Who Would Pay the Governor’s Proposed Tax Increase?

The Governor’s Proposed 2012-13 Budget assumes the passage of a ballot measure that would add three new rates to the state’s income tax on high-income Californians and add a new 0.5 percent sales tax rate. For married taxpayers, the proposed measure would increase the tax on income between $500,000 and $600,000 from 9.3 percent to 10.3 percent, that on income of between $600,000 to $1 million to 10.8 percent, and that on income in excess of $1 million to 11.3 percent. The new income tax rates would apply for 2012 through 2016, while the sales tax rate would take effect January 1, 2013 and end December 31, 2016.

The Department of Finance estimates that the proposed tax measure would raise $6.9 billion, on average, between 2013-14 and 2015-16. In 2012-13, $2.5 billion would go toward an increase in the Proposition 98 school funding guarantee, and $4.4 billion would help close the budget gap. The Legislative Analyst’s Office estimates a somewhat smaller increase. Of the additional revenues, $1.2 billion would come from the sales tax rate and $5.8 billion from the higher income tax rates in 2011-12 and 2012-13.

Who would pay the proposed tax? An analysis by the Institute on Taxation and Economic Policy shows that the top 1 percent of Californians would pay the largest share of their income toward the new tax, while all Californians would pay the higher sales tax. The extremely progressive increase in the income tax – which would provide about two-thirds of the new revenues – would be modestly offset by a regressive increase in the sales tax.

As the CBP has previously noted, economists such as Nobel Prize winner Joseph Stiglitz, argue that “Economic theory and evidence gives a clear and unambiguous answer: It is economically preferable to raise taxes on those with high incomes than to cut state expenditures.” Absent a balanced approach to closing the budget gap, Californians face even deeper cuts to schools, universities, and our other core public systems and structures.

–Jean Ross