As California slips further into long-term structural deficits and years of overspending catch up with policymakers, new and recycled tax increase discussions have begun once again. Corporate income tax rates continue to be central to these discussions. However, focus on this tax source ignores several basic realities about the overall economy and the enormous reach of the state’s overall tax and fee policies.

The data used below relies on the annual Total State and Local Business Taxes reports prepared by Ernst & Young in cooperation with Council on State Taxation and State Tax Research Institute.  These reports estimate the portion of state and local taxes paid by businesses in each state.  While the most recent report published last December covers FY 2023, that data is not used below as the estimates for California appear to be significantly low.  The amount shown for business income taxes (paid both through CIT and PIT) is shown as only $30.9 billion, while one of their main data sources—US Census Bureau—shows $46.0 billion alone for CIT (an amount that includes PTET).

The ongoing fixation on corporations ignores the fundamental fact that an increasing number of businesses are being formed as pass-through taxation entities including sole proprietorships, LLCs, Subchapter S corporations, and partnerships.  Using the Ernst & Young results, state taxes (PIT) from this type of business entity have been fundamentally equal or larger than state taxes from corporations (CIT) in recent years.  Note that the trend shift in the last two years of the chart is due to the number of pass-through businesses that have chosen to be taxed at CIT rates under the state’s PTET option.

The focus on CIT along with the attendant “fair share” arguments ignores the reality that this is only one of the many taxes businesses pay in this state.  Looking at the period since 2012 when the state’s higher PIT rates and revenues first became effective under Prop 30, CIT averaged 10.1% of total state and local taxes paid by businesses in the period FY 2012 through 2020, and still only reached 20.1% in FY 2022 as the result of the PTET option.  Between FY 2012 and FY 2022, total business taxes increased 107.7% ($86.7 billion) to a total of $167.2 billion.

While more comprehensive than some analyses, the charts do not incorporate all the taxes and fees businesses pay in California, in particular fees.  While license fees are included in the data, both the state and local governments charge a bewildering range of other fees paid by businesses in their normal operations directly and as well as indirectly such as the costs of Cap and Trade and LCFS embedded in purchased energy, a range of similarly embedded regulatory fees such as deposits, California-only product requirements, and others.

And there’s even more coming.  California CIT was increased by $6 billion through limitations on the use of net operating loss and R&D tax credits as part of last year’s budget bills.  Even though California was given federal pandemic assistance funds specifically to pay off its unemployment insurance debt, that $23 billion and rising debt means the unemployment insurance tax on all businesses will continue increasing.

Businesses—corporations and pass-throughs—create further rounds of tax revenue generation by hiring employees and contractors and providing inputs into the production of other goods and services.  If the resources they use to do this are taxed, there are less tax revenues created down the road.

As an example, the Ernst & Young data show business taxes have averaged about 35% of the state total tax revenues since FY 2012, but just over half in the case of local taxes in this period.  Less business activity due to increased taxes consequently would hit local governments far harder than the state.  And as far as “fair share” arguments many tax proponents want to make, the 41.8% share of all state and local taxes in FY 2022 was about the same as shown in the 2004 results from the first edition of this series of studies.  California’s FY 2022 share is slightly below the US average, but this result stems from the state’s overall higher tax burden, in particular the surge in revenues stemming from the Prop 30 and Prop 55 rate increases on high income earners.

As discussed in our monthly Center for Jobs reports, California job numbers have essentially been stagnant over the past two years, and those jobs that have been created are coming from public spending on government jobs and government-supported jobs in Health Care & Social Assistance, especially minimum wage, part-time In-Home Supportive Services (IHSS) jobs paid through Medi-CAL.  Unemployment remains fixed above 1 million, and our unemployment and underemployment rates are the highest among the states.

Other states in contrast are seeking to expand jobs.  Recent moves to LOWER business taxes and shift these resources to jobs creation effective in 2025 include the following: