NEWS: Proposition 55: A Lesson in Not-So-Temporary Temporary Taxes

Posted August 30th, 2016

Tuesday, August 30, 2016

Coming out of the Great Recession that ravaged the state budget, Governor Jerry Brown and the state’s teachers’ unions joined forces to successfully push Proposition 30, a 2012 ballot initiative labeled, “Temporary Taxes to Fund Education.”

Yet, despite a General Fund that grew 42 percent since Governor Brown became governor and Proposition 98 education spending that increased 52 percent over the same time period, a new ballot initiative, Proposition 55 will ask voters to continue the income tax portion of Proposition 30 for another dozen years. The Legislative Analyst’s Office and the Governor’s Director of Finance project this initiative could bring in between $5 and $11 billion dollars per year.

Not all the money will go toward education if Proposition 55 passes because of a compromise over the revenue reached by the teachers’ unions and health care providers, which will direct about $2 billion a year to Medi-Cal.

There is a question of how much of the already collected Proposition 30 money actually went into the classroom to boost education.

The State Controller’s Office tracks Proposition 30 money, which is sent to county education offices and forwarded to school districts. However, as Stanford lecturer, research scholar on economic policy, and member of the State Budget Crisis Task Force David Crane pointed out because the state shifted more pension obligations on to school districts, pensions are eating up the Proposition 30 funds.

Since CalSTRS, the teacher retirement fund, recently reported funds were well below investment goals, and officials project the fund could have negative cash flow for 15 years or more, Proposition 55 education money likely would also go to help offset the pension shortfall.

Supporters of the ballot measure argue it is essential to keep schools from facing another economic crisis. Pointing to Governor Brown’s Department of Finance projections, they argue that the budget could take a $4 billion hit in 2019-2020 fiscal year, the year after Proposition 30 expires. Brown said the state could manage if Proposition 30 were not extended, and he has piled up a nearly $7 billion fund for “rainy days.”

Governor Brown, who led the campaign for the temporary tax, when pressed on his position about the tax extension, verbally refers to the temporary status of Proposition 30 but there seems to be a metaphorical wink in his response. He said he would let the people decide. The Governor won’t be on the campaign trail reminding voters of his emphatic support for the temporary taxes just four years ago.

Governor Brown won’t object to additional revenues to meet the dramatically increased budgets during his tenure or the need for new revenue as a result of his own actions. He signed a new minimum wage law that his staff said will add $4 billion a year to the state budget when fully implemented.

The politics of passing Proposition 55 fall heavily in favor of the proponents. They will have a lion’s share of the campaign money. Close to $70 million was spent in support of Proposition 30. A similar amount backing Proposition 55 is not unthinkable. The teachers’ union already put $13 million into a campaign committee.

And there is no question business opposes the effort to extend the temporary tax. The California Chamber of Commerce and the National Federation of Independent Business/California have already come out in opposition to Proposition 55. Particularly significant is the case of CalChamber since it was neutral during the Prop 30 campaign. The important question: will members of the business community raise big money to oppose the tax extension?

There is reason for business to be concerned about continuing the tax that applies to upper income taxpayers. Many business owners pay their business taxes through their personal income taxes. In a recent survey done by the Los Angeles County Business Federation, the personal income tax was ranked first among concerns of the organization’s members. In addition, business opponents of the tax cite a negative effect on the economy.

However, there seems to be little enthusiasm at this point for mounting an expensive campaign against a tax aimed at the rich that is already on the books and dedicated mainly to schools, a triple whammy that will be hard to overcome.

Op-eds and appearances on radio talk shows will have little impact against a multi-million dollar campaign. Opposition’s best hope is that the effort to continue a supposed temporary tax coupled with many other tax increases that will appear on state and local ballots might turn the electorate against the heavy tax increases and the income tax extension.

Should Proposition 55 pass, California will double-down on its reliance on high-end taxpayers to fund its budget. California has traditionally had high income tax rates. The state experiences roller-coaster budget rides relying on top income taxpayers and the ups-and-downs of their capital gains portfolios.  Continuing the tax rates introduced by Proposition 30 will only magnify the crisis during a recession. Governor Brown, among others, warns this course will lead to huge budget shortfalls during down economic times.  The wide disparity of revenue gains quoted by the state financial prognosticators tied to Proposition 55 mentioned earlier is based on the expected wild swing in revenue from good economic times to bad.

State leaders recognize the problem California’s tax structure presents of maintaining a steady revenue flow to government. State Senator Bob Hertzberg and State Controller Betty Yee are pushing efforts to consider reform in the state’s tax system, relying less on taxing incomes and more on adjusting the tax system to parallel the state’s economy.

But changing the tax system is hard and will be made more difficult if the current structure is cemented in place if Proposition 55 passes.

2016 PROPOSITION 55

In November 2012, voters passed Proposition 30, which temporarily increased income and sales taxes. With Proposition 30’s expiration approaching, Proposition 55 would extend the income tax increases for another 12 years. Supported by the teachers’ unions, Proposition 55 allocates 89% of the revenues to K-12 schools and the remaining 11% to community colleges.  It also earmarks up to $2 billion annually for healthcare. The Legislative Analyst’s Office estimates suggest it will increase income tax revenues by between $4 billion and $9 billion, depending on economic health.

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