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Government Coercion (Taxation Policy), Revenues, Social/Economic Equity-Key Terms & Practices
Alvin Holliman, DM, CPA (retired/inactive)
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Taxation Policy & Terms
Progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups.
Proportional tax—A tax that takes the same percentage of income from all income groups.
Regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.
Comparing Regressive, Progressive, and Proportional Taxes
apps.irs.gov › les05 › media › ws_ans_thm03_les05
These terms most commonly apply to income taxes but to appropriately determine a government’s overall tax burden on various income groups, all types of taxes must be considered such as sales taxes, property taxes, sin taxes (alcohol, cigarettes, etc.), gasoline taxes, and tolls.
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Taxation Policy & Terms (continued)
For income tax calculation purposes another important concept involves deductibles from adjusted gross income. These typically include itemized deductions.
Home-owners generally benefit from itemized deductions as a result of mortgage interest and property tax write-offs.
Renters typically do not receive such benefits except for charitable contributions and the deductibility of state and local taxes on a federal tax return; but these items generally do not exceed the standard deduction allowed to non-home-owners.
It is quite fair to say, and backed up by long-standing empirical evidence, that income tax systems (federal or state) are very slanted in favor of married individuals and homeowners as well as people with dependents (usually children).
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Federal income tax rate schedule
| Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Jointly) |
| 10% | Up to $9,700 | Up to $19,400 |
| 12% | $9,701 to $39,475 | $19,401 to $78,950 |
| 22% | $39,476 to $84,200 | $78,951 to $168,400 |
| 24% | $84,201 to $160,725 | $168,401 to $321,450 |
| 32% | $160,726 to $204,100 | $321,451 to $408,200 |
| 35% | $204,101 to $510,300 | $408,201 to $612,350 |
| 37% | Over $510,300 | Over $612,350 |
2019 Tax Brackets for Single/Married Filing Jointly
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California income tax rate schedule - single
| Tax Bracket | Tax Rate |
| $0.00+ | 1% |
| $8,223.00+ | 2% |
| $19,495.00+ | 3% |
| $30,769.00+ | 4% |
| $42,711.00+ | 8% |
| $53,980.00+ | 9.3% |
| $275,738.00+ | 10.3% |
| $330,884.00+ | 11.3% |
| $551,473.00+ | 12.3% |
| $1,000,000.00+ | 13.3% |
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California income tax rate schedule married
California - Married Filing Jointly Tax Brackets
| Tax Bracket | Tax Rate |
| $0.00+ | 1% |
| $16,446.00+ | 2% |
| $38,990.00+ | 4% |
| $61,538.00+ | 6% |
| $85,422.00+ | 8% |
| $107,960.00+ | 9.3% |
| $551,476.00+ | 10.3% |
| $661,768.00+ | 11.3% |
| $1,000,000.00+ | 12.3% |
| $1,074,996.00+ | 13.3% |
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Progressive vs. Regressive Overall Tax Example
Whether or not taxes in any given government are progressive, regressive, or proportional, depends on many factors and cannot be precisely applied in a uniform manner- it depends on individual or family circumstances.
So, a fairly realistic example for California follows:
1. The average state sales tax rate is 8.65%
1. Assume couple A is living together (legally unmarried) and is renting a home in Los Angeles. They pay $2,700 a month for rent, each earns $55,000 per year (adjusted gross income) and each takes the standard deduction for a single person. One member of the household smokes one pack of cigarettes a day (about $4 per pack for federal and state tobacco taxes) and their alcohol consumption equates to $40 per month in federal and state taxes. They spend $8,000 per year on items susceptible to state sales tax (they pay $692 in annual sales taxes).
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Progressive vs. Regressive Overall Tax Example (continued)
2. Assume couple B is married and pays a mortgage on a home in Los Angeles. They pay $3,500 a month for the mortgage, including property taxes and interest which total $2,700 a month for the interest and property taxes. Each earns $75,000 per year (adjusted gross income, or $150,000 as a couple) and they deduct $3,000 per year for charitable contributions and $8,000 per year in state and local taxes (excluding property taxes)on the federal return only. Like Couple A, one member of the household smokes one pack of cigarettes a day (about $4 per pack for federal and state tobacco taxes) and also like Couple A, their alcohol consumption equates to $40 per month in federal and state taxes. Again, like Couple A, they spend $8,000 per year on items susceptible to state sales tax (they pay $692 in annual sales taxes).
OK, let’ see if this is a regressive or progressive tax situation.
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Progressive vs. Regressive? (continued)
Couple A net annual tax calculation:
Person # 1 Person # 2 Total
Adjusted gross Income 55,000 55,000 110,000
Federal standard deduction (12,200) (12,200)
Taxable Income 42,800 42,800
Federal Income tax 5,274 5,274 10,528
(10% x 9,700) + (12% x 29,774) + (22% x 3,324)
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Progressive vs. Regressive? (continued)
Couple A net annual tax calculation:
Person # 1 Person # 2 Total
Adjusted gross Income 55,000 55,000 110,000
California standard deduction ( 4,537) ( 4,537)
Taxable Income 50,463 50,463
State Income tax 1,123 1,123 2,246
(1% x 8,223) + (2% x 11,272) + (3% x 11,274) + (4% x 11,942)
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Progressive vs. Regressive (continued) Couple A Total Tax
Adjusted Gross Income $110,000
Federal Income Tax $10,528
State Income Tax 2,246
Cigarette Taxes ($4 per day x 365) 1,460
Alcohol Taxes ($40 per month x 12) 480
Sales Taxes 692
Total Taxes $ 15,406
Taxes as a % of AGI 14.00%
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Progressive vs. Regressive? (continued)
Couple B net annual tax calculation:
Total
Adjusted gross Income 150,000
Federal itemized deductions ( 43,400)
Taxable Income 106,600
Federal Income tax
(10% x 19,400) + (12% x 59,949) + (22% x 27,649) 15,169
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Progressive vs. Regressive? (continued)
Couple B net annual tax calculation:
Total
Adjusted Gross Income 150,000
California’s Itemized Deductions (excludes $8,000 in federal local
tax deductions) (35,400)
Taxable Income 114,600
State Income tax 6,855
(1% x 16,446) + (2% x 22,544) + (4% x 22,638) + (6% x 23,885) + (8% x 22,538) +
(9.3% x 6,640)
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Progressive vs. Regressive (continued) Couple B Total Tax
Adjusted Gross Income $150,000
Federal Income Tax $15,169
State Income Tax 6,855
Cigarette Taxes ($4 per day x 365) 1,460
Alcohol Taxes ($40 per month x 12) 480
Sales Taxes 692
Total Taxes $ 24,656
Taxes as a % of AGI 16.40%
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Progressive vs. Regressive (continued)
So, in the example/exercise leading up to this slide:
Couple A = $110,000 in AGI and an overall tax rate of 14.00%
Couple B = $ 150,000 in AGI and an overall tax rate of 16.40%
Does this scenario represent a progressive or regressive tax condition?
What might the impact be if Couple A also owned a home and was paying mortgage interest.
What might the scenario be if Couple A (an unmarried couple) be if they owned a home with similar income and payments as Couple B?
What might the scenario be if Couple A smoked 2 packs of cigarettes a day and Couple B smoked none (no other changes to scenario).
What are some key elements missing from this scenario so far that need to be included for a more realistic assessment?
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Progressive vs. Regressive (continued)
Well, what about gasoline taxes – let’s assume each couple uses 1500 gallons of gasoline a year at $1.20 per gallon in total gasoline taxes; this equals $1,800 per year.
With this additional consideration, Couple A pays a total of $17,206 in taxes, or 15.64% of AGI: Couple B pays $26,456 or 17.6% in taxes.
What a minute, but what about housing costs and other essential living expenses? OK, let’s assume each couple incurs $24,000 a year in living expenses beyond housing – what is the disposable income versus taxes now?
Couple A = $110,000 AGI less $32,400 in housing less $24,000 in other living costs = net disposable income before taxes of 53,600; taxes = 17,206; tax rate = 32%; Couple A = 150,000 AGI less 42,000 in housing and 24,000 in other living costs = net disposable income before taxes of 84,000; taxes = 26,456; tax rate = 31.4%
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Revenue Forecasting
As stated in Module 3, Revenue, expenditure, and capital project forecasting and planning should all consider external data markers as well, such as CPI, interest rates, state, national, and global political and economic changes, and any potential adverse environmental issues such as water contamination, excessive poor air quality, earthquakes, floods, storms, etc.
Forecasting systems can be complex, using computer modeling which incorporates all internal and eternal possible factors, or they can be simple and tackle factors one at a time and then blend them into one overall projection. Honestly, gut instincts are also often used and tainted by political preferences.
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Revenue Forecasting (continued)
Revenue forecasting practices often involve the use of sophisticated consulting firms for projecting property tax and sales tax income. In California, some of the main firms include Henderliter D’Llamas & Associates (HdL) as well as Municipal Resource Consultants (MRC).
These firms have access to county property tax rolls as well as sales tax data from the California Board of Equalization. Basically, they tell cities ad counties what the real data and trends are for property tax revenue and sales tax revenue.
If all other key factors remain equal, property taxes typically grow by the 2% annual inflator per Proposition 13 and any increases in value pursuant to property sales (however, sales data can also be negative in times of distressed property values such as the period between 2008 and 2012).
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Revenue Forecasting (continued
Factors involved in forecasting sales tax receipts include projected changes in the consumer price index (CPI), significant new retail entrants into the local marketplace, or large retailers who have moved out, and projected consumer demand for certain goods.
Again, assuming all other factors remain equal, if City A had sales tax revenues in fiscal year 2017-18 of 5,000,000 and the CPI is 2% and consumer demand is expected to increase by 1%, the 2018-19 projection would normally be 5,000,000 x 1.02 x 1.01 = 5,151,000.
Further assuming all other factors remain equal, if property tax revenue was 4,000,000 in 2017-18 and the only expected change is the 2% annual Proposition 13 inflator of 2%, 2018-19 property tax revenue would be projected as 4,000,000 x 1.02 = 4,080,000.
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Revenue Forecasting (continued
While property taxes and sales taxes typically represent the largest portion of local government revenues, there are other sources as well including hotel occupancy taxes (transient occupancy taxes), fees for services, intergovernmental grants and other receipts/transfers, motor vehicle license fees, and fines and forfeitures.
Each of these other revenue sources must include forecasts that consider not only changes in CPI but changes in population, changes in laws/regulations, changes in tourism or out of area business travel, and changes in local fee ordinances.
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Social/Economic Equity
The Standing Panel on Social Equity in Governance of the National Academy of Public Administration (NAPA) defines Social Equity as “The fair, just and equitable management of all institutions serving the public directly or by contract, and the fair and equitable distribution of public services, and implementation of public policy, and the commitment to promote fairness, justice, and equity in the formation of public policy.”
In the broader sense social/economic equity also considers the nature of governmental taxation systems (progressive, regressive, or proportional), and is biased toward progressive systems whereby the more income one has, the higher percentage of taxes he pays.
When the revenues from the higher income taxpayers are transferred into social expenditures (Aid for Dependent Children, Welfare, Section 8 Housing Assistance, etc.) this constitutes a form of income redistribution and is intended to provide greater social/economic equity.
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Social/Economic Equity (continued)
The Public Administration principle of fair and equal distribution of services is, of course, very noble but has many realistic challenges relative to practice such as:
1. Most policies that concern social/economic equity occur on a macro scale – global (Big 3 NGO’s + NATO and WHO), national (US, etc.), and states (California, etc.)
2. Most cities and counties have very little control over laws and revenues that can enact social equity at a local level (especially in California where tax generation is very restricted by statute.
3. Reduced or no fees for low income or disadvantaged groups relative to things such as park entrance fees, toll roads, etc. is impacted by the threat of Tragedy of the Commons and the local governments own fiscal capacity.
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Social/Economic Equity (continued)
Despite the umbrella of macro laws and policies beyond a local government’s control, there are many things which can be and are often done:
For locally owned utilities, reduced rates for lower income groups
Depending on funding availability, provision of “access” materials such as personal computers (in-home or libraries) – sometimes working in partnership with local non-profits and seeking grants.
Provision of adequate and accessible public transportation at reduced rates.
Coordination and counseling services for public health facilities, education (including English as a second language), Meals on Wheels, and extensive Parks and Recreation programs (after-school, weekends, etc.)
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