California’s Changing Income Distribution

Background A much-publicized issue in California has been the widening gap in income received by low-income versus high-income households during the past several decades. This report uses California tax return data compiled between 1975 and 1998 to examine the changes in California's income distribution and their causes. L The distribution of adjusted gross income (AGI) reported on Cali-fornia tax returns has shifted a great deal in recent decades, with the share attributable to the top 20 percent of returns rising and that for the bottom 80 percent falling. L Over the entire period, this shift reflects a large increase in real average earnings reported at the high end, contrasted with declines in the low and middle portions of the income distribution. While in recent years incomes have risen throughout the distribution, the shift has nevertheless continued and even accelerated. This is because the most rapid income gains have occurred at the top. L Numerous factors have contributed to the shifting distribution. These include an influx of younger workers and immigrants into California's labor force, industry restructurings, the impact of globalization and technological changes on wages for skilled versus unskilled jobs, and high returns accruing to investors. L Due to the state's highly progressive income tax structure, the shifting distribution has helped cause state revenues to surge in the past five years, made state revenues more volatile, and raised the share of taxes paid by high-income Californians. L The underlying factors that have contributed to increased inequality will likely remain powerful forces in the future. L In dealing with income distribution issues, and to the extent that increasing disparities are addressed, priority should be given to policies that will facilitate upward income mobility.