Evaluation of the California Tax System
Equity and Ability-to-Pay Criteria
A necessary criterion for any good tax system is one that shares the tax burden equitably among its citizens requiring every person and business to pay some tax to their government (Brimley, Verstegen, & Garfield, 2016). The sole purpose of a tax system is to divert private funds to the public sector to provide the necessary goods and services, like education, to all citizens. The obligation to pay taxes must also be met with a measure of vertical and horizontal equity. Vertical equity ensures taxpayers who share similar economic circumstances pay similar amounts while horizontal equity ensures that “taxpayers in different circumstances…be treated according to those differences” (Brimley et al., 2016, p. 115). Along with the principle of equity, a good tax system should be based on a taxpayer’s ability to pay. People who have a greater capacity to pay will contribute more and those who are not able to pay as much will contribute a smaller percentage. In theory, the ability-to-pay principle sounds logical and equitable, however, determining economic well-being and wealth is a complicated process. Unlike in decades past, when property ownership was the primary source of wealth, now people are able to diversify their wealth through means such as investments, stocks, automobiles and off-shore investments which makes determining wealth far more complicated than simply assessing real property.
Adequacy of Yield Criteria
For a tax to be effective, it must generate a substantial revenue. If a tax is not able to yield a significant revenue, then it is merely a nuisance tax that is only able to provide minimum revenue and should be avoided so as to not overburden and further complicate the system.
Cost of Collection
An additional requirement for a sound tax revenue source is the ease with which the tax can be collected. It “should have relatively low collection and administrative costs for the government and the individual” (Brimley et al., 2016, p. 117). The main goal for government is to maximize their net proceeds so it is advantageous for them to collect the dollars that are easily identifiable and collectable. Unlike real property, such as a home, personal property like investments and stocks are difficult to collect on because they can be difficult to locate and assess.
Predictability (Easy to Estimate)
Predictability and stability are key ingredients when looking for a revenue source for education. School districts function more efficiently when they are able to rely upon a consistent stream of revenue and not be bound by the ups and downs of the economy. This predictability provides schools with “a steady revenue stream regardless of changes in the economy and serves as a solid foundation for budgeting” (Brimley, 2016, 118).
While the original intent of the taxation system was to collect money from the private sector and to allocate those funds to public resources, it was not meant to modify the purchasing and behavioral patterns of taxpayers (Brimley, 2016). When citizens make purchasing decisions based upon the tax rate, the system is no longer neutral and may begin to interfere with the operation of an efficient economy.
Adequacy and Equity for Taxpayers
On the issue of tax equity, taxpayers should pay taxes based upon their ability to pay. Ability to pay offers equity by proportioning the tax burden in percentages of income rather than dollar amount. The question then becomes how do we measure the ability to pay? In the past, the standard measure of income was a paycheck, however, today, income is derived from a variety of sources other than a salary, such as stocks, rental income, or other personal property assets.
According to Repetti (2008), taxes should be designed to achieve equal opportunity for all citizens. The tax system should protect disadvantaged taxpayers from paying high tax rates that may hinder them from making the best life for themselves, yet it also should ensure that the “tax burden on advantaged taxpayers is sufficiently high to provide the revenues needed to permit a low burden for the disadvantaged” (Repetti, 2008, p. 1132). The quest for a just tax system needs to focus on the fairness of the incomes earned by the taxpayers yet bearing in mind the end goal of achieving the educational objectives necessary for a healthy and productive economy for the future.
Up until Proposition 98 in 1988, education had been primarily financed through property taxes. However, using local property values created large per pupil discrepancies in funding across districts which prompted the courts and voters to shift funding away from property taxes. The California Supreme Court ruled the system unconstitutional and ordered the state to equalize funding by mandating a minimum of 40% of the state’s general fund to be set aside for education each year. Along with property taxes being held unconstitutional as the primary means for financing education, the system used to allocate the funds is complicated and not well understood even by those in the profession (Legislative Analyst’s Office, 2012). The shift away from property tax also reflects the understanding that real property no longer is reflective of a person’s wealth or ability to pay (Brimley et al., 2016). Despite being almost impossible to avoid paying, property tax is a bad measure of wealth given the diverse investment alternatives available, “some of which can escape taxation” (Brimley et al., 2016, p. 131).
A fair and equitable tax should allow for vertical and horizontal equity which treats equals as equals. This may best be exhibited through a taxable income structure. Although the personal income tax systems vary greatly from state to state, with California having 9 brackets, the federal system is fairly easy to estimate, with 7 brackets varying from 10% to 39.6% depending upon income level (Brimley et al., 2016). The major disadvantage to funding education through personal as well as corporate income taxes, however, is that collecting the taxes are not economical. The income tax system is highly complex, difficult to administer and costly to collect. Another disadvantage of relying upon income tax as a primary revenue source for education rather than property or sales tax is that it is highly susceptible to economic changes. While corporate income taxes offer another revenue source, it is just as complicated. Corporate equity can be held in tax-exempt forms, they can be evaded through offshore accounts and loopholes within the complex tax codes.
Notwithstanding the aforementioned disadvantages, income tax revenue tends to offer greater across-the-board equity than other options such as sales taxes. While sales taxes provide a revenue-rich source of income for education, they tend to unfairly burden poor families who spend a “larger proportion of their budget on food that do high-income families (Brimely et al., 2016, p. 129). Since sales tax is not income-based, the poorer you are the greater share of your income goes to food and basic life necessities. Despite their instability and susceptibility to economic declines, state sales taxes continue to deliver large revenues which are easy to administer and inexpensive to collect.
Brimely et al (2016) state that “using income as a measure of fiscal capacity creates a fair system of tax burden on society” (p. 115) in that the system equates equal tax burden among equal wage earners. However, the education finance system is far too complex to rely on only one avenue of revenue. Equity in education needs to be a blend of local, state and federal dollars which will provide the stability necessary to sustain unforeseen economic fluctuations. The greater issue in education is how to promote, sustain and provide the funds necessary for all children to succeed and how to make that happen where all citizens contribute fairly with the realization that funding education benefits all.
Brimley, V., Verstegen, D. A., & Garfield, R. R. (2016). Financing Education in a Climate of Change (12 edition). Boston: Pearson.
Legislative Analyst’s Office. (2012, November). Understanding California’s Property Taxes. Retrieved September 8, 2017, from http://www.lao.ca.gov/reports/2012/tax/property-tax-primer-112912.aspx
Repetti, J. R. (2008). Democracy and Opportunity: A New Paradigm in Tax Equity. Vanderbilt Law Review, 61(4), 1129–1186.