his numbers in such a way as to make it appear that the rich are under taxed. If you examine the report, you’ll notice that the author compares groups of taxpayer in 20% increments, until he gets to those making over $94,000. At that point he divides the last 20% into smaller divisions with the final group being the top 1% of earners. So, we’re really not comparing apples to apples. Why not divide the numbers into equal 20% increments? One suspects that the reason is clear – it would likely be more difficult to prove his point. There are possibly other problems with this report as well. Low income households rely heavily on government transfer payments such as food stamps, aid to families with dependent children, etc. Whether or not these types of income are included in the household income figures for the lower taxpayer groups is unknown. My suspicion is that they are not.

Finally, this whole attempt to vilify higher income taxpayers as deadbeats is predicated on the idea that how much an individual pays as a percentage of income is a statistic that tells us something useful about whether someone contributes their fair share to society. It doesn’t. Here’s an alternate figure to consider: For the 2004 tax year, the top 3 percent of tax returns, those reporting incomes exceeding $200,000, paid about 60 percent of all state taxes. We’ll take a more detailed look at what it means to “pay your fair share” in another post, but for now, all you really need to do is cast a skeptical eye on the numbers being bandied about in his article to see that Michael Hiltzik has an agenda. He believes we should raise taxes, especially on the wealthy, and he’ll use whatever statistics he can find in an attempt to mislead his readers into agreeing with him.

What Conclusions Should We Draw?

Hiltzik makes three suggestions on how we should solve our budget problems – and all of them are nonsense.

Once again, Hiltzik calls for the elimination of the two-thirds legislative requirement to pass a budget or raise taxes. As I pointed out in my previous post, the two-thirds rule is not the source of our problems, unless you think that our problem is that our taxes are too low. And the results of last Tuesday’s election shows that few if any real taxpayers think that’s the case. Because the Republicans in our state legislature are in the minority, and they generally favor lower taxes and less spending, the two-thirds rule does give them more power than they would otherwise have. This is a good thing, because it prevents a simple majority of politicians from overspending and overtaxing. At least it’s supposed to work that way. However, in the last decade, a handful of republicans have shirked their fiscal responsibility and joined the Democratic majority in an orgy of increased spending that has now brought us to the brink of insolvency. But let’s suppose that the Republicans were the in majority and Democrats were using the two-thirds rule to prevent them from passing a budget with massive cuts to social welfare programs. Do you think Michael Hiltzik would be calling for the elimination of the two-thirds rule? Of course not. He’d be hailing it as the saving grace of the underprivileged.

Hiltzik then calls for an end to term limits, under the assumption that highly entrenched career politicians would do a better job managing our state’s fiscal health. But Hiltzik offers absolutely no logical explanation as to how or why this idea would make any difference. He simply claims that state government hasn’t gotten any better since term limits were imposed, implying that instead, it’s gotten worse. State government may have gotten worse, but there’s no proof that term limits are the reason or that term limits haven’t prevented government from being worse than it otherwise would be.

Finally, Hiltzik calls for a revision of Proposition 13, the 1978 ballot initiative that brought an end to skyrocketing property taxes. Again, Hiltzik takes aim at this voter imposed constitutional provision because he wrongly believes that the rich just aren’t paying enough. But Prop 13 mostly protects middle income taxpayers from having their major investment, their homes, taxed so highly as to make ownership impossible. It also protects the elderly on a fixed income from being forced out of the homes they’ve lived in for decades, a regular occurrence prior to the passage of Prop 13. Hiltzik claims that Prop 13 renders property tax “useless as a revenue device”. Yet he fails to give any evidence for this outlandish claim. In 2007, California collected over $2.3 billion in property taxes. I’m not sure how Michael Hiltzik defines “useless”, but to me, something that brings in over $2 billion in taxes annually wouldn’t be it. Furthermore, because of the way Proposition 13 was written, property taxes provide a steady source of revenue rather than fluctuating with the economy. As we have seen during this economic downturn, when tax revenue is subject to the vagaries of the economy, governments can find themselves with huge unforeseen deficits. This is exactly what is happening now in California. Altering Proposition 13 so property owners are taxed on the fluctuating values or their property would only make such a situation worse. Too bad Michael Hiltzik can’t take the time to research this economic principle or he might understand the concept a little better.

So what’s the lesson we should take away from the public’s stunning repudiation of Propositions 1A-E?

It’s not, as Michael Hiltzik claims, that

California’s voters have been trained for too long to think they can have roads, schools, universities, clean air and other amenities without paying their true cost.

It’s that we can have these things. We just have to reign in our spending in other areas; we need to prioritize. We must make sure our elected officials don’t get us into long term union contracts and other financial obligations that are unsustainable, especially in an economic downturn. We need to stop passing ballot initiatives that earmark more and more of our tax revenue for pet projects. We need to eschew the idea that we can tax ourselves into prosperity.

The voters have made it plain that they want the State to cut spending, not raise taxes; that they expect the State to live within its means. This message was obviously lost on Michael Hiltzik. Hopefully, our representatives in Sacramento heard it loud and clear.

May 24th, 2009 Posted by freedomminute | State Government | no comments