Not all taxes are created equal. Are some “better” than others, or more equitable, or fair? I have selected six criteria in order to compare different taxes in California, from the perspective of funding public education.
Criterion 1: Adequacy. This criterion is about how much revenue is generated by the tax. It addresses whether or not the tax is able to draw in enough money to run the school system.
Criterion 2: Equity (progressive, proportional, or regressive). This criterion is about whom the tax collects money from and how much it collects from different individuals. Proportional taxes collect the same percentage from each person. Progressive taxes collect a higher percentage from those who are more able to pay (sometimes referred to as “ability to pay” (Brimley, Verstegen, & Garfield, 2011)), and regressive taxes collect a higher percentage from those less able to pay (the poor). Though one hopes it would be obviously unfair to collect a higher percentage from the poor, we will see below that these taxes still exist.
Criterion 3: Ability To Be Understood (not overly complex). Ideally, all people should be able to figure out for themselves, in advance, the amount of their tax bill. If people understand how their tax and their neighbors’ taxes are calculated, they can plan ahead for the tax bill, and they will be more likely not to suspect the tax of being unfair.
Criterion 4: Ability To Funnel/Direct Money Where It Is Needed. Some taxes provide funding only for a specific expense. Though this reassures taxpayers that their money will not be “wasted” on “frivolous” expenditures, it creates extra expenses in the form of monitoring/accountability and paperwork, and it ties the hands of districts when some programs are overfunded and others are underfunded. Compromise, flexibility, and creativity are often necessary to balance budgets in lean years, and earmarked dollars hinder all three.
Criterion 5: Unintended Consequences. Some taxes have an effect beyond collecting revenue. Some people fear that taxes that are too high discourage business or encourage business people to move their companies elsewhere. Other taxes, like the lottery, have social consequences discussed below.
Criterion 6: Predictability. It is important for those in state and local government to know how much money will be collected and available to spend.
This blog post focuses on the following four tax types: income, sales, property, and lottery.
Income Tax. This is the most progressive of the taxes examined here, and therefore ranks highest based on criterion 2: Equity. Income is taxed at varying rates, based on the amount an individual, family, or corporation makes. California’s seven personal income tax brackets range from sound 1 to 11% (Brimley, Verstegen, & Garfield, 2011). The progressivity of the income tax lowers its understandability rank, as what counts as income and what is exempt is a challenge for the average person to understand, tally, and, though one hopes never to be required to, document.
Sales Tax. This tax is perhaps the easiest to understand, as it is “simply” a set percentage added to purchases. In terms of criterion 3, understandability, only the lottery ranks higher. Sales tax rates in California vary from county to county, complicating things somewhat (I do not even know the rate in my neighborhood).
Sales tax is regressive if it taxes necessities such as food and other necessities (Brimley, Verstegen, & Garfield, 2011), and though some grocery store purchases are exempt in California, not all are. Further evidence that sales tax is regressive is the fact that the poor tend to spend all of their income each month, while the rich save much of theirs. Finally, as sales tax varies from region to region, those with the most time and ability to comparison shop and travel can somewhat circumvent this tax.
Sales tax, again because it varies from place to place, has the unintended consequence of sending some commerce elsewhere. Oregon has no sales tax, so those who can often try to make purchases across the border.
Sales tax is the least predictable (criterion 6) of the taxes, as it changes from year to year based on the overall economy.
Sadly, though this is not the simplest tax to understand, and is regressive and unpredictable, it is the greatest source of revenue (criterion1: adequacy): one third of state tax revenue is supplied through this channel (Brimley, Verstegen, & Garfield, 2011).
Property Tax. There are three types of property tax: real, personal, and special bond. Historically, property taxes used to be the largest source of school funding. Now, though they provide most of the local funding, state funding still provides more overall.
Real Property. Real property refers to land and buildings owned by both individuals and corporations/businesses. Property taxes seem to be unpopular among all groups: the rich claim they own more expensive homes, so are taxes more, the middle class claim they spend a greater percentage of their wealth on their home, so they are taxed more, and those who do not own a home feel that their landlords pass property taxes on to them in the form of higher rent. Though one could say a tax that everyone hates might actually be equitable, it is said by some to be the most regressive of taxes (Brimley, Verstegen, & Garfield, 2011) because of the ability of the rich to funnel their wealth into investments other than their primary home, often avoiding significant taxes. Also, California’s Proposition 13 restricts inflation in assessments so that neighbors with similar homes often receive tax bills differing by a factor of 10 depending on when the home was purchased.
Personal Property. Personal property includes things people and businesses own (both tangible things like cars, jewelry, and machinery and intangible things like cash, bank and stock accounts) that, unlike real property, are easily movable. Taxing personal property makes property tax more equitable, overall, but as always, those with the most money also have the most incentive and resources to hide their property from such taxes. They have also tended to be successful at lobbying to dissuade lawmakers from pursuing personal property taxes aggressively.
Special Bond Election. Sometimes, a local school board will ask the voters (via an election) to allow the district to borrow money for a capital outlay (to purchase land or construct or modernize buildings), the loan to be paid back via a property tax levied over the next several years or few decades. This tax ranks high on the adequacy and directability scales, medium on the understandability scale (though voters usually understand what the money is for, they often do not understand the amount of interest that will eventually be paid, and when/if they find out, they are often horrified), and low on equity, as all residents get to vote, but only property owners have to pay.
The Lottery. Though easily understandable, the lottery, as discussed in my previous blog post, has perhaps the most serious unintended consequences: promoting and normalizing gambling among young people. It also provides the smallest amount of revenue (about 2% of the total California school budget) and is the least flexible in terms of funneling money where it needs to go: mainly textbooks/instructional materials. Finally, as a regressive tax, targeting the poorest neighborhoods with the highest concentrations of ticket sales institutions (see studies referenced in my blog post below), the lottery ranks lowest of the four taxes discussed here.
Brimley, V. R., Verstegen, D. A., & Garfield, R. R. (2011). Financing Education in a Climate of Change (11 edition.). Boston: Pearson.
Kundu, P. V., Pilver, C. E., Desai, R. A., Steinberg, M. A., Rugle, L., Krishnan-Sarin, S., & Potenza, M. N. (2013). Gambling-Related Attitudes and Behaviors in Adolescents Having Received Instant (Scratch) Lottery Tickets as Gifts. Journal of Adolescent Health, 52(4), 456–464. doi:10.1016/j.jadohealth.2012.07.013
Wiggins, L., Nower, L., Mayers, R. S., & Peterson, N. A. (2010). A geospatial statistical analysis of the density of lottery outlets within ethnically concentrated neighborhoods. Journal of Community Psychology, 38(4), 486–496. doi:10.1002/jcop.20376