The Franchise Tax Board (FTB) is California’s primary tax collector. Its 5,400 employees and dozens of bureaus regularly collect over $50 billion in personal and corporate taxes, supplying about 60% of the General Fund. It also administers nontax programs and delinquent debt collections, including for past due vehicle registration,  court-ordered debt and Industrial Health and Safety assessments. The board is transitioning from the State and Consumer Services Agency to the new Government Operations Agency by July 1, 2013, as part of a larger government reorganization.

General Fund Cash Basis Report (State Controller’s Office) (pdf)

In 1929, California joined a wave of states adopting income taxes during the Great Depression. The Legislature passed the Bank and Corporation Franchise Tax Act and formed the Office of the Franchise Tax Commissioner, predecessor to the Franchise Tax Board (FTB), to administer it.

When the state personal income tax was created in 1935, the responsibility for the revenue it would bring in would have been a boon for any department, and was assigned to the tax commissioner's office rather than the much more powerful Board of Equalization (which administers sales and use taxes) or the state Controller's office. According to the recollection of Martin Huff, the second executive officer of the FTB, “the political climate was such that [the Legislature] did not want to attach the income tax to the Board of Equalization.”

The tax commissioner's office soon presented its own problems for politicians. In 1948, lawmakers investigated accusations that some of the office's employees were freelancing as tax preparers, and, at least in theory, could take money to file tax returns as private citizens and then review those same returns as public servants.

Also of concern was the tax commissioner himself, Charles McColgan. According to Huff, after almost two decades on the job, McColgan “had become a recluse. . . . He would go into his office [in San Francisco] and his own employees never knew him at work. He would shut the door and that was it.” Thomas Kuchel, who was serving as state Controller at the time, recalled afterwards that McColgan “did not function.”

The McColgan inquiry focused, at least officially, on his civil service status rather than his rumored personal problems. When California had adopted constitutional changes in 1934 creating the civil service system, it neglected to mention the tax commissioner, leaving the means for hiring and firing him unclear. In 1950, rather than untangling problems in the existing agency, the Legislature abolished it entirely and established the current Franchise Tax Board.

The board's responsibilities have remained largely unchanged since its formation, with some expansion. In 1975, in the wake of the Watergate scandal, an independent unit of the board began conducting audits of reports and statements filed with the state by candidates for political office, political committees and lobbyists. That year, the board began intercepting tax refunds of individuals who owe money to other state and local agencies, and redirecting the money to the agencies owed. In 1985, it began doing the same thing with lottery winnings.

In 1992, the FTB began a pilot program for collecting delinquent child support payments, and expanded it to any county that wished to enroll in 1994. Although not without its critics—including the federal government, which in 2000 refused to grant it anticipated funding on the grounds that it wasn't statewide—the program was successful enough that the Franchise Tax Board's role as state collections agent has expanded to include other fees and payments.

2007 Annual Report: History (Franchise Tax Board website)

California Democrats' Golden Era: 1958-1966 (Martin Huff interview, conducted by Gabrielle Morris, Regional Oral History Office, Bancroft Library)

Notes on the Formation of the Franchise Tax Board (Calisphere)

Thomas H. Kuchel Interview: Creation of the Franchise Tax Board (Calisphere)

2001 Budget Analysis: Franchise Tax Board (Legislative Analyst's Office)

California Franchise Tax Board At a Glance (Franchise Tax Board website) (pdf)

The Franchise Tax Board (FTB) is comprised of three members: the chair of the Board of Equalization, the director of the Department of Finance and the state Controller as FTB chair. The members appoint an executive officer. Along with the Board of Equalization and the Employment Development Department, it is responsible for California's taxes.

The FTB administers the personal income and corporate taxes—the majority of the state's General Fund revenue. This includes assessing and collecting them, ensuring their payment through audits and criminal investigation, and educating taxpayers on how to file and calculate them. Like most California agencies, the FTB keeps records and statistics on its operations, which are crucial props in the government's yearly budget negotiations.

The board offers two free online filing services for individuals: ReadyReturn and CalFile. While both are subject to restrictions based on filing status, the FTB estimates that more than 6 million people qualify for CalFile alone.

When taxes aren’t paid, the Financial Institution Record Match program, created in March 2011, enables the board to find delinquent taxpayers’ bank accounts and collect on debts directly. The City Business Tax program data exchange allows the FTB to identify self-employed individuals who haven't filed state income tax returns, and cities to track down businesses that have failed to pay local taxes.

In addition to these and other programs aimed at narrowing the tax gap, the board educates taxpayers on their obligations through an information hotline, volunteer centers throughout the state and at events for nonprofits, community groups and public schools scheduled by the Speakers' Bureau. The Taxpayers' Rights Advocate's Office also responds to questions and problems, promising an “independent review” of any issue.

Several other agencies use the Franchise Tax Board as their collections agent. The board goes after overdue vehicle registration fees and court-ordered fines, fees and bail money, sometimes garnishing wages to secure repayment. Its Financial Data Match program, on which the Financial Institution Record Match program is modeled, identifies the bank accounts of child-support deadbeats and collects overdue payments from them. And the Interagency Intercept Collections program pays off debt to other government bodies—including California schools—before issuing the balance of any tax refund owed to an individual filer.

The FTB also conducts audits of campaign statements and lobbyist reports in cooperation with the Fair Political Practices Commission. The FTB unit responsible for the audits does not exchange information with the rest of the agency, and does not audit statements from the state Controller or Board of Equalization members with whom it shares such close ties.

Board Member Biographies (Franchise Tax Board website)

Franchise Tax Board At a Glance (Franchise Tax Board website) (pdf)

About Us (Franchise Tax Board website)

Through tax collection and auditing, the Franchise Tax Board brings in far more money than it spends, supplying the largest portion of the General Fund of any agency. It also charges other government bodies—the Employment Development Department, Department of Child Support Services and Department of Corrections, among others—for collecting taxes and overdue payments. It received $3.9 million from other agencies in 2011.

What the board does spend goes overwhelmingly to information technology. In 2011, nearly 97% of the FTB's expenditures to contractors paid a million or more were for computing, telecommunications or related services, including a nearly $400 million award to CGI Group to improve tax data storage, transparency and analysis. (Ignoring the CGI contract as an outlier, 70% of major contract money went to IT.) The board also made large payouts to the Department of Justice, Inter-Con Security Systems and JP Morgan Chase.

Since the board's revenue is provided by individuals and businesses, and funds the government, all sectors of the economy are invested in FTB operations. Groups subject to special tax regulations such as those doing business in enterprise zones and Native American tribes have more to lose or gain, along with tax lawyers and accountants.

Top 10 Contractors: The Office of Planning and Research's largest service contractors in 2012, according to the  State Contract & Procurement Registration System (eSCPRS) in the Department of General Services, were:

* The contract with the California Tax Education Council (CTEC) is a reimbursement contract where CTEC reimburses FTB for  expenses incurred in educating and enforcing provisions of the Business and Professions and California Revenue and Taxation codes, according to the FTB.

3-Year Budget (pdf)

States Look to Modernize Their Aging Tax Systems (by David Raths, Government Technology)

Tax Amnesty

Facing yet another budget deficit in 2011, California turned to a time-tested method for generating additional revenue: tax amnesty.

Taxpayers were allowed to amend old tax statements to include previously unreported income without incurring a penalty. The window of opportunity stretched between August 1 and October 31 during which time the Franchise Tax Board collected $350 million from 1,000 confessors. Although businesses were a small percentage of the repentants, they accounted for $100 million. 

This wasn’t California’s first tax amnesty. In 1985, its motto was a bit more on the menacing side, “Get to us before we get to you,” but the message was the same as in 2004 when the state garnered $1.3 billion and 2005 when a broader amnesty netted $3.2 billion.

“Let’s make a deal.”

The deal didn’t let participants avoid dealing with the Internal Revenue Service,  and it didn’t give them a pass if they were involved in a related criminal action. But some still found it an encouragement, perhaps, to do the wrong thing.

“If you run tax amnesties too often, you’re actually incentivizing people to not pay on time because they know that there will be an amnesty coming up, and they can always get back into the good graces of government,” said Kim Rueben, senior fellow with the Tax Policy Center.

Another senior fellow at the Tax Policy Center, Roberton Williams, has raised questions about the effectiveness of an amnesty because you can’t measure a hypothetical. “What you don't know is how many people would come in without an amnesty program or how many people don't come in even with an amnesty. We don't know how effective they are.”

Williams also noted what he thought was a basic unfairness about amnesty:  “Some people who, for various reasons, are less at their own fault for falling behind in their payments end up getting penalized more than people who willfully cheated.”

San Francisco lawyer Steve Moskowitz also cited what he considered an inequity in the process, at least in the 2011 amnesty. The state required an admission of intentionally violating the law. “I found that horribly offensive,” Moskowitz said. “A lot of people inadvertently violated a law they hadn’t even heard of.”

Forbes writer Ashlea Ebeling echoed that sentiment when she noted that state amnesties often attract people already known to tax authorities, but who have been unable or unwilling to pay their bills. She quoted tax lawyer Kelly Phillips Erb: “I believe most people want to do the right thing and pay their taxes. People come in who are overwhelmed. They're losing sleep at night. The amnesty gives them the right to fix things.”

California Amnesty Program for Tax Dodgers (by Kathleen Pender, San Francisco Chronicle)

States To Tax Deadbeats: Let's Make A Deal (by Ashlea Ebeling, Forbes)

State's Tax Amnesty Program Raises $350M (by Will Evans, California Watch)

Voluntary Compliance Initiative 2 (VCI 2) (Franchise Tax Board website)

California Adopts Tax Amnesty (by attorneys Joseph K. Fletcher, III and Eugene Illovsky) (pdf)

Repentants Beating Path to Franchise Board (by Lynn O’Shaughnessy, Los Angeles Times)

Results for California's Tax Amnesty Programs (Franchise Tax Board website)

Fiscal-Crisis Furloughs Cost the State Money

Faced with a massive budget deficit in 2008, Governor Arnold Schwarzenegger decided to save money by sending state workers home. By 2010, the furloughs increased from one day a month to three. Unions, Democratic legislators and state Controller John Chiang decried the order on the grounds that it unilaterally reduced workers' pay—the mandatory 36 days off a year were equivalent to 13.8% reduction in salary.

Cutting payroll costs was the Schwarzenegger administration's intention, however, and the argument over workers' rights played out along predictable ideological lines. More embarrassing was the charge that, for some state agencies, furloughs cost rather than saved money.

The Franchise Tax Board was a chief site of lost revenue: tax employees at home for Furlough Fridays were performing fewer audits and collecting fewer overdue funds. The FTB estimated that the state would lose $550 million over the course of the furloughs. A state Senate Office of Oversight and Outcomes report stated that each dollar “saved” by furloughing board employees would cost the General Fund $7.

Forcing workers to take unpaid leave also led them to accrue more vacation time. Those who retired and claimed payment for those days hampered their departments' operations without ultimately reducing their pay. And in agencies like the Department of Corrections, where 24-hour operations were unavoidable, the furloughs sometimes meant employees ended up getting overtime to work during the artificially created staff shortage.

All told, the Schwarzenegger administration's refusal to exempt any agency from the furloughs meant the state saved $236 million rather than the promised $1.3 billion, according to the Berkeley Center for Labor Research and Education. The outcome had been predicted by Democratic state Senator Denise Ducheny during a budget subcommittee hearing in 2009: “I don't believe the third furlough day is creating the savings [the Department of] Finance has said,” she insisted. “Their projections are not credible.”

Controller Joins Unions in Lawsuit Challenging Schwarzenegger (by Michael Rothfeld and Patrick McGreevy, Los Angeles Times)

State Tax Collectors Denied Exemption from Furloughs (by Marc Lifsher, Los Angeles Times)

Furloughs at the Franchise Tax Board: Loss Is Seven Times Greater Than the Savings (California Senate Office of Oversight and Outcomes) (pdf)

Furloughs Causing Banked Vacation to Skyrocket (by Chase Davis, California Watch)

The High Cost of Furloughs (by Ken Jacobs, UC Berkeley Center for Labor Research and Education) (pdf)

Mandatory Furloughs May Not Save as Much as Advertised (Capitol Weekly)

Hyatt v. Franchise Tax Board

In the early days of the computer industry, companies like Texas Instruments and Intel were racing to become the first to invent a microprocessor chip, the computation engine on a single wafer otherwise known as a central processing unit, or CPU.

Intel claimed victory in 1971, patented its creation and was generally regarded as the inventor of the microprocessor upon which the desktop computer industry was built. But in1990, the U.S. Patent and Trademark Office reversed its decision and awarded that recognition to Gilbert Hyatt of California, who had submitted a microprocessor patent application in 1968.

In anticipation of earning millions for his invention, Hyatt moved to Nevada, where the tax laws were more favorable and in 1991 received a $40 million payment for licensing his patent. The Franchise Tax Board, which claimed Hyatt had been a citizen of California at the time of his windfall, audited him and in 1995 said he owed substantial taxes and a huge penalty payment for fraud.

In the meantime, the patent office conducted a five-year proceeding to determine if yet another competing patent claim had any substance and in 1996 reversed its decision and recognized former Texas Instruments engineer Gary W. Boone as the inventor of the single-chip microprocessor. The patent office said Hyatt’s device as designed was not implementable with the technology available at the time. By then, Hyatt had netted at least $70 million in licensing fees and sued in federal court to overturn the patent office’s determination.

Hyatt also fought back against FTB and sued the board in Nevada in 1998. He claimed that the FTB broke the law during its investigation of him, “including invasion of privacy, outrageous conduct, abuse of process, fraud and negligent misrepresentation.” Bill Leonard—a former California state legislator and member of its other big tax collection agency, the Board of Equalization—described the FTB’s behavior this way: “Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. . . . What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the storm troopers are alive and well at the FTB.”

The FTB argued that it couldn't be sued in Nevada courts, but in 2003 the U.S. Supreme Court unanimously sided with Hyatt and the case proceeded to trial. In the meantime, the FTB’s Protest Division issued a final ruling on the original board claim against Hyatt, upholding its determination that he owed California back taxes and a penalty. Hyatt appealed to the California Board of Equalization in 2007.

In August 2008, a Las Vegas jury returned a verdict in Hyatt's favor, awarding him $138 million in compensatory damage and $250 million in punitive damages. The FTB’s request for a new trial was denied and it appealed to the Nevada Supreme Court.

In March 2011, while Hyatt’s appeal of the FTB ruling and the FTB’s appeal of the Nevada trial court were pending, the California State Controller got involved by issuing subpoenas for out-of-state records and depositions in New York as part of the FTB hearing. Hyatt appealed to the New York State Supreme Court to quash the subpoenas and take other legal action to protect him. The court’s decision was a mixed bag of seven rulings allowing the FTB to issue the subpoenas but within certain limitations.

As of January 2012, the Nevada Supreme Court had received all legal briefs from Hyatt and the FTB, and was preparing for oral arguments in the 40-year-old dispute.

Hyatt’s appeal of the patent office decision reversing his patent claim also made it to a high court, the U.S. Supreme Court, where he argued that the courts had improperly disallowed new information that he had presented to make his case. That case was also pending as of January 2012.

For Texas Instruments, Some Bragging Rights (by John Markoff, New York Times)     

The Intel 4004

The Franchise Tax Board’s Conduct Could Cost California $500 Million (by Paul Hatfield, Village to Village)

Extraterritorial Audits, Tax Competitors, and Narratives: Hyatt (by Steve R. Johnson, Florida State University College of Law)

California Loses Big in Litigation Involving Its Tax Jurisdiction and Related Residency Audits (by David Nolte, HGExperts)

Obtaining New York Subpoenas for Out-of-State Proceedings (by attorney Victor M. Metsch, Hartman & Craven LLP)

Kappos v. Hyatt (Legal Information Institute)

Tax Scofflaws

The Franchise Tax Board (FTB) estimates that 90% of taxpayers pay their fare share of income taxes. But those who don’t pay account for an estimated $6.5 billion annual tax gap that would go a long way toward covering the state’s chronic budget deficit.

In 2007, despite cries of privacy invasion, the FTB and the Board of Equalization (BOE), which collects sales and use taxes, each began publishing a list of their 250 largest tax scofflaws. The FTB updates its list annually and the BOE freshens its list every quarter. As of February 14, 2012, the listed FTB debtors owed a total of $122.9 million. They make the list when a tax lien is filed by the state.

Leading the FTB list is Halsey M. and Shannon Minor who, at $14.2 million, have been atop the roster since 2009. Halsey Minor is founder of online technology news site CNET. The Minors made the list for personal income tax;  the top corporate tax scofflaw is Van Rex Gourmet Foods, Inc. at $4.5 million.

Steven Bren—former race car driver and son of real estate mogul Donald Bren—is eighth on the list at $2.3 million, and celebrity Pamela Anderson is halfway down the list at $607,860.

The FTB mails letters to individuals and businesses who are about to appear on the list, giving them an opportunity to pay their bills. The FTB received $13 million in payments by April 2011 from people to avoid having their names posted and the board says it has raised $78 million this way since it began posting the list in 2007.

The Legislature’s AB 1424  in 2011 expanded the lists of both boards to 500 names with inclusion of more information and harsher penalties for delinquents. It takes effect July 1, 2012.

Critics of the lists extend to beyond those who appear on them. The state Department of Finance warned in 2006 that, “Confidentiality of tax returns is an important feature of the tax system. Breaching that confidentiality may work to undermine the public’s confidence in the tax system.”

State Tells Delinquent Taxpayers to Pay Up (by Joanna Lin, California Watch)

Top 100 Delinquent Taxpayers Owe $419M (by Sam Pearson, California Watch)

Top 250 Delinquent Taxpayers (Franchise Tax Board website)

Largest Sales & Use Tax Delinquencies in California (Board of Equalization website)

Department of Revenue

Debate over “tax reform”—the changes to the tax code itself in pursuit of fairness, public policy incentives and disincentives, and government revenue—is ongoing. In the past decade, multiple commissions have formally studied and made recommendations on tax rates, Governor Arnold Schwarzenegger introduced the elective single sales factor for corporate taxes, and Governor Jerry Brown pushed for a major tax referendum. How the fluctuating tax code is administered and enforced has received less dramatic attention—but more consistent calls for reform—from before the time of the Franchise Tax Board's creation.

Officials across the political spectrum, including some tax administrators, have bemoaned the redundancy of California's current tax organization, in which three agencies have a role in administering taxes. Much of the ire has been directed at the Board of Equalization and its elected members rather than the Franchise Tax Board. “It's simply ludicrous that the administration of taxes is dependent on the ideological whims and personal agendas of five politicians,” writes Dan Walters of the Sacramento Bee. Others have complained about the current tax appeals system, in which tax judges frequently work for the same agencies as tax collectors. As early as 1979, the Little Hoover Commission recommended the establishment of an independent tax appeals body.

Whether it's the political motivations of Board of Equalization members, the partiality of the tax appeals process or the sheer redundancy of the current structure that a critic most finds fault with, the proposed solution has been similar: the elimination of some or all of the three agencies, often with the aim of creating a unified Department of Revenue. Anyone wishing to do so will have to go over the state constitution, however, in which both tax boards are enshrined.

It's Time to Abolish the Board of Equalization (by Dan Walters, Sacramento Bee)

The Tax Appeals System in California (Little Hoover Commission) (pdf)

The “Tax Gap”

A major focus of reforms is bridging the “tax gap”—the disparity between taxes owed and taxes paid. As California has repeatedly faced major deficits, efforts to track down non-filers and collect overdue funds have grown more aggressive. “[B]efore we talk about cutting vital services,” opines Capitol Weekly's Jim Hard, “let's collect what we are already owed.”

The Franchise Tax Board and Board of Equalization have begun publishing a list of the biggest tax evaders, and in 2011, the Legislature passed a bill expanding that list and allowing tax administrators to pull the professional and drivers licenses of the greatest offenders. The Franchise Tax Board estimates that the tax gap accounts for $6.5 billion in unpaid income taxes each year.

Efforts to eliminate the tax gap have tended to focus on corporate tax evaders and the self-employed. In 2004, the Legislative Analyst's Office recommended establishing systems for tax withholding and third-party reporting for the self-employed in order to improve compliance. The government also offers tax amnesty periods for corporations who owe taxes to pay without the fear of fines or prosecution. Tax amnesty brought in $350 million in 2011, but not without some controversy. Critics question whether the short-term cash is worth forgoing overdue fees, and say that amnesty may encourage corporations to withhold taxes, knowing they'll be forgiven later.

The Franchise Tax Board and the Legislative Analyst's Office also differ in their opinion of “soft” measures to encourage tax compliance, such as education and outreach programs. In 2007, the LAO recommended reallocating some proposed softer tax gap funds to enforcement. Lawyer Erika Kelton has also proposed a so-far unimplemented enforcement measure, publicly calling for a whistleblower program to receive tips from within businesses in 2010.

Chris Parker of Capitol Weekly doesn't see the tax agencies' organizational and tax gap difficulties as unrelated problems. “This redundancy [of three separate tax agencies] is what ultimately enables tax scofflaws to hide their tax responsibility by submitting separate—and often far understated—reports of their activities,” Parker writes.

Improve State Tax-Collection System to Help Close Budget Gap (by Jim Hard, Capitol Weekly)

Jerry Brown Signs Bill to Take Cars Away from Tax Cheats (by Claudia Buck, Sacramento Bee)

2004 Budget Analysis: Franchise Tax Board (Legislative Analyst's Office)

State's Tax Amnesty Program Raises $350M (by Will Evans, California Watch)

2007 Budget Analysis: Franchise Tax Board (Legislative Analyst's Office)

Opinion: Bridge the Tax Gap: Bring in the Whistleblowers (by Erika Kelton, op-ed, Capitol Weekly)

State Not Doing Enough to Collect Billions in Unpaid Taxes (by Chris Parker, Capitol Weekly)

Who Pays Income Taxes, and How Much

When Californians go to the ballot box in fall 2012, they'll vote on Governor Jerry Brown's solution to the state's budget problems: a five-year hike in personal income taxes for those making more than $250,000 a year and a four-year half-cent raise in sales tax. The additional revenue would be spent on education and public safety, and would free up money in the General Fund for other spending. Governor Brown estimates that the measure would raise $6.9 billion each year.

The proposal comes on the heels of the previous governor's temporary tax increases in 2009. Under similar fiscal pressure, Governor Schwarzenegger raised the sales tax by one cent and income taxes across the board by .25%. Governor Brown tried and failed to extend those increases during the 2011 budget negotiations.

2009 also brought changes to corporate income taxes. Businesses previously required to calculate taxes based on employment, sales and property within the state were given the choice of using either the existing “triple factor” system or basing their tax payments on sales alone. The “elective sales factor” has been both praised as a way to incentivize business investment in California and derided as a loophole. Governor Brown wants to establish the single sales factor as mandatory, eliminating corporations' ability to choose the cheaper of the two methods.

The state's chief executives are not alone in their attempts to change the tax structure: a number of advocacy groups have vowed to get their own tax measures on the 2012 ballot.

The debate takes place amid slow recovery from the Great Recession and national discussion about taxation and income inequality. While Governor Brown and others call plans to tax the wealthy and eliminate corporate tax credits “fair,” opponents contend that they create an atmosphere toxic to business that ultimately hurts the economy.

Governor Brown may be facing an uphill battle. Californians have voted to raise income taxes only once, on those making more than $1 million annually, in 2004.

Temporary Taxes to Fund Education. Guaranteed Local Public Safety Funding. Initiative Constitutional Amendment. (Attorney General's website) (pdf)

Kamala Harris Gives Jerry Brown Go-Ahead on California Tax Initiative (by Kevin Yamamura, Sacramento Bee)

Brown's Countdown, Day 89: California Tax Debate Goes on the Road (by Kevin Yamamura, Sacramento Bee)

California Tries a New Direction on Corporate Taxation (by Malcolm Maclachlan, Capitol Weekly)

Got a Calculator?: Rival Tax Plans Complicate Ballot (by Greg Lucas, Capitol Weekly)

Jerry Brown Defends California and His Tax Plan (by David Siders, Sacramento Bee)

Mental Health Services Act (Proposition 63) (Department of Mental Health website)

Tax the Rich More

Raising taxes on the rich seems like common sense to many Democrats, liberals and social justice advocates, as a proportionate response to the growing gap between the rich and the poor. While opponents of “millionaire taxes” claim the wealthy already pay more than their share, that tax burden doesn't seem to be hurting too much: according to the California Budget Project (CBP), more than a third of income gains went to the top 1% of the state's earners between 1987 and 2009.

The income tax system in every state and federally is progressive, taxing individuals at higher income levels at higher percentages. The effective tax rate, though—how much of all their wealth people pay in taxes—is, by some calculations, regressive. Taxation happens when money or property changes hands, so the less you have, the less you can avoid taxation. CBP research shows that the bottom fifth of income-earning families pay 11.1% in state and local taxes (including sales tax), while the top three-fifths pay closer to 8 or 9%.

In other words, the tax-the-rich advocates say, California's supposedly rich-punishing tax system actually isn't. As Calitics' David Dayen fumed at a rival publication: “It's comical to hear Calbuzz call our state income tax ‘steeply stepped.’ There are NO tax brackets between $47,500 and $1,000,000. That's a ridiculous statement.”

California's harsh taxes on businesses have been similarly over-advertised. Although it has one of the highest corporate tax rates, that rate is mitigated by the many available business credits (or loopholes). The Council on State Taxation calculated California's effective rate at 4.7% in 2010—approximately the national average.

State losses due to loopholes (“tax expenditures” in the Legislature's language) have been more fiercely decried as budget crises have necessitated deep cuts across programs. In 2011, the state Senate's Office of Oversight and Outcomes released a report calling 10 loopholes “blank checks” and estimating that corporate tax breaks had cost the state $6.3 billion more than originally forecast.

Champions of closing loopholes frequently argue that they pick favorites, giving certain industries or businesses a competitive advantage over others without truly stimulating the economy. Even Katy Grimes of the generally anti-tax publication Cal Watchdog contends that tax credits don't create jobs (although she goes on to say that lower taxes across the board would do so).

Those who say that those who have more can pay more also tend to scoff at claims that higher taxes drive either businesses or individuals out of the state. State and local taxes are too small a part of the cost of doing business to base business decisions on, they contend. Professor Cristobal Young studied a millionaire tax in New Jersey and found that only the small subset of millionaires who lived off investments and didn't work responded to the tax hike by migrating. “If the tax ‘works’ in New Jersey, it certainly works in California,” Young said.

The Occupy Movement's Message (by Alissa Anderson and Jean Ross, Los Angeles Times)

Who Pays Taxes in California? (California Budget Project) (pdf)

The Latvia Option: Let's Regress the Regressivity! (by David Dayen, Calitics)

Don't Cry for Corporations, California - Corporate Taxes Not as Bad as They Claim (89.3KPCC)

Bleeding Cash: Over a Decade, Ten Tax Breaks Cost California $6.3 Billion More than Anticipated (Senate Office of Oversight and Outcomes) (pdf)

A Taxing Day in Senate Committee (by Katy Grimes, Cal Watchdog)

Stanford Study Examines Millionaire Tax: Will It Drive out the Wealthy? (Stanford University Institute for Research in the Social Sciences)

Tax the Rich Less

In 2007, Californians who earned more than $200,000 a year claimed 39% of the state's income, but paid 66% of its income taxes. This outcome, predictable though it may be in a progressive income tax system, has opponents of further taxes on the rich calling class warfare, and warning of diminishing returns should taxpayers pass Governor Brown's tax measure.

“When you tax something, you get less of it,” writes reporter John Seiler, boiling down the idea that taxes ultimately cost the state money, driving revenue down after a certain point. The editors of the Orange County Register claim the government has arrived at that point, and that high earners will flee the state or evade taxes in response to the Brown plan. Even Bill Lockyer, the Democratic state Treasurer, has expressed concern about the potential flight of the wealthy: “I think we’re very near the tax ceiling on the personal income tax side,” he told the Sacramento Press Club in July 2011.

Conservatives and moderates also claim that reliance on taxes on millionaires and big businesses leads to revenue volatility, making the revenue predictions the budget process depends on unreliable. The Legislative Analyst’s Office, which traffics largely in those predictions, warns that “differing fortunes for these upper-income taxpayers can create or eliminate billions of dollars of projected state revenues.”

Despite the concern over volatility, state revenue has fallen from the previous year only seven times from 1945 to 2008. In the recent recession and recovery, however, California's pool of earners with incomes over half a million was reduced by a third.

Instead of raising taxes on the wealthy, some tax reformers say, the state needs to rely on a more dependable mix of taxes on income and sales. While the sales tax is effectively regressive, it's relatively stable. Think Long, an independent reform committee including such luminaries as Gray Davis, Condoleeza Rice and Eli Broad, planned to put a measure on the 2012 ballot to extend the sales tax to services and bring down income tax rates. The group has since decided to save the measure for another year.

California Taxes: Who's Paying Most? (by Phillip Reese, Sacramento Bee)

Taxes, Whitman and Skelton (by John Seiler, Cal Watchdog)

California Debate Over Higher Taxes Misses Point (Orange County Register editorial)

State Treasurer Says Taxes on Rich High Enough (by Brian Joseph, Orange County Register)

The 2012-2013 Budget: Overview of the Governor's Budget (Legislative Analyst's Office)

Lawmakers: Consider Carefully Before Changing State Tax System (by Teresa Casazza, Capitol Weekly)

California's Top-Earners Dwindle as Brown Counts on Higher Taxes (by Christopher Palmeri and James Nash, Bloomberg)

A Blueprint to Renew California: Report and Recommendations Presented by the Think Long Committee for California (pdf)

Will Bush, 2005-2006 (interim)

Gerald H. Goldberg, 1980-2005

Martin Huff, 1963-1980

John J. Campbell, 1950-1963