California Citizen

California’s Super Rich and Our State Government

How the fortunes of one have fueled the struggle of the other

Living in a Recession is hard on everyone, even on the bears living high in the Sierra Nevada mountains. Ranger W.Dan helps his friend Griz understand why a lot of state parks are closed, and how it’s linked to the state’s Super Rich.

Griz learns that the California state government relies heavily on the personal income tax paid by the state’s Super Rich, the top 1% of taxpayers. But because the Super Rich make a lot of their money from investments, their income tends to go up and down from year to year. As a result, inconsistent tax revenues put the state budget and the legislature in a near constant state of crisis.

The Rich keep getting richer

The most dramatic change in looking at taxes and the Super Rich, is how much the richest Californians have seen their income increase in the last 15 years, and how little any other income group has improved. The Super Rich have seen their income go up 78% to be exact. (See tables below: AGI Per Return, Percent Changes) While that might make the rest of us green with envy, from a tax perspective, it just makes the state tax revenues even more volatile. And it can have adverse impact on the second largest source of state revenue, sales tax.

Also, it’s important to note that the charts below listing income percentages are not based on household incomes, but on taxpayer returns. They do not distinguish between individual or joint returns. And further, they reflect taxable income, not individual assets or income that is tax exempt.

The first to recover from the Recession are the Super Rich

Further illustrating the volatility of California’s tax structure, is that just when things were looking their darkest last year, the projected deficit of $26 billion, got a bit of a break because the first people to recover from the Recession were: the Super Rich.

The difference between paying the most in dollars and paying the highest percentage of income

Another clarification is that that while the richest Californians pay the highest rates in personal income tax, it does not mean that they are necessarily paying a greater percentage of their income in taxes overall.

A recent study by the California Budget Project found, “The bottom fifth of the state’s non-elderly families, with an average income of $12,600, spent 11.1 percent of their income on state and local taxes. In comparison, the wealthiest 1 percent, with an average income of $2.3 million, spent 7.8 percent of their income on state and local taxes.”

“The bottom fifth of the state’s non-elderly families, with an average income of $12,600, spent 11.1 percent of their income on state and local taxes.”

“In comparison, the wealthiest 1 percent, with an average income of $2.3 million, spent 7.8 percent of their income on state and local taxes.”

Things are more complicated than they seem

Yet another issue for the average citizen is how complicated State finances are, and how little we understand about the collection of taxes, let alone how they are spent. Here are more points to contextualize the information in our story.

Taxes paid on investments are called capital gains taxes. The number tables below show how drastic capital gains taxes can change from year to year. It is the capital gains tax that generates the bulk of the volatility within personal income tax. (See tables below: Capital Gains Income, Capital Gains as Percent of General Fund)

Personal Income Tax vs. Property Tax

The State’s general fund is a breakdown of statewide taxes. It takes into account personal income tax which helps fund services like schools (K-12 and university), Medi-Cal, the prison system, roads, and state parks.

However, property tax is not included in the General Fund breakdown. While our story doesn’t cover property tax, we need to mention that it plays a significant role in funding local governments so that cities and counties can provide service for schools (K-12), police, fire, and other local services.

Just the numbers, please:

Based on 2008 Taxes paid: The numbers below are based on average returns. They do not separate out individual vs. joint filers. They are also based on Adjusted Gross Income (AGI) as reported in state taxes. AGI does not include Social Security and unemployed benefits nor do they include lottery winnings. In other words:

  • The top 1% pay 42.8% of personal income tax. This is people who make a minimum of $450,000, and an average of $1,429,556.
  • The top 20% pay 87.6% of personal income tax. This is people who make a minimum of $85,977, and make an average of $213,357.
  • The next 20% pay 9.3% of personal income tax. This is people who make a minimum of $47,211, and make an average of $63,883.
  • The next 20% pay 2.6% of personal income tax. This is people who make a minimum of $27,548, and make an average of $36,613.
  • The next 20% pay 0.5% of personal income tax. This is people who make a minimum of $14,263, and make an average of $20,619.
  • The next 20% pay 0.04% of personal income tax. This is people who make a minimum of $0, and make an average of $7,685.

AGI Per Return (Real 2008 Dollars)

The state of California divides taxpayers into five sets, known as Quintiles, each representing 20% of taxpayers.

Year Top 1% Next 4% Next 5% Next 10% Top Quintile 4th Quintile 3rd Quintile 2nd Quintile Bottom Quintile Overall per Return AGI
2008 $1,429,556 $256,857 $152,507 $321,955 $213,357 $63,883 $36,613 $20,619 $7,685 $68,434
2007 $1,924,042 $284,982 $161,228 $387,003 $248,095 $66,269 $37,928 $21,258 $7,729 $76,257
2006 $1,902,015 $283,659 $158,212 $382,771 $245,364 $66,865 $38,891 $22,069 $8,193 $76,276
2005 $1,895,767 $283,334 $159,756 $382,788 $246,130 $67,516 $39,197 $22,218 $8,201 $76,652
2004 $1,598,601 $267,375 $155,354 $344,487 $225,589 $66,993 $39,352 $22,239 $8,192 $72,473
2003 $1,304,162 $252,652 $151,119 $307,036 $206,548 $66,226 $39,078 $22,291 $8,120 $68,454
2002 $1,196,064 $246,722 $150,463 $293,527 $199,626 $66,865 $39,462 $22,318 $8,006 $67,256
2001 $1,403,147 $257,791 $153,589 $320,226 $213,844 $67,595 $39,928 $22,432 $7,998 $70,359
2000 $2,260,426 $295,721 $163,940 $426,302 $269,242 $69,655 $41,098 $22,985 $8,479 $82,268
1999 $1,812,701 $276,108 $157,402 $370,415 $239,744 $68,383 $40,172 $22,454 $8,178 $75,787
1998 $1,428,552 $253,318 $150,506 $319,441 $211,878 $67,166 $39,474 $22,194 $8,119 $69,765
1997 $1,270,659 $242,390 $145,411 $296,727 $199,407 $65,322 $38,437 $21,402 $7,861 $66,485
1996 $1,111,303 $226,793 $138,987 $271,342 $185,072 $63,421 $37,116 $20,626 $7,523 $62,752
1995 $912,664 $213,145 $133,216 $243,132 $169,365 $61,346 $35,848 $20,159 $7,394 $58,822
1994 $810,357 $204,922 $131,505 $228,758 $162,996 $63,704 $37,779 $21,130 $7,623 $58,647
1993 $804,099 $201,867 $130,358 $226,336 $161,156 $63,841 $37,883 $21,041 $7,528 $58,289
Source: Franchise Tax Board Personal Income Tax Changes in Income Distribution, 1993 through 2008

AGI Per Return, Percent Changes

Year Top 1% Next 4% Next 5% Next 10% Top Quintile 4th Quintile 3rd Quintile 2nd Quintile Bottom Quintile Overall per Return AGI
1993-08 77.8% 27.2% 17.0% 42.2% 32.4% 0.1% -3.4% -2.0% 2.1% 17.4%
2007-08 -25.7% -9.9% -5.4% -16.8% -14.0% -3.6% -3.5% -3.0% -0.6% -10.3%
2006-07 1.2% 0.5% 1.9% 1.1% 1.1% -0.9% -2.5% -3.7% -5.7% 0.0%
Source: Franchise Tax Board Personal Income Tax Changes in Income Distribution, 1993 through 2008

Tax Concentration

The percentages listed below represent what percentage of personal income tax each group pays.

Year Top 1% Next 4% Next 5% Top 10% Top Quintile 4th Quintile 3rd Quintile 2nd Quintile Bottom Quintile Total
2008 42.8% 21.3% 11.7% 75.8% 87.6% 9.3% 2.6% 0.5% 0.04% 100.0%
2007 48.1% 20.2% 10.4% 78.7% 89.0% 8.2% 2.3% 0.5% 0.1% 100.0%
2006 47.9% 20.4% 10.2% 78.5% 88.5% 8.4% 2.5% 0.5% 0.1% 100.0%
2005 47.5% 20.3% 10.4% 78.3% 88.6% 8.3% 2.5% 0.5% 0.1% 100.0%
2004 42.7% 21.6% 11.4% 75.7% 87.1% 9.5% 2.8% 0.6% 0.1% 100.0%
2003 38.7% 22.2% 12.2% 73.1% 85.7% 10.5% 3.1% 0.7% 0.1% 100.0%
2002 36.7% 22.1% 12.5% 71.4% 84.6% 11.1% 3.4% 0.7% 0.1% 100.0%
2001 39.5% 21.5% 11.8% 72.8% 85.3% 10.6% 3.4% 0.7% 0.1% 100.0%
2000 48.7% 19.4% 10.0% 78.1% 88.2% 8.4% 2.7% 0.6% 0.1% 100.0%
1999 44.5% 20.3% 10.8% 75.6% 86.9% 9.5% 3.0% 0.6% 0.1% 100.0%
1998 40.6% 21.2% 11.7% 73.5% 85.2% 10.7% 3.4% 0.7% 0.1% 100.0%
1997 37.7% 21.2% 11.9% 70.8% 83.6% 11.8% 3.7% 0.7% 0.1% 100.0%
1996 36.4% 21.4% 12.2% 70.0% 83.1% 12.3% 3.8% 0.7% 0.1% 100.0%
1995 35.6% 21.6% 12.3% 69.6% 83.1% 12.4% 3.7% 0.7% 0.1% 100.0%
1994 32.6% 21.2% 12.4% 66.1% 80.7% 13.8% 4.5% 0.9% 0.1% 100.0%
1993 33.3% 20.9% 12.5% 66.7% 80.5% 13.9% 4.6% 0.9% 0.1% 100.0%
Source: Franchise Tax Board Personal Income Tax Changes in Income Distribution, 1993 through 2008

Tax Concentration, Percent Changes

Year Top 1% Next 4% Next 5% Top 10% Top Quintile 4th Quintile 3rd Quintile 2nd Quintile Bottom Quintile Total
1993-08 9.5% 0.4% -0.8% 9.1% 7.1% -4.6% -2.0% -0.4% 0.0% 0.0%
2007-08 -5.3% 1.1% 1.3% -2.9% -1.4% 1.1% 0.3% 0.0% -0.1% 0.0%
2006-07 0.2% -0.2% 0.2% 0.2% 0.5% -0.2% -0.2% 0.0% 0.0% 0.0%
Source: Franchise Tax Board Personal Income Tax Changes in Income Distribution, 1993 through 2008

Capital Gains Income, 2000 to 2010

Year Capital Gains Income
2010e $59.4 Billion
2009e $42.4 Billion
2008p $49.9 Billion
2007 $129.6 Billion
2006 $117.3 Billion
2005 $112.4 Billion
2004 $76.3 Billion
2003 $47.6 Billion
2002 $35.5 Billion
2001 $50.7 Billion
2000 $117.6 Billion
p: projected, e: estimated
Source: Governor’s Budget, Revenue Estimates

Capital Gains as Percent of General Fund:

Year Capital Gains
2010-2011 6.0%
2009-2010 4.3%
2008-2009 5.4%
2007-2008 11.8%
2006-2007 11.1%
2005-2006 10.8%
2004-2005 8.3%
2003-2004 5.7%
2002-2003 4.5%
2001-2002 6.3%
2000-2001 14.8%
Source: Governor’s Budget, Revenue Estimates