Before diving in, I want to recognize Elise Buellesbach, rising senior at Presentation High School, who interned with me this summer (virtually, via Zoom!). Elise did a fantastic job helping me research recent topics we’ve covered and she contributed significantly to this particular post. You can connect with Elise on LinkedIn if you’d like to be in touch with her. Thank you, Elise, for your great work this summer and best of luck in your senior year and beyond!
While canvassing the neighborhoods of District 10 during my campaign for City Council, I started each conversation with the same question:
Which local issues are most important to you and how well is City Hall addressing them?
Across the nearly 10,000 doors I knocked on, one of the most common reactions I heard was:
Where does all the money go? I don’t get it. I pay thousands of dollars each year in property taxes alone, and I really don’t understand where it’s going. My road hasn’t been paved in fifteen years, the police don’t have enough capacity to follow up on property crime, I see trash and weeds along the expressways and our local bus service is getting cut. Where does it all go?
It’s an important line of questioning. And it’s one I’m reflecting on regularly as I study local issues and prepare to take office to represent you next year. I think we all want to understand where our tax dollars are going and whether or not we’re getting good value for those dollars. The first step in answering these questions is understanding where our tax dollars are allocated.
In this post, we’ll estimate how much the median San Joséan pays in taxes and how those dollars are spent. This post will be informational — i.e. fact-based estimates of what we pay and how it is spent. I’ll save my personal assessment of the efficacy of various types of spending for future posts on specific policy areas (as I recently did for education).
My goal in this post is to describe the big-picture situation and establish a shared context for discussing taxes and public budgets. The scale and proportions of spending will be useful, but it would take many more months of research — and probably a team of accountants — to nail down each dollar, much less analyze its effectiveness.
I’ll also note that COVID is starting to wreak havoc on public budgets (including a $71 million shortfall in San José’s budget), which means that some spending patterns will change in the years ahead. My hope is that having an understanding of past taxation and spending levels will help us better understand future changes and tradeoffs.
How Much Did You Say?
Everyone has a unique financial situation, but for the sake of establishing a baseline from which we can make some assumptions, let’s say that you live in the median income household in San José.
As such, you are a homeowner with a mortgage, you live in a dual-income household, and your combined income is approximately $104,000 per year. Again, by definition, this thought experiment won’t reflect your personal situation, but it gives us a sense of the median San Joséan’s experience (i.e. half of San José households earn more income and half earn less) and you can adjust the following scenario using this handy tax calculator to better approximate your personal circumstances.
As the median San José taxpayer, how much do you pay in taxes each year?
This is unfortunately less straightforward than one might think, but we can do some back-of-the-envelope math to get an estimate:
- You pay $12,128 in income taxes between the federal and state governments, assuming you file jointly, take the standard deduction and have one dependent (the average household in San José has 3.14 residents).
- You pay $7,493 in payroll taxes for Social Security and Medicare (your employer pays an equal amount on your behalf).
- As a homeowner, you pay property taxes. This amount is highly variable depending on when you purchased your home, but let’s assume the taxable value on your home is $500k, or approximately half of the average home value in San José today. This implies that you purchased your home over a decade ago. With the standard 1% tax rate on your taxable value, you would pay $5,000 per year in property taxes. (Note for renters: property taxes are indirectly captured in your monthly rent).
- In addition to the base property tax, you also pay “special assessments” on your property tax bill that apply to the sewer system, garbage collection, library parcel tax, flood control, mosquito abatement and a variety of other local taxes passed by voters. For the median San José homeowner, these taxes and fees cost on the order of $1,200 per year, though your bill will vary depending on the districts in which you live.
- You pay sales tax on all qualifying purchases. We couldn’t locate a figure for median household sales tax in San José, but the Governor’s 2019–2020 budget message states that the average California household spends about 27% of income on items that are eligible for sales tax. Combining this figure with our median household income of $104,000 and San José’s 9.25% sales tax, we get an estimated total sales tax of $2,597 per year.
- You pay fees and taxes associated with car ownership, including a gas tax of $0.50 per gallon. The Legislative Analysts’ Office estimates that each driver pays about $750 per year in taxes and fees. Since the median household owns two vehicles, we will double it to $1500 per year.
From time to time, you likely pay other taxes and fees as well, including capital gains tax when you sell assets (e.g. stocks, bonds, property), additional fees if you buy a new car, a 6% tax on alcohol and tobacco purchases, special taxes on hotel stays, and others.
This list does not include user fees for certain government-run services, such as parking, airports, and state parks. It also does not include charges for some government-regulated utilities, such as water, gas and electricity. Finally, this list does not include taxes on businesses, which are largely passed on to consumers in the form of higher prices.
That said, if we focus on the big-ticket taxes above that are consistently applicable to the median taxpayer, we get a total tax bill of about $29,918 or 29% of your annual income. If you purchased your home recently, your property taxes are likely 2–3 times higher, which would push your total tax burden into the range of 34–38% of income. Generally speaking, the more you earn, the higher your tax burden as a percentage of income (federal and state taxes are mostly, but not entirely progressive). For most readers, annual all-in taxes will range from about 25% up to about 50% of income.
As the median taxpayer, you send nearly one-third of your hard-earned income to our government each year. So how is it spent?
Where The Money Goes
The federal government collects about 55% of all tax revenue ($16,460, for our median taxpayer), primarily through income and payroll taxes. There’s a joke that the U.S. Government is basically an insurance company with a large standing army — and that’s about right.
Almost half (48%) of these federal dollars ($7,900) goes to Social Security, Medicare, Medicaid and other health care spending. Most of this spending ensures that Americans over 65 years of age — which, God-willing, each of us will be one day — have basic retirement income and health care. These programs also provide health benefits to children and Americans with disabilities.
The other half (52%) of your federal dollars ($8,560) goes to the following priorities: national defense ($2,520), interest on the national debt ($1,400), income security such as unemployment payments and nutrition assistance ($1,120), benefits for federal retirees and veterans ($1,050), education ($360), transportation and infrastructure ($350), among many other smaller areas of spending ($1,760).
These figures are estimated and rounded to the nearest ten using data from the Congressional Budget Office (2019 spending). It’s worth noting that states, not the federal government, fund the lion’s share of education and transportation spending in the United States.
That leaves 45% of the median household’s tax dollars ($13,463) to the state and local levels of government. The accounting gets more complicated at this point due to intergovernmental transfers, nearly countless local governmental bodies and different methods of classifying spending, but the U.S. Census Bureau’s survey of state and local financial data (last updated with 2017 data) allows us to take a bird’s-eye view of state and local spending in California by category.
This is an admittedly imperfect approach, but we can use the Census Bureau’s figures to remove — by category of spending — federal transfers and the user fees we excluded from your tax bill above (e.g. parking fees, public hospital charges, airport landing fees, etc.) to avoid double-counting and thereby get a rough sense of how all other tax revenues — such as your income, property and sales tax dollars — are spent.
Using this method, we find that education makes up the largest share of state and local spending outside of federal transfers and user fees. Healthcare is in fact the largest spending line item in California, but the federal government funds about half of healthcare spending in the state, which we’ve already accounted for above, and public hospitals cover most of their expenses through patient billing (i.e. fees).
Thus, of your state and local tax dollars, education spending comes in first ($4,350), with almost two-thirds of that category ($2,900) dedicated to K-12 public education and most of the rest ($1,400) devoted to higher education and workforce development.
Health and human services come in second ($3,300). This category is broad and includes various outpatient health services such as developmental services for residents with disabilities, elder care services, supplemental income for vulnerable populations, child protective services, public hospital costs not covered by fees, and more. It does not include private health insurance through employers. Unfortunately, the Census Bureau data does not break down these categories in a particularly useful way, but the Governor’s most recent budget message details the state’s role in these services (inclusive of federal transfers).
Public safety — spending on police, fire, corrections and inspections — comes in third ($1,700). Within this category, policing is the largest expense ($700), followed by corrections (i.e. jails and prisons; $530) and fire response ($310).
Environment and housing is the next largest category of spending ($1,174), primarily made up of housing subsidies ($340), natural resource management ($215), and parks and recreation ($200).
Government Administration, including the state’s judicial system, comes next ($900) and is closely followed by Transportation ($850), which includes spending on highways, airports, ports and transit. Highways are the single largest line item within transportation, followed by transit.
Finally, debt service ($740) and all other smaller categories of spending ($620) consume your remaining tax dollars.
Within state and local spending, unfunded pension liabilities are an increasingly important cost driver to understand. Essentially, operating budgets must cover retiree pension and health care obligations when public sector employee retirement funds are insufficiently funded. This is commonplace today due to years of underfunding and overly optimistic assumptions about the funds’ investment returns. Unfunded liabilities effectively translate into the public getting less value out of current taxes.
These costs are hidden from a top-down view of spending, such as the one we’re doing here, because they impact specific sub-budgets, such as those of individual school districts. Some experts estimate that the total unfunded pension and health care liabilities for public sector retirees across California’s state and local governments are over $1 trillion (3–4 years’ worth of total state and local tax revenue) and growing. I won’t be able to do justice to this issue here, but I plan to use a future post to more closely examine California’s growing risk from unfunded pension and health liabilities.
Backing up, the above summary outlines where the money goes at a high level. Taking all government spending together and applying my own broad categorization, most government spending falls into three big categories:
- Social Insurance: The largest category of expense involves social insurance programs like Social Security, Medicare and Medicaid that ensure that Americans have a basic income and access to health care into old age. These safety net programs also provide health, nutrition and other services to disabled and low-income Americans, including millions of vulnerable children. These programs reflect our solidarity as a nation. They also represent a growing financial obligation as our population ages.
- Protection: The second largest category of expense focuses on protection from physical harm, including national defense, police, fire, corrections and inspections. While national defense spending has decreased as a percentage of economic output over the last fifty years (see chart below), spending on policing and corrections has increased over that time span and has come under greater scrutiny.
- Future Investments: Third, we invest in our future in a number of ways, but especially by educating younger generations and building and maintaining public infrastructure. Spending on both public education and infrastructure as a percentage of economic output has been relatively flat over the last fifty years. If anything, spending in this third category has been constrained by growing obligations in the social insurance category, representing a tension between spending that provides critical support to today’s adult generations and investments from which our children and future generations would benefit.
Before closing, let’s look more closely at the portion of local spending that occurs through the City of San José. We’ve already accounted for this spending within state and local spending above, thus the following figures do not represent an additional hit to your pocketbook. This is simply a look at the specific slice of local spending that falls under the purview of the City, as opposed to the County, VTA, Valley Water, school boards, and so forth.
San José Spending
The City’s 2020–2021 adopted budget proposes $4.1 billion in net spending across all functions. This figure is about $600 million lower than last year’s budget, thanks partly to COVID, but it is still larger than two years prior.
$4.1 billion works out to about $12,733 per San José household. However, unlike the spending we examined above, the City’s budget is significantly funded by business taxes and usage fees (more on this below). Therefore, this figure is not representative of the average household’s tax burden specific to city government. We use the per household spending figures below because they help put the City’s spending priorities in a more understandable context, but please keep in mind that your household tax burden for these expenditures is lower.
When we think of the city’s budget, most of us think of the General Fund, which is the City’s operating budget. This budget primarily funds departments that deliver services to residents. The General Fund will spend $1.3 billion in the 2020–2021 fiscal year, or $4,100 per household.
Policing tops General Fund expenses at 33.4% of spending ($1,370 per household), followed by Fire at 18.4% ($750). Together, public safety makes up 52% of the fund’s expenditures.
The next largest area of spending is classified as capital contributions, transfers to other funds and reserves. Together, this category comprises 13.5% of General Fund expenditures ($557). Capital contributions are one-time allocations to capital investments (building or repairing physical assets) that aren’t already funded via an existing tax or bond. For example, this year’s budget allocates $2.2 million toward elevator modernization at the Police Administration Building (the current elevators were built in the 1960s).
Transfers send General Fund dollars to other City funds. For example, this budget makes a one-time transfer of $8.9 million to the Municipal Golf Course Fund to pay off remaining debts at Los Lagos Golf Course. The one-time expense saves taxpayers $1.3 million in debt servicing costs over time, but also raises the question of why the City is operating an enterprise that no longer breaks even.
Reserves are allocations set aside for future use, such as the Future Deficit Reserve that the Mayor called for establishing in anticipation of COVID-related budget impacts. Not all reserves will be spent in this fiscal year; in fact, the current General Fund budget includes over $100 million carried over from last year’s budget. You can see the full list of capital expenditures, transfers and reserves funding on pages 591–613 of the budget.
The next largest area of spending is “City-Wide Expenses” at 6.7% ($272), which is spending that sits outside of a single department’s core operations or may span multiple departments. For example, the current budget allocates $875,000 to planning for the future of the Diridon Station Area, which is an economic development project that draws on resources across departments. The key is that these expenditures are one-off allocations rather than long-term operating costs. You can see the full list of city-wide expenses on pages 565–589 of the budget.
Continuing through the major line items, 6% of General Fund spending goes to parks, recreation and other neighborhood services ($250), 2.8% to public works ($115), 2.8% to transportation ($115) and 2.7% to libraries ($110). Interestingly, these categories of spending came up frequently at voters’ doors but constitute a relatively small portion of General Fund spending.
A number of smaller City departments and offices — ranging from the City Attorney and City Auditor to the Department of Planning, Building and Code Enforcement — make up the remaining 13.7% of the General Fund budget.
In addition to the General Fund, the City manages capital and special funds. Capital funds account for $1 billion in current year spending ($3,100 per household) on repairs, purchases and construction of city-owned fixed assets, such as buildings, roads, parks, libraries, airport facilities and more. Capital funds are primarily financed by voter-approved bonds and revenues from specific city enterprises, such as the airport or the wastewater sanitation plant. You can see the full list of capital funds on pages 107–108 of the budget.
Finally, the City oversees a range of “special funds” that are self-administered and associated with specific city enterprises or functions. In this fiscal year, special funds will spend a total of $2.5 billion ($7,764 per household). By dollar amount, most spending through special funds is associated with a few large city enterprises, such as the airport, electricity and natural gas, waste management, sewerage and wastewater treatment.
These enterprises’ operations are primarily funded by usage fees. For example, the airport (SJC) charges airplane landing fees, concession fees, parking fees and so forth that cover its cost of operation. If you fly into or out of SJC, you contribute to this fund, whether or not you live in San José. If you don’t fly into or out of SJC, you don’t pay into this fund. We excluded these fee-for-service enterprises from the median household’s tax bill above due to the variability of residents’ usage and the fact that they are not taxes in the traditional sense.
That said, some of the largest city enterprises (e.g. energy, waste management, sewerage, wastewater treatment) are used by and therefore paid into by virtually all residents and businesses. You can see the full list of special funds and their 2020–2021 expenditures on pages 105–106 of the budget.
Also, please note that net spending in these three areas (General Fund, capital funds, and special funds) only equals $4.1 billion after eliminating transfers and loans between funds that would otherwise double count spending.
Budgets are a reflection of values. I think it’s important for all of us to be aware of what’s in our budget and participate in shaping the budget so that it does a good job of reflecting our community’s priorities. I ran for City Council to build greater trust in local government by increasing transparency and holding the City accountable for delivering high-quality services to residents. As you think about how our tax dollars are spent, I’d love to hear your reactions.
Councilmember-elect, San José District 10; firstname.lastname@example.org, 408–891–9708
Matt is Councilmember-elect for San José District 10, which includes Almaden Valley and Blossom Valley. Matt takes office in January 2021 and uses this blog to share what he’s learning about a variety of local issues and his take on those issues. Matt and his wife, Silvia, are proud to be raising their two young children, Nina and Luke, in District 10. You can subscribe to Matt’s updates here: https://forms.gle/ycvcf3fbKSFU2JfA6