SACRAMENTO — Are Californians overtaxed?

On the face of it, the question should not even have to be posed. Californians pay the highest sales tax in the nation. Their top-bracket earners have the second-highest income tax rate in the country. The middle class to upper class — those making $48,000 to $1 million — are right up there among the most highly taxed, too. California's gas tax, at 35.3 cents per gallon, is third-highest in the nation. Corporations face the highest tax rates in the West.

So, case closed, right? If you mix in the contention that California has the nation's third-worst business climate, any argument for new taxes would appear to stand on wobbly legs. Why would you raise taxes, even if it is just on the wealthy and corporations, when the state is facing the deepest recession since the Great Depression, when jobs are scarce and companies are being driven out of the state by its burdensome tax and regulatory system?

That's what Republicans and conservative taxpayer rights groups are stressing as the debate heats up over how to overcome the $24.3 billion budget deficit facing the state. They argue that any added taxes would be ruinous to the already-teetering economy. Californians already are facing $12 billion in new taxes over the next two years.

"Do we overtax the wealthy? Absolutely," said Jon Coupal, president of the Howard Jarvis Taxpayers Association. "Do we overtax the working class? Absolutely. The car tax is the highest in the country. I can't imagine any additional transference from the private sector to the government sector that would do the state any good."

Some Democrats and liberal tax fairness groups, however, insist that any number of targeted tax increases — including loophole closures — are needed to keep the state from collapsing into fiscal chaos. They also make the case that the tax burden is not as bad as Republicans say it is — particularly for the wealthy.

"California has relatively high tax rates, but it's because we have a loophole-ridden tax system," said Jean Ross, director of the California Budget Project. "If we had fewer loopholes for the rich, we could have lower tax rates. (Resisting tax increases) is really a smoke screen for saying we believe government ought to do less for education, children and health care."

Taxes re-emerged as an issue after Gov. Arnold Schwarzenegger proposed wholesale elimination of programs for poor children and the working poor, as well as massive cuts to schools and higher education — while insisting that tax increases would not be considered. Outraged groups have demanded that he put taxes back into the mix.

So, who is right? Those who say we are overtaxed and cannot afford more in times of economic stress, or those who say there is room for more taxes, especially in a fiscal crisis?

According to rankings compiled by the Tax Foundation, a conservative Washington, D.C.-based think tank, California is in no position to absorb any more taxes. The state is ranked as having the nation's third-worst business climate because of its high corporate, individual income, and sales taxes. Only New Jersey and New York were worse, the study said.

California's corporate tax rate, at 8.84 percent, is ninth highest in the nation and highest among Western states. Its top bracket-income tax is at 10.55 percent, second only to Hawaii's 11 percent. In addition, the state's 8.25 percent sales tax is the highest in the nation.

It is a ranking — along with the argument that companies are leaving the state in droves because of high taxes — that Republicans and taxpayer advocates have used as a bludgeon against any thought about taxes.

"The high cost of living that continues to force Californians out of state should serve as a powerful reminder of the effect high taxes are having on our society," said Ron Nehring, the Republican state party chairman. "Higher taxes that make California even less affordable at a time of high unemployment and economic uncertainty is a prescription for failure."

There are other ways, however, to determine the tax burden on businesses and the wealthy.

A study by giant auditing firm Ernst & Young showed that, as of 2007, businesses in 34 states paid a higher share of overall tax collections than in California.

California ranked 17th in tax collections as a percent of income in 2006, the most recent year data is available from the U.S. Census Bureau. That is hardly the worst and is a more accurate reflection of effective tax burden, said Justin Garosi, an economist with the Legislative Analyst's Office.

In addition, a 2007 study by the Public Policy Institute of California showed that only a small number of businesses leave the state — and for many reasons other than taxes.

Polls consistently show that voters think taxes should be raised on the wealthy, whom they think have floated above the damaging effects of the economic downturn that most others have experienced. They also were supportive of Schwarzenegger's proposal to impose a 9.9 percent tax on every barrel of crude oil pumped out of the ground before he backed down in February.

There may be a reason for this class resentment. The wealthy pay a far smaller share of their income in taxes than the working class and poor, according to a study by the liberal Washington, D.C.-based Citizens for Tax Justice. Even after the last round of tax increases approved in February, those in the top 1 percent — people making $2.3 million or more — pay only 7.8 percent of their income, while those in the lowest rungs — making $20,000 or less — pay more than 11 percent of their income in state taxes.

"Californians with the very highest incomes pay a lower effective tax rate than any other income group," Bob McIntyre, the president of Citizens for Tax Justice told a committee studying reforms in California's tax system.

The number of tax loopholes that California offers corporations reduces the effect of high tax rates, analysts say.

California has the highest research and development credit in the country, costing the state $1.2 billion this year, according to the Franchise Tax Board. Certain foreign companies are exempted from taxes under the state's "water's edge election" policy, costing the state $700 million. Enterprise zones get nearly $500 million in tax breaks, benefiting companies such as Wal-Mart, which locate their distribution centers in economically distressed areas. Businesses are able to avoid taxes on gains from the sale of commercial property at a cost of $350 million. Tax havens cost the state at least $150 million from companies that park their profits offshore.

In addition, California stands alone in giving oil companies a pass on taxes for oil extraction, leaving about $1.3 billion in the companies' pockets.

It is no wonder that California has more billionaires than Texas, Florida and Nevada combined — states with no income taxes, said Lenny Goldberg, executive director of the liberal California Tax Reform Association.

"You're not going to get as much from them as you would in a boom time, but the wealthy are making money being in California and they're doing well in California," he said. "We're leaving a lot of money on the table that could have an impact (on the debate over spending), and that includes the top bracket. The problem is that every time we have a recession, they yell it's the business climate and that taxes should be cut instead of being raised."

Republicans vilify Democrats for their "soak the rich" politics — accusing them of waging class warfare — but risk losing the political battle over taxes if they are seen as defending the rich, said Bill Whalen, a research fellow at the conservative Hoover Institution and former speech writer for former Gov. Pete Wilson.

"Republicans don't want to get into a discussion about protecting the wealthy, they don't want to be on the floor of the Legislature defending millionaires," Whalen said. "They want to have a discussion about the size and scope of government, how much money is being picked out of peoples' pocket."

Reach Steven Harmon at 916-441-2101 or sharmon@bayareanewsgroup.com.

Where California ranks nationally in tax rates

Sales: 8.25 percent (first)
Income (for highest bracket): 10.55 percent (second), trailing only Hawaii's 11 percent.
Corporate: 8.84 percent (ninth)
Alcohol: 20 cents per gallon (49th)
Cigarette: 87 cents per pack (30th)
Gas: 35 cents per gallon (third)
Source: Tax Foundation

Some of California's tax loopholes and the cost to the state this fiscal year

Research and development credit: $1.2 billion
Water's edge election (exempting foreign companies from taxes): $700 million
Enterprise zones (tax breaks for companies that locate in economically distressed neighborhoods): $500 million
Exemptions from gains on sale of commercial property: $350 million
Tax havens (profits that companies park in offshore accounts): $150 million
Potential oil extraction fees not collected: $1.3 billion
Source: Franchise Tax Board and California Tax Reform Association