Before discussing the pros and cons of Proposition 55, we would like to remind you of where California was in November 2012.
Right up until election day, pundits and prognosticators were forecasting Gov. Jerry Brown’s loss of political power, assuming his tax increase measure, Proposition 30, would go down to defeat.
By putting his governorship on the line for an initiative to end the state's budget deficits, Brown answered questions about his ability to lead a state that many back then were saying was “ungovernable.”
The passage of Prop. 30, combined with passage of Prop. 39 – which created $1 billion in new revenue by changing the tax code on out-of-state corporations – put California in its best fiscal situation in many years.
Promoted by teachers unions to protect California’s recession-ravaged schools, Proposition 30 was no one’s perfect solution. It was mostly an income tax hike on the rich, and California already over-relies on high earners. Because so much of their income is capital gains, their taxes amplify boom-and-bust cycles in revenue.
But proponents vowed the tax hike would expire by 2018, as would an accompanying quarter-cent rise in the state sales tax. Public schools were looking at huge “trigger cuts” and a shortened school day if it didn’t pass, and public university students were facing massive tuition increases.
So, forced to choose – as this state so often is – between good schools and sensible, affordable taxes, voters passed it. Now, after four years of recovery, some economists see another recession gathering on the horizon. And the teachers unions and their allies are back.
It feels churlish to urge a “no” vote on Proposition 55, the initiative that would extend the income tax piece of Proposition 30 for another 12 years. Schools are important. Children are the future. And the state can’t compete economically without an educated workforce.
Top incomes have soared in the past four years of the recovery, and Proposition 55 only would impact the affluent – individuals earning more than $250,000 and households earning more than $340,000. The more regressive sales tax piece of Proposition 30 expires at the end of this year.
Brown, budget taskmaster that he is, has kept a lid on excessive public spending. And from the new Common Core curriculum to the legislative push to enroll more black and brown students at the University of California, this is no time to cut corners on education. Too many of this state’s college freshmen already arrive at UC and Cal State classrooms insufficiently prepared.
But even though we recommend a “yes” vote on Proposition 55, our endorsement comes with reservations. More than half of the state budget already goes to education. That is unlikely to change, due to constraints imposed by the state Constitution and prior ballot initiatives.
Sequestering yet another income stream for schools would force other essential state services to bear the brunt of budget cuts, again, in the next recession. Meanwhile, wealthy taxpayers will be on the hook for another 12 years for another supposedly “temporary” levy.
And schools will be handed yet another feast or famine source of funding. The revenue estimates for Proposition 55 from the nonpartisan Legislative Analyst’s Office range from $4 billion to $9 billion a year, “depending upon [the] economy and stock market.” That’s a huge range.
Of that money, roughly half would go to K-12 schools and community colleges. Another $60 million to $1.5 billion would go to pay down debt or into the state’s rainy day fund. After that, half of whatever is left, up to $2 billion, would be allocated to another gigantic and voracious line item, Medi-Cal.
The problem here isn’t just where the money is going. It’s where it comes from, and how that impacts the state economy. Though the rainy day fund passed at Brown’s behest in 2014 has brought a measure of stability to the state’s finances, the tax system is outdated, riddled with inequities and uncomfortably reliant on the wealthy.
Though California’s economy is largely service-based, the sales tax mostly applies to manufactured items. There have been wild disparities in the taxation of commercial and residential properties since the 1978 passage of Proposition 13, which essentially got us into this revenue pickle.
Tax breaks and disparities in sin taxes on items like tobacco – but not, say, wine – complicate the picture. And more than two-thirds of the general fund now comes from personal income taxes, which made up less than a fifth of state revenue in the 1950s, according to the LAO.
Most of that money is coming from people who, if they wanted, could afford at any time to move to no-state-income-tax Nevada. According to the Franchise Tax Board, in 2014, nearly half of California’s income taxes were paid by the top 1 percent.
If there were even a faint hope that the Legislature might summon the political will to overhaul this state’s dysfunctional tax structure, we would not be recommending Proposition 55’s passage. Given the difficulty of such undertakings in good economic times, however, that’s not the case.