Perceptions of Inequity Cloud State Tax System : Revenue: In California, the reality is the more you make, the more you pay. But there are lots of exceptions.

Retired real estate agent R. F. Montandon is irked by the $7,000 property tax bill he must pay on the Laguna Niguel condo where he lives and the three modest houses he rents out.

“I bought all my houses in the ‘80s, so none of them benefit from Proposition 13,” he complained. “A favored few enjoy Proposition 13 while the majority suffer.”

But two of those “favored few”--Robert and Lois Senseney, ages 76 and 74, of Westminster--say the 1978 tax revolt initiative has been a lifesaver. The retired couple, living in the same three-bedroom house they bought 30 years ago for $21,000, paid $521 in property taxes in 1992.

“Proposition 13 was a good thing,” Senseney said. “Without it, we’d have a hard time getting by.”

There is plenty to love and hate in California’s illogical, antiquated and complex tax system, and everyone who pays taxes has a strong opinion about whether the state tax system is fair.

Public opinion polling and a Times survey of a cross-section of Southland taxpayers show that many Californians believe it is not. They see a tax system riddled with inequities: income and sales taxes plastered with exemptions and property tax bills that can vary widely for property of similar value.

Yet broadly speaking, tax experts say the bottom line on California taxes is this: The more you earn and the more you own, the more you pay.

A five-month Times study of the California tax system found a surprising vacuum of research on the state tax burden and whether it is distributed fairly across people of different income groups. There are billions of bits of raw data about California taxpayers in the computers in Sacramento. But there is no definitive study that quantifies who bears the weight of the dozens of taxes and fees collected under the immensely complex state and local tax systems.

In 1990, the state Senate Office of Research issued a two-volume report entitled “California’s Tax System: Who Pays?” It never answered the question.

The Times analysis reached these broad conclusions about equity in the California tax system:

* The rich bear a major share of the income tax burden in California, primarily through the state’s highly progressive personal income tax. The poor pay little or no income tax, the broad middle class pays a modest rate, and the wealthiest pay a lot. In 1990, half of all income tax revenues came from the wealthiest 5% of taxpayers, roughly those making $90,000 or more.

* With 1991 increases, California’s sales tax rate, averaging nearly 8% statewide, is one of the highest in the nation. Although it exempts food and prescription drugs, the California sales tax generally imposes a greater burden on low- and middle-income people than on the wealthiest income earners.

* The greatest apparent inequity is created by Proposition 13, which establishes two classes of homeowners: those who bought houses in the mid 1980s or before and who enjoy the lowest effective rates, and more recent buyers who pay more based on higher assessments--in many cases much higher for homes of similar value.

* Although business often complains that it gets socked the hardest whenever the state raises taxes, the record shows that the proportion of taxes paid by corporations and individuals is almost the same as it was 30 years ago: Individuals pay 75%; business pays 25%.

These general conclusions about the tax burden do not definitively answer the question of fairness, which is largely a subjective judgment, heavily colored by political viewpoint. Although a broad consensus of Californians believes that those who can afford it should bear the largest portion of the tax burden, there is considerable disagreement about what portion is enough.

A sampling of Southern California taxpayers interviewed by The Times agree on one thing: Whatever the tax, they do not believe that they are getting their money’s worth from government.

This is a marked departure from the golden California boom days of the 1950s and ‘60s, when the state generally led the nation in the quality of services it provided. Californians then largely believed that their money was well spent on a first-rate educational system, the nation’s best freeways, an excellent state park system, the most modern libraries and the like, surveys have shown.

Now, it is not uncommon to hear comments such as this one from George King, 71, a Burbank businessman: “Our roads are terrible. Our libraries are closing; parks are terrible.

“I would be very happy to pay double and triple (his current property taxes) to get services restored,” King said.

From there, opinions diverge widely about which tax is the most onerous. Some especially dislike the sales tax. Others detest the income tax. Still others believe that the rich are getting away without paying their fair share.

Some of those interviewed said they willingly would pay more taxes if they believed that they were getting quality government services in return.

“I’m not opposed to additional taxation to cope with additional problems as they arise,” said 68-year-old Felix Rinde of Granada Hills, a veteran technician for the U.S. Postal Service.

Not surprisingly, California taxpayers tend to view taxes from a personal standpoint.

Consider landlord Montandon and his $7,000 property tax bill. Without Proposition 13, he probably would be paying far higher property taxes. So he does benefit from Proposition 13. But, as he said, many, like the Senseneys, benefit more.

In analyzing California’s state and local tax system, The Times focused on the four largest taxes--income, sales, property and business--and examined how they hit broad classes of people and institutions.

* INCOME TAX

Public opinion polls indicate that Californians are more hostile toward the state’s personal income tax than the sales tax, although the income levy is considered by far the fairer of the two because it is based on the ability to pay.

Experts regard California’s income tax as the most progressive in the nation. Its rates increase as you go up an eight-step income scale. Rates range from 1% for the least affluent to 11% for the wealthiest--couples with more than $414,000 in adjusted gross income.

In Times interviews with Southland taxpayers, many complained that the rich do not pay their fair share because they can afford to hire accountants to exploit loopholes and deductions not available to them. One example: In 1990, 102,800 wealthy individuals wrote off $5 billion from their personal income based on losses from closely held businesses.

Still, state studies indicate that lower-income taxpayers in general are able to shield a far greater percentage of their income from taxes through deductions--even the standard deduction--than are the wealthy.

Barbara Canter, who owns a pet store in Huntington Beach, said: “I’m in favor of an across-the-board income tax--no deductions--where everybody pays the same percentage.”

But a flat tax such as that would strip the state income tax of most of its progressiveness, probably allowing the rich to pay far less in taxes than they do now.

Veronica Grijalva, 26, of Rancho Santa Margarita, complains that it is pointless for middle-income workers such as her 26-year-old mechanic-husband, Caesar, to work overtime to earn more money because taxes eat up any additional pay.

“Sometimes, it seems that the more he works, the less take-home pay he makes,” she said.

But even at the top 11% bracket, each additional dollar earned costs only 11 cents in state income taxes after deductions.

Taxpayers commonly believe that they pay more in taxes than they do. Rodrigo and Cynthia Ramos, ages 40 and 44, of Glendale, estimated that nearly 40% of their $109,000 income goes to taxes. But when they itemized what they paid to local, state and federal governments, it turned out to be closer to 20%.

* SALES TAX

If there is a tax the average Californian should dislike, it is the sales tax. Most experts consider sales taxes regressive because the less affluent spend a greater share of their income on taxable goods such as clothing, autos and other essentials. The tax also applies to gasoline, on top of other fuel taxes.

California has increased the sales tax rate more often in recent years than any other statewide levy, and most counties have added sales taxes for regional transportation programs or other purposes. The rate now runs as high as 8.5% in some counties.

Yet Californians did not balk at a major sales tax increase in 1991 to help close the massive state budget gap. They did rebel at the confusing “snack tax,” which accounted for a fraction of the new revenue. Opponents quickly collected enough signatures to put a referendum on the 1992 election ballot. The sales tax on candy bars and other snack foods was repealed resoundingly.

John Brennan, director of the Los Angeles Times Poll, found the California public “particularly ambivalent” about the sales tax. A 1991 Field Poll discovered that Californians thought the sales tax was the most excessive of all general California taxes. At the same time, those sampled by The Times poll, if forced to choose, far preferred the sales tax over the income tax.

“The public seems to feel it has discretion in paying sales taxes that is absent with the income tax,” Brennan said.

Few taxpayers interviewed by The Times for this series complained about the sales tax, although 58-year-old Ruth Durden of Fullerton, a $7,200-a-year housekeeper, said: “They need to lower it. It hits the poor people.”

King, the Burbank businessman, believes the sales tax helps broaden the tax burden because no one can avoid it, except by electing not to buy things.

Gary Baer, 38, a Los Angeles city worker, tends to agree. Baer buys a new car about every three years, eats out a lot, and keeps his wardrobe up to date, so he pays considerable sales taxes for his $38,000 annual income.

California’s sales tax is particularly regressive, experts say, because it applies mostly to consumer goods, even though it exempts food and prescription drugs. The rate is so high because the tax base is so narrow. The most frequently proposed reform is to expand the base to a variety of services that increasingly are taxed in other states, from dry cleaning to legal services to amusement park admissions.

A study conducted at UC Davis this summer estimated that for a family earning $20,000, the mean burden for state consumption taxes (sales, gasoline, cigarette and alcohol) is $430, or 2.15% of gross income. A family earning $55,000 pays $924, or 1.68% of gross income. And a family earning $100,000 pays $1,224 or 1.22% of gross income.

* PROPERTY TAX

It is not surprising that The Times interviews are riddled with angry comments about the property tax.

Primarily, the objections come from latter-day home buyers who pay far higher property taxes than neighbors who have lived in similar homes since the late 1970s or early 1980s.

This was a predictable effect of Proposition 13, the 1978 tax revolt ballot initiative that slashed property taxes 57%, froze tax rates and locked in advantages for people who owned homes at that time and have stayed in those homes.

“We know people with houses worth more than ours (who are) paying peanuts in property tax,” Barbara Canter complained. “They’re getting the same services we are--police, fire department--yet we’re paying more money. How is that equitable?”

It isn’t. But one of the primary goals of those who sponsored Proposition 13 was to protect retired people living on fixed incomes who were threatened with the loss of their homes because they could not afford soaring property taxes.

A recent UC Davis study confirms that those who got the greatest benefit from Proposition 13 were the elderly and less-affluent homeowners. They tend not to move as often as others; and their home assessments, therefore, remain at lower levels.

Among them are Al and Anita Feinblatt, ages 81 and 70, a retired couple living in the same Van Nuys tract home they bought for $25,600 in 1967. Anita Feinblatt is grateful they get the full benefit of Proposition 13, but she sympathizes with those who do not.

“As much as we like not paying much in property tax, we don’t feel our next-door neighbor should be paying that much more,” she said.

The Times interviews revealed a second source of hostility--from those who do not own homes. A substantial number of renters complained that they are denied the benefits of home ownership, including tax rate controls afforded by Proposition 13 and the mortgage interest deduction from income taxes.

“We’re getting penalized because we don’t earn enough to own a house,” said Walter Rodriguez, 26, a computer analyst who rents in North Hills. “Someone who makes double what I do can buy a house and then they get a tax break.”

Susan Pruitt, 34, of Costa Mesa, a professional who is single and rents, said of Proposition 13: “It hurts people in my age bracket because high property taxes make the dream of buying a house that much further away.”

The irony is that homeowners pay a far bigger chunk of their income in taxes than do renters; even with all the benefits, the property tax is a major part of their total tax bill.

* BUSINESS TAXES

Decade after decade, the debate has raged in California: Does business pay its fair share of taxes? There is no definitive answer. This debate has become muted in the recession of the 1990s as the fear was raised that businesses might be fleeing to lower-tax states.

If it is difficult to compare one Californian’s individual tax situation with another’s, it is doubly so in trying to assess the burden on an individual or family relative to a California corporation.

Businesses generally pay the 9.3% corporate income tax only when they make a profit. Also, they are afforded an array of deductions not available to individuals. Businesses can write off all the interest they pay on money borrowed to conduct their affairs. In 1989, corporate interest deductions totaled $884 billion.

California companies took in nearly $8 trillion that year in gross receipts, with gross profits of $1.5 trillion. After all deductions, their collective taxable income was $33 billion, on which they paid $4.4 billion in taxes.

During the current recession, a number of Democrats have joined Republicans in supporting tax breaks to energize the economy. Economists are skeptical about tax concessions, saying they cost the state money in the short run and may not pay off over the long haul.

Taxpayers surveyed for this story were interviewed by Times staff writers Susan Christian in Orange County, Richard Lee Colvin in the San Fernando Valley and Paul Lieberman in Los Angeles.

* BEARING THE TAX BURDEN: A look at how state taxes affect several Californians. A16, A17