Skip to content
Report

Understanding Proposition 35

Implications for Californians, Medi-Cal, and the State Budget

August 2024 | By Kayla Kitson and Adriana Ramos-Yamamoto

Mid adult nurse helps a senior man fill out a medical form as he waits to be seen by a doctor.

key takeaway

California voters will decide on November 5th, 2024 whether to pass Proposition 35, which would 1) require the state to request federal approval for the Managed Care Organization tax on an ongoing basis and 2) allocate those dollars for certain health care investments.

Access to health care is essential for everyone to be healthy and thrive. In California, Medi-Cal, the state’s Medicaid program, provides free or low-cost health care to over one-third of the state’s population. Medi-Cal covers a wide range of services to Californians with modest incomes, and many children, seniors, people with disabilities, and pregnant individuals rely on it. About half of Medi-Cal beneficiaries are Latinx, highlighting Medi-Cal’s role in promoting health equity.

California’s shortage of health care workers undermines the availability and quality of care for communities across the state. When people can’t find a provider in their area or experience long wait times for appointments, they don’t have meaningful access to health care. Enrolling in Medi-Cal and navigating the health care system can also be difficult, underscoring the need to invest in outreach and enrollment supports. While state policymakers have made considerable investments in recent years to bolster the health care workforce, more progress is needed.

what is health equity?

When everyone has the opportunity to be as healthy as possible and no one is disadvantaged from achieving this because of their race, gender identity, sexual orientation, the neighborhood they live in, or any other socially defined circumstance.

This year, policymakers had to make challenging decisions about health care investments due to the state’s recent budget shortfall and resistance from some state leaders to raise ongoing revenues. This has led to debates over the allocation of revenue from the state’s recently approved Managed Care Organization (MCO) tax. In response, many representatives of the health care industry have proposed Proposition 35, which would: 

  1. Require the state to request federal approval for the MCO tax on an ongoing basis.
  2. Allocate MCO tax revenue for certain health care investments.

There are merits to having dedicated funding to invest in the state’s health care system. However, this approach would reduce flexibility in the state budget and could negatively affect available funding for other key services that improve the lives of Californians. This Q&A provides a high-level overview of Prop. 35, including how Californians with low incomes might be impacted by its passage as well as implications for the state budget.

table of contents

What is the Managed Care Organization (MCO) tax?

Managed Care Organizations (MCOs), also known as health insurance plans, are responsible for managing health care services as a way to control costs, utilization, and quality of care. Anthem Blue Shield and Kaiser Permanente are two examples of MCOs in California. These health insurance plans oversee the health care benefits that people receive, often requiring prior authorization or referrals to ensure that people receive appropriate and cost-effective care.

MCOs manage health care services for people with private health insurance as well as Medi-Cal enrollees. They contract with Medi-Cal to receive payments based on the number of Medi-Cal recipients they serve. Medi-Cal is a joint federal-state program, with the federal government covering part of the cost and the state covering the rest.

Federal law allows states to impose a tax on MCOs and other health-related services to help cover the state share of Medicaid health care costs, but states must comply with federal regulations and receive federal approval for these taxes. Eighteen states reported having an MCO tax in place during the 2023 state fiscal year.

California’s MCO tax is a charge based on enrollment in Medi-Cal managed care plans and private health insurance plans. The MCO tax is distinct from other types of state taxes in that the primary state fiscal benefit comes from the additional federal dollars drawn down as a result of the tax. MCOs bear very little of the cost, as they receive Medi-Cal payments from state and federal funds that offset the portion of the tax levied on Medi-Cal enrollment. By drawing down additional federal funding, the MCO tax frees up state General Fund dollars that would otherwise have been used to support existing Medi-Cal services.

California’s MCO tax was most recently approved in December 2023, and it will expire at the end of 2026 unless it is renewed again. However, state leaders are seeking additional changes to the MCO tax structure to draw down more federal funding. These changes are still pending federal approval. 
The state is expected to receive net revenues of $7 billion to $8 billion annually while the tax is in effect, assuming the federal government approves recent changes. Essentially, the net revenues are the additional federal funds the state is able to draw down minus the cost of the state’s portion of payments to MCOs to offset the cost of the tax. Under the enacted 2024-25 budget, most of that revenue will be used to offset state General Fund spending on existing Medi-Cal services, with a smaller portion going to increased provider rates and augmentations.

How do policymakers currently plan to use MCO tax dollars?

Policymakers outlined a plan — which Prop. 35 would overturn — to use revenue from the MCO tax in the 2024-25 budget package, with the majority of dollars allocated to offset General Fund spending on Medi-Cal and maintain existing services in the program. Assuming that the federal government approves the changes to the MCO tax that state leaders are seeking, the budget includes the following MCO tax dollars to sustain existing services in Medi-Cal:

  • $6.9 billion in 2024-25
  • $6.6 billion in 2025-26
  • $5.0 billion in 2026-27

Policymakers also allocated funding from the MCO tax for new targeted Medi-Cal provider rate increases as well as other investments. These budget allocations include:

  • $133 million in 2024-25
  • $728 million in 2025-26
  • $1.2 billion in 2026-27

The rate increases from the current MCO tax spending plan are intended to build on investments that policymakers made in previous years. As shown below, the majority of funds for rate increases that will go into effect on January 1, 2025 will support emergency department physician services, abortion care and family planning, and ground emergency medical transportation.

The current MCO tax spending plan also includes additional rate increases and investments that would take effect on January 1, 2026, with the vast majority of dollars allocated to physician and non-physician professionals (e.g., physician assistants, nurse practitioners and certified nurse midwives). 

Policymakers also allocated $40 million one-time MCO tax dollars in 2026-27 to strengthen and support the development and retention of the Medi-Cal workforce. This amount reflects a decrease in health care workforce investments that state leaders made in the past. More substantial and sustained investments are necessary to build a health care workforce that can better meet the needs of Californians.

This MCO tax spending plan would be overturned if voters approve Prop. 35.

How does Prop. 35 differ from the current MCO tax plan?

Prop. 35 proposes a major shift to how state policymakers have used MCO tax revenue to essentially reduce, or offset, General Fund spending on Medi-Cal. If passed, Prop. 35 would overturn the current MCO tax spending plan that policymakers agreed upon in the 2024-25 budget. 

Prop. 35 would require the California Department of Health Care Services to request federal approval for the MCO tax on an ongoing basis in an attempt to make this funding stream more permanent. Federal approval is required for the state to levy health care taxes that draw down additional federal dollars. 

While Prop. 35 provides some flexibility for the state to structure future versions of MCO tax proposals to comply with federal regulations and ensure federal approval, it does set limits to the tax on commercial enrollment. This limitation could affect the state's ability to secure future approval for a tax that generates the same level of revenue as the current tax. The measure also specifies that the MCO tax would not go into effect if the state does not receive federal approval and federal funding in the future.

Additionally, Prop. 35 would establish rules for how MCO tax revenue would be spent in the short term (2025 and 2026) and long term (2027 and beyond). The key difference is that policymakers would no longer be able to use the bulk of the dollars to offset General Fund spending in Medi-Cal. Another notable difference is that Prop. 35 would require funds to be spent by the end of each calendar year or fiscal year, beginning 2027. Currently, policymakers have the flexibility to save funds for future years to help cover costs if the MCO tax is not approved in the future. 

If passed, funds would first cover a portion of MCOs’ cost of the tax as well as administrative costs. 

For calendar years 2025 and 2026, $2 billion would be used to offset General Fund spending in Medi-Cal. Specifically, this amount would cover a portion of the non-federal share of Medi-Cal managed care rates for health care services for children, adults, seniors, and people with disabilities. This represents the majority of funds (about 43%), as shown below. MCO tax revenue would also support health workforce initiatives, including primary care, specialty care, and emergency care.

For calendar year 2027 and beyond, Prop. 35 would allocate revenue from the MCO tax differently. After covering a portion of MCOs’ cost of the tax as well as administrative costs, the next $4.3 billion collected from the tax would be allocated for specific purposes. The majority of funds (44%) would support access to primary care and specialty care. Specifically, it would increase reimbursement rates for primary care services and increase the number of specialty care service providers. A smaller portion of funds would support other rate increases, such as emergency department services and family planning. Prop. 35 would allow the Department of Health Care Services to allocate 8% of funds — $344 million — to provide overall support to the Medi-Cal program.

If there are remaining MCO tax revenues after these funding allocations are made, the measure contains parameters to allocate the excess revenue. Examples of these other allocations include:

  • Additional General Fund offset to support existing services in Medi-Cal.
  • A grant program to expand the number of community health workers. 
  • Supporting the state’s ongoing efforts to reduce the cost of prescription drugs.
  • Providing additional funding to health workforce initiatives.

In addition, Prop. 35 would establish oversight and accountability measures, requiring the state controller to perform independent financial audits. It would also create an advisory committee that would provide input to the Department of Health Care Services on future MCO tax proposals. This advisory committee would be made up of mostly health care provider representatives.

Would Prop. 35 actually make the MCO tax permanent?

No, the MCO tax funding structure under Prop. 35 is entirely dependent on federal approval and ongoing renewals. Prop. 35 would require the California Department of Health Care Services to request federal approval for the MCO tax on an ongoing basis in an attempt to make this funding stream more permanent. Federal approval is required for the state to levy health care taxes that draw down additional federal dollars.

One issue with Prop. 35 is that the MCO tax may not be a sustainable, long-term funding source. While the federal government has historically approved California’s MCO tax, it has indicated that it may revise the rules governing state MCO taxes in the future, which would have implications for the amount of net revenue that future versions of the tax may bring into the state. 

Without federal approval and federal funding, the MCO tax and spending plan under Prop. 35 would not be implemented.

How would Prop. 35 impact the state budget?

While Prop. 35 would ensure more funding is dedicated for health care, its requirement to spend MCO tax revenues on specific services would also limit policymakers’ flexibility in making budget decisions. This is particularly concerning in years when the state is facing a budget shortfall because the reduced flexibility could lead policymakers to make cuts to other critical public services to balance the budget.

State leaders are required to balance the budget each year, and there are already several strict requirements on how some state funds are spent that make budgeting complex. By creating additional mandates on state spending, Prop. 35 would result in policymakers having even less flexibility in making budget decisions. While the measure gives policymakers some ability to modify the structure and uses of the MCO tax, changes would require a three-fourths vote in the Legislature — which can be difficult to obtain — and would need to further the purpose of Prop. 35. 

In years when the state is facing a budget shortfall, this limited flexibility could result in cuts to other critical public services that help Californians make ends meet and address vital needs, such as income supports, subsidized child care, food assistance, and investments in reducing homelessness and increasing affordable housing.  

Of course, cuts could be limited or avoided during budget deficits if state leaders are able to raise new revenues to address a shortfall. However, the state Constitution requires a two-thirds vote in the Legislature to raise taxes, while spending cuts can be approved with a simple majority, and state leaders have generally been more inclined to make cuts than to increase taxes.

In the near term, Prop. 35 would result in the recently enacted 2024-25 budget being out of balance. This is because a solution to the budget shortfall involves using some MCO tax dollars that were previously intended to support provider rate increases and other augmentations to instead offset General Fund spending on existing Medi-Cal services. Since Prop. 35 would require MCO tax revenues to be used for health program augmentations instead of offsetting existing spending, state leaders would have to identify other solutions — potentially spending cuts or delays, revenue increases, or additional budget reserve withdrawals — in next year’s budget to cover the difference. The Legislative Analyst’s Office estimates that the General Fund impact would be between $1 billion and $2 billion in 2025 and 2026, but in a legislative hearing on August 13, 2024, the Department of Finance noted that it estimates the impact could range from $2.6 billion and $4.9 billion in fiscal years 2024-25 through 2026-27.

In the long term, raising state General Fund revenues — through sources aside from the MCO tax — would help to increase the state’s capacity to cover the costs of existing Medi-Cal services and improve state health services and increase access to care, without jeopardizing other state services. This is especially important given that there is no guarantee the federal government will continue to approve an MCO tax that yields the amount of revenue anticipated from the currently authorized tax.

How would Prop. 35 impact Californians?

If passed, millions of Californians who receive health care services through Medi-Cal — about half of whom are Latinx — could have better access to care, especially for primary care and specialty health care services. Increasing provider participation in Medi-Cal is critical to improving access to a wide range of health care services, especially in historically underserved areas where there is often a shortage of providers. By increasing the number of providers in the Medi-Cal network, patients can receive more timely care, which can help improve health and well-being for all Californians, but especially Latinx communities. 

However, there are some critical health equity investments that are included in the current MCO tax spending plan that are either not included or not prioritized in Prop. 35. Examples include:

These potential cuts raise health equity concerns, as they would disproportionately impact people of color, children, older adults, and people with disabilities. Policymakers should explore alternative revenue-raising measures to sustain and advance these crucial health equity initiatives, if Prop. 35 passes.

Additionally, Prop. 35’s limitations on using MCO tax proceeds to offset General Fund spending on current Medi-Cal services could make policymakers more likely to make cuts to other state services when facing budget shortfalls. Such cuts would likely harm Californians with low incomes most. For example, in the difficult budget years during and following the Great Recession, deep cuts were made to safety net programs such as subsidized child care, income supports for families under the California Work Opportunity and Responsibility to Kids (CalWORKs) program, and income support for older adults and people with disabilities under the Supplemental Security Income/State Supplementary Payment (SSI/SSP) program.

Lastly, the passage of Prop. 35 would lock in spending decisions in the future, which would impact how Californians engage with the state budget process. Advocates and community members would have less opportunity to weigh in on how state resources should be allocated because the MCO tax spending decisions would be constrained by the ballot measure. Currently, Californians can contribute to conversations about how MCO tax revenue should be spent during the budget process via public hearings and interactions with policymakers.

What are arguments for and against Prop. 35?

Supporters of Prop. 35 believe the measure will protect and enhance access to care for Medi-Cal patients by ensuring that MCO tax dollars are directed toward patient care. They argue that it would prevent lawmakers from redirecting funds intended for health care to other purposes. Key supporters include the California Medical Association, Planned Parenthood Affiliates of California, the California Hospital Association, the California Primary Care Association, and the California Dental Association.

Opponents of Prop. 35 argue that the measure would reduce flexibility in how Medi-Cal dollars are allocated and overturn the commitments made in the 2024-25 budget to fund important services with MCO tax dollars, including continuous Medi-Cal coverage for young children and the rate increase for community health workers. Opposition groups include The Children’s Partnership, the California Pan-Ethnic Health Network, the California Alliance for Retired Americans, Courage California, and the League of Women Voters of California.

Ballot Propositions
Health & Safety Net

You may also be interested in the following resources:

Stay in the know.

Join our email list!

key takeaway

California voters will decide on November 5th, 2024, whether to pass Proposition 36, which would increase penalties for several drug and theft crimes. This would significantly drive up state prison costs, cut funding for behavioral health treatment and other critical services, and potentially push more Californians into homelessness.

Introduction

Over many years, California lawmakers and voters adopted harsh, one-size-fits-all sentencing laws that prioritized punishment over rehabilitation, led to severe overcrowding in state prisons, and disproportionately impacted Californians of color.

California began reconsidering its “tough on crime” approach in the late 2000s. Multiple reforms were adopted as prison overcrowding reached crisis proportions and the state faced lawsuits filed on behalf of incarcerated adults. These reforms worked as intended: The number of adults serving sentences at the state level fell from a peak of 173,600 in 2007 to around 90,000 today. Meanwhile, violent and property crime rates in California remain well below historical peaks. 

A key justice system reform was Proposition 47, which passed with nearly 60% support in 2014. Prop. 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. As a result, state prison generally is no longer a sentencing option for these crimes. Instead, people convicted of a Prop. 47 offense serve their sentence in county jail and/or receive probation.

Prop. 47 also requires the state to calculate prison savings due to reduced incarceration and use those dollars to reduce recidivism and support crime victims. Since 2016, over $800 million in Prop. 47 savings has been allocated across the state for behavioral health treatment and other critical services that promote community safety.

However, interest groups opposed to justice system reforms qualified Prop. 36 for the November ballot. Their goal is to increase punishment for drug and theft crimes in California, including by reversing key provisions of Prop. 47. Major donors to Prop. 36 include Walmart ($2.5 million), Home Depot ($1 million), Target ($1 million), In-N-Out Burger ($500,000), the California Correctional Peace Officers Association ($300,000), and Macy’s ($215,000).

Prop. 36 Would Increase Penalties for Several Drug and Theft Crimes

Prop. 36 would amend state law to increase penalties for several drug and theft crimes. These changes would disproportionately impact Californians of color given racist practices in the justice system as well as social and economic disadvantages that communities of color continue to face due to historical and ongoing discrimination and exclusion.

Prop. 36 would increase penalties for drug crimes in multiple ways. Key drug-related provisions of the measure include the following:

Prop. 36 also would increase penalties for theft crimes in multiple ways. Key theft-related provisions of the measure include the following:

Prop. 36 Would Drive Up State Prison Spending and Create Unfunded Costs at the State and Local Levels

By increasing punishment for several drug and theft crimes, Prop. 36 would create substantial new costs — including for incarceration and the court system — at the state and local levels. However, the measure would provide no new revenue to pay for these expenses.1Prop. 36 states that a person charged with a “treatment-mandated felony” may receive, if eligible, relevant Medi-Cal or Medicare services that are delivered through a court-ordered treatment program. (Medi-Cal is supported with state and federal funding; Medicare is funded solely by the federal government.) Therefore, some federal funding could be available to support services for people who are charged with a treatment-mandated felony and are eligible for Medi-Cal or Medicare. However, the state would have to pay a portion of any Medi-Cal services delivered, and Prop. 36 would not provide any revenue to offset those new state costs. In addition, the costs associated with treatment-mandated felonies represent only part of the substantial state and local criminal justice costs that Prop. 36 would create — costs for which the measure provides no new funding. State and local leaders would face the prospect of curtailing funding for existing public services in order to make room in their budgets for the unfunded costs imposed by Prop. 36.

While Prop. 36 would clearly burden public budgets, the magnitude of the impact is uncertain. Cost estimates have been developed by the nonpartisan Legislative Analyst’s Office (LAO) as well as by Californians for Safety and Justice (CSJ), a leading statewide public safety advocacy group. Both organizations suggest that the cost of Prop. 36 could be substantial, although the LAO’s estimates are significantly lower than CSJ’s.2The substantial gap between these two sets of estimates is likely the result of different assumptions, methodologies, and/or data sources adopted by each organization.

Specifically:

  • The LAO estimates that the ongoing increase in state criminal justice costs would likely range from several tens of millions of dollars to the low hundreds of millions of dollars. This estimate reflects a larger prison population — which could grow by “around a few thousand people” — as well as an increase in state court workload.
  • In addition, the LAO estimates that ongoing local criminal justice costs would likely increase by tens of millions of dollars due to Prop. 36. This estimate reflects larger county jail and community supervision populations — which, combined, could rise by “around a few thousand people” — as well as higher costs for courts, prosecutors, public defenders, and county agencies like probation and behavioral health departments.
  • In contrast, CSJ projects that Prop. 36 would lead to much higher costs. CSJ estimates that combined state and local costs would rise by around $4.5 billion ongoing. For example, CSJ suggests that more than 32,000 additional people would be sentenced to state prison within seven years. CSJ also assumes that over 31,000 additional people would serve one-year sentences in jail each year. These projected increases in incarceration are much higher than what the LAO’s analysis suggests.

Regardless of the magnitude of the costs created by Prop. 36, the result would be the same: elected officials would face difficult choices about how to accommodate these new unfunded costs in their budgets. Such choices could disproportionately harm Californians with low incomes and communities of color depending on which current state and local services were affected by funding reductions.

These tough decisions would come at a time when state and local leaders are already struggling to keep their budgets balanced and ensure ongoing support for core services. For example, the 2024-25 state budget package relies heavily on borrowing from future budgets and only temporarily increases revenues — decisions that could compromise the state’s ability to sustain core programs as well as stall much-needed investments in the coming years. The new unfunded costs imposed by Prop. 36 would make it even more challenging for state leaders to sustain support for core services and maintain a balanced budget.

In addition, Prop. 36 would reverse the modest progress that California has made in controlling state prison spending. Justice system reforms, including Prop. 47, have reduced the prison population and allowed state leaders to end private-prison contracts, begin closing state-owned prisons, and bend the prison cost curve. In fact, prison spending is billions of dollars lower today than it would be absent these reforms. These freed-up dollars have been redirected to critical state services that rely on the state’s General Fund for support.

Moreover, the prison system’s “footprint” on the state budget has been shrinking as reforms have taken effect. The budget of the California Department of Corrections and Rehabilitation (CDCR) comprised over 9% of total General Fund spending in 2013-14 — the fiscal year before Prop. 47 was approved in November 2014. Since then, CDCR’s share of the state budget has dropped to less than 7% as prison spending has grown more slowly than overall state expenditures.

Still, state correctional spending remains too high, and more work is needed to further downsize California’s costly and sprawling prison system. However, the trend has been moving in the right direction, and the significant gains that have been made over the last decade would be eroded if Prop. 36 is approved by voters.

Prop. 36 Would Reduce State Funding for Behavioral Health Treatment and Other Critical Services

By passing Prop. 47 in 2014, voters not only reduced penalties for several low-level crimes and lowered the prison population — they also required state prison savings from Prop. 47 be used for services that reduce crime, support youth, and help crime victims heal. To date, Prop. 47 savings — as calculated by the Department of Finance — exceed $800 million, or around $90 million per year, on average.

Prop. 47 savings are annually deposited into the Safe Neighborhoods and Schools Fund and used as follows:

  • 65% for behavioral health services — which includes mental health services and substance use treatment — as well as diversion programs for individuals who have been arrested, charged, or convicted of crimes. These funds are distributed as competitive grants administered by the Board of State and Community Corrections.
  • 25% for K-12 school programs to support vulnerable youth. These funds are distributed as competitive grants administered by the California Department of Education.
  • 10% to trauma recovery services for crime victims. These funds are distributed as competitive grants administered by the California Victim Compensation Board.

Prop. 47 savings are invested in a broad range of programs that support healing and keep communities safe. For example, a recent evaluation shows that people who received Prop. 47-funded behavioral health services and/or participated in diversion programs were much less likely to be convicted of a new crime. People who enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who have served prison sentences (recidivism rates range from 35% to 45% for these individuals). These programs are also successful in reducing homelessness and promoting housing stability, with a 60% decrease in the number of participants experiencing homelessness by the end of the program compared to when they enrolled.

Because Prop. 36 would undo key provisions of Prop. 47, the annual state savings from Prop. 47 would decline. The LAO estimates that this reduction would likely be in the low tens of millions of dollars per year, whereas CSJ projects that the state savings would be entirely eliminated.

The most recent estimate of Prop. 47 savings is $95 million, as reflected in the 2024-25 state budget. If Prop. 36 had been in effect this year, these savings would have been tens of millions of dollars lower (based on the LAO’s analysis) or entirely eliminated (based on CSJ’s assessment). Either way, there would be substantially less funding for services that reduce crime, support youth, and help crime victims heal. In other words, Prop. 36 would shift tens of millions of dollars or more each year from behavioral health treatment and other critical services back to the state prison system.

Prop. 36 Could Push More Californians Into Homelessness

Prop. 36 could worsen homelessness in California by pushing more residents into the carceral system, further exacerbating the deep link between homelessness and incarceration. While the lack of affordable housing is the primary cause of homelessness, this detrimental outcome is intensified by incarceration as formerly incarcerated people are nearly 10 times more likely  to experience homelessness than the general population. 

Californians leaving incarceration often face significant obstacles to securing long-term, stable housing, which is essential for reconnecting with support networks, finding employment, and maintaining health. Without proper housing, which Prop. 36 does not account for or ensure, formerly incarcerated individuals are more likely to recidivate and resort to survival crimes, perpetuating the harmful cycle.

A recent statewide homelessness study found that nearly 1 in 5 unhoused Californians (19%) entered homelessness directly from an institutional setting, primarily a jail or prison. Additionally, fewer than 20% of people leaving jail or prison had support finding housing upon their release. Prop. 36 does nothing to address this need and instead reverts funding from existing programs that help unhoused individuals with conviction histories connect with housing, behavioral health treatment, and other necessary services needed to reintegrate.

Further, Prop. 36 fails to follow effective, evidence-based interventions that successfully help individuals obtain and sustain mental health and substance use treatment, with housing as a foundational component. The initiative allows certain people arrested for drug possession to admit guilt (or plead no contest) and have their charges dismissed if they complete court-ordered treatment.

However, completing a treatment program is especially challenging for individuals experiencing housing instability or homelessness. Not having a home causes severe stress and trauma and harms physical and mental well-being, which can trigger or worsen mental health issues and lead to complex coping mechanisms like substance use. Yet there is no guarantee that those who are referred to treatment and who may need housing will receive it in a timely manner, essentially curtailing their chances of completing the program and increasing their likelihood of facing incarceration for up to three years.

Moreover, coerced treatment is antithetical to successful “Housing First” principles, which prioritize permanent housing before addressing treatment and other comprehensive needs. Policy experts also recommend against legally compelling people to comply with treatment for opioid use disorders as an alternative to other sanctions like incarceration. While coerced treatment may help engage people with substance use challenges, it likely has minimal to no effect on treatment retention, remission, and overdose mortality. This approach effectively places individuals in vulnerable positions that can lead to long-term incarceration and an increased likelihood of homelessness under Prop. 36.

Creating Safe and Equitable Communities Requires Smart Investments, Not Harsh Penalties and Mass Incarceration

Creating safe, vibrant communities for all Californians is achievable through intentional investments that uplift opportunities and economic security. Rather than promoting this positive vision for California, Prop. 36 advances an incarceration-focused approach that:

Instead of increasing incarceration, state leaders should prioritize policies and interventions proven to reduce crime, enhance public safety, and expand behavioral health treatment options. Effective measures include increasing affordable and supportive housing, expanding economic security programs, broadening access to health care and behavioral health services, supporting education and youth intervention programs, improving recidivism reduction strategies, and implementing equity-centered policies that target vulnerable residents. By focusing on these proven strategies, we can create safer, more equitable communities for all Californians.

Ballot Propositions
Health & Safety Net
  • 1
    Prop. 36 states that a person charged with a “treatment-mandated felony” may receive, if eligible, relevant Medi-Cal or Medicare services that are delivered through a court-ordered treatment program. (Medi-Cal is supported with state and federal funding; Medicare is funded solely by the federal government.) Therefore, some federal funding could be available to support services for people who are charged with a treatment-mandated felony and are eligible for Medi-Cal or Medicare. However, the state would have to pay a portion of any Medi-Cal services delivered, and Prop. 36 would not provide any revenue to offset those new state costs. In addition, the costs associated with treatment-mandated felonies represent only part of the substantial state and local criminal justice costs that Prop. 36 would create — costs for which the measure provides no new funding.
  • 2
    The substantial gap between these two sets of estimates is likely the result of different assumptions, methodologies, and/or data sources adopted by each organization.

You may also be interested in the following resources:

Stay in the know.

Join our email list!

key takeaway

Despite California’s commitment to funding education through Proposition 98, increased child poverty and budget shortfalls pose substantial challenges.

All California students deserve the opportunity to learn and achieve their goals. Recognizing the critical role schools play in supporting student success, California voters adopted Proposition 98 (Prop. 98), which established an annual minimum funding guarantee for public K-12 schools and community colleges. 

When students and their families struggle to make ends meet, their educational success is put at risk. The poverty rate for children in California more than doubled from 2021 to 2022, suggesting that more support is needed to help families meet their basic needs. 

Helping Californians meet those needs while adequately funding K-14 education is challenging when the state experiences a budget shortfall that results from revenues falling far short of projections — as is the case this year. Understanding Prop. 98 and its interaction with the state budget is essential to assess policymakers’ options for addressing the challenges this year’s state budget presents.

jump to

What is Proposition 98?

Prop. 98 is a constitutional amendment adopted by California voters in 1988 that establishes an annual minimum funding level for K-14 education each fiscal year — the Prop. 98 guarantee. Prop. 98 funding comes from a combination of state General Fund revenue and local property taxes. Prop. 98 spending supports K-12 schools (including transitional kindergarten), community colleges, county offices of education, the state preschool program, and state agencies that provide direct K-14 instructional programs. While Prop. 98 establishes a required minimum funding level for programs falling under the guarantee as a whole, it does not protect individual programs from reduction or elimination.

How is the Prop. 98 minimum funding guarantee calculated?

Each year’s Prop. 98 guarantee is calculated based on a percentage of state General Fund revenues or the prior year guarantee adjusted for K-12 attendance and an inflation measure.1The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent. Since some of this information is not available until after the end of the state’s fiscal year, the Legislature funds Prop. 98 at the time of the annual Budget Act based on estimates of the Prop. 98 minimum funding level. 

Once the final Prop. 98 guarantee is determined, the process of reconciling the actual and estimated guarantee is known as “settle up.” If the final Prop. 98 guarantee turns out to be higher than initially estimated, the Legislature must provide additional funding to make up the difference. On the other hand, if the Prop. 98 spending requirement is below the funding level assumed in a budget act, the Legislature has the option to amend the Budget Act to reduce funding to the lower revised minimum Prop. 98 guarantee.2The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.

To the extent that the Legislature provides funding above the Prop. 98 minimum guarantee, it can increase the following year’s Prop. 98 minimum funding level and state spending required to fulfill the Prop. 98 obligation in future years. In other words, deciding to provide funding above the Prop. 98 minimum guarantee for one budget year can increase the minimum funding level for the subsequent year’s budget and beyond.

What is the Prop. 98 reserve?

California voters approved a constitutional amendment in 2014 that established the Public School System Stabilization Account (the PSSSA) – the Prop. 98 reserve. Constitutional formulas require the state to make deposits into, and withdrawals from, the Prop. 98 reserve. When the state faces a budget problem, discretionary withdrawals from the Prop. 98 reserve may also be made if the governor declares a budget emergency and the Legislature passes a bill to withdraw funds, which can only be used to support K-14 education.

Why is California facing a budget shortfall? And how large is it?

California faces a budget shortfall, also known as a “budget problem,” of tens of billions of dollars. The shortfall is based on estimates of revenues and spending across three fiscal years: 2022-23, 2023-24, and 2024-25 (the fiscal year that begins on July 1, 2024). This three-year period is known as the “budget window.” The main reason for the budget problem is that state revenue collections have fallen short of projections. A large portion of the problem is related to state revenues for the 2022 tax year, which are estimated to be about $25 billion lower than what policymakers expected when they adopted the budget for the current fiscal year last summer.

The extent of the 2022 revenue shortfall only became clear in late 2023 due to the extension of tax filing deadlines for 2022 taxes to November 2023. Because of this delay, state leaders had to finalize the 2023-24 budget last June with much less complete revenue information than usual, and they enacted a budget assuming significantly more revenue for the 2022 tax year than actually materialized.

How does California’s budget problem affect the Prop. 98 guarantee?

Revenue collections falling short of projections not only creates a budget problem for the state, it also means the Prop. 98 minimum funding guarantee for K-14 education is significantly lower than the level assumed in last year’s enacted budget. Based on revenue estimates in the governor’s January 2024 budget proposal, the Prop. 98 minimum funding guarantee dropped by $14.3 billion across the three-year budget window (2022-23 to 2024-25) compared to assumptions made last June.3The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

Reconciling Prop. 98 spending with revised estimates of the Prop. 98 guarantee can be challenging when the minimum funding guarantee falls — and it is especially difficult if the revised guarantee falls significantly. The current challenge of managing such a large decline in the Prop. 98 minimum funding guarantee is further complicated because the majority of the drop — $9.1 billion — is attributed to the 2022-23 fiscal year, which ended on June 30, 2023. 

The Legislature can address the challenge by amending last year’s Budget Act to reduce Prop. 98 funding to the lower revised minimum Prop. 98 guarantee. But, because the state has already allocated 2022-23 dollars to K-14 education, reducing K-14 education funding would be logistically difficult and would significantly impact K-12 schools’ and community colleges’ budgets. On the other hand, maintaining 2022-23 Prop. 98 spending above the minimum funding requirement could boost the state’s funding obligation to meet the Prop. 98 guarantee in 2023-24 and 2024-25.

How does the governor propose to address the budget problem and protect students and educators?

To help address the state budget shortfall, the governor’s January budget proposal assumes a reduction in state funding to the lower revised estimates of the Prop. 98 guarantee over the three-year budget window (2022-23 to 2024-25). To reduce Prop. 98 spending, the governor proposes a combination of spending reductions and discretionary withdrawals from the Prop. 98 reserve. 

A significant part of the governor’s plan is an $8 billion reduction in Prop. 98 spending attributable to 2022-23, which would help reduce state General Fund spending to the lower revised Prop. 98 minimum funding level. However, the governor’s proposal would not take away the $8 billion from K-12 schools and community colleges — dollars they received for 2022-23 that have largely been spent. Instead, the governor proposes a complex accounting maneuver that would shift the $8 billion in K-14 education costs — on paper — from 2022-23 to later fiscal years.

First Look: Understanding the governor's 2024-25 state budget proposal

Learn about the key pieces of the 2024-25 California budget proposal, and explore how the governor prioritized spending and determined cuts amid a sizable projected state budget shortfall.

Read Report

Specifically, $8 billion in 2022-23 costs would be spread across five state budgets from 2025-26 to 2029-30 ($1.6 billion per year). Moreover, these delayed expenses would be paid for using non-Prop. 98 funds. In other words, $8 billion in General Fund dollars from the non-Prop. 98 side of the state budget — funds that could otherwise support health, safety net, housing, and other critical services — would be spent on K-14 education but would not count as Prop. 98 spending nor boost the Prop. 98 minimum funding guarantee (the implications of this are discussed below).

In addition, to help pay for existing K-14 education program costs in 2023-24 and 2024-25, the governor proposes making $5.7 billion in discretionary withdrawals from the Prop. 98 reserve. These one-time reserve funds would help support K-14 education in 2023-24 and 2024-25 at the same time that the state reduces General Fund spending required to meet the Prop. 98 minimum funding obligation.

How could the governor’s proposal affect non-Prop. 98 spending?

The governor’s proposal would use non-Prop. 98 resources to make a total of $8 billion in payments to K-14 education starting in 2025-26, but the proposal fails to propose additional revenue or other non-spending cuts to make these payments. Because no additional alternatives are part of the plan, the proposal would create pressure to reduce spending for state budget priorities outside of K-14 education starting in 2025-26.

Shifting Prop. 98 costs to the non-Prop 98 side of the budget creates significant risks to state spending that supports California’s children and families. By creating a future obligation for K-14 education without additional resources to pay for it, the governor’s plan could force reductions in spending for programs such as child care, student aid, and social safety net services that many Californians depend on for support to make ends meet.

How can state leaders address the decline in the Prop. 98 guarantee?

Policymakers have options to address the large decline in the Prop. 98 minimum funding guarantee that include the following:

Bottom line: Policymakers can address the decline in the Prop. 98 guarantee without creating pressure to reduce spending for priorities outside of K-14 education. The decline in the state’s Prop. 98 minimum funding guarantee due to state revenues falling short of expectations creates significant challenges for state leaders this year. However, policymakers have options for addressing these challenges, including raising revenues from wealthy corporations and high-income individuals who have ample resources to contribute.

Policymakers can also choose to withdraw more from the state’s Prop. 98 reserve to support K-14 education spending. Relying on Prop. 98 reserve funds alone may not be sufficient to cover all K-14 education expenses for which the state has made commitments. However, policymakers should look to raising revenue and other options to address the decline in the Prop. 98 guarantee that do not harm K-12 schools and community colleges or create pressure to reduce spending for state budget priorities outside of K-14 education.

Ballot Propositions
Health & Safety Net
  • 1
    The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent.
  • 2
    The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.
  • 3
    The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

You may also be interested in the following resources:

Stay in the know.

Join our email list!

key takeaway

California voters will decide on March 5th, 2024, whether to pass Proposition 1, a two-part initiative aiming to improve access to behavioral health services. This includes funding for treatment facilities, housing support, and changes to the Mental Health Services Act.

Millions of Californians who cope with behavioral health conditions — mental illness or substance use disorders — rely on services and supports that are primarily provided by California’s 58 counties. Improving California’s behavioral health system is critical to ensure access to these services for all Californians, regardless of race, age, gender identity, sexual orientation, or county of residence.

In recent years, state policymakers have launched various initiatives to transform California’s behavioral health system with the goal of improving access for Californians. The most recent of these initiatives is Prop. 1. Last year, state policymakers passed, with strong support from Governor Gavin Newsom, Senate Bill 326 and Assembly Bill 531. Together, these bills placed Prop. 1 on the March 2024 ballot.

On March 5, 2024, California voters will vote on Prop. 1, a two-part measure that would 1) amend California’s Mental Health Services Act and 2) create a $6.38 billion general obligation bond. The bond would fund:

  • Behavioral health treatment and residential facilities,
  • Supportive housing for veterans and individuals at risk of or experiencing homelessness with behavioral health challenges.

This initiative presents beneficial aspects as well as potentially adverse consequences for Californians. This Q&A provides a high-level overview of Prop. 1, including how Californians with behavioral health conditions might be impacted by its passage as well as implications for the state budget.

jump to

Key Terms

Why Does Prop. 1 Matter for Californians?

Prop. 1 would impact how many Californians access mental health services and substance use disorder treatment in their communities. It would restructure a key funding source for county behavioral health services in ways that would increase housing supports but might adversely impact counties’ ability to provide behavioral health services.

The Mental Health Services Act (MHSA), which Prop. 1 would amend, accounts for about one-third of funding for county behavioral health services. The MHSA is essential in supporting services for Californians across different ages, addressing a spectrum of mild to severe behavioral health conditions.

Prop. 1 would also authorize a statewide bond to create mental health and substance use treatment beds, and housing with supportive services for unhoused Californians with behavioral health challenges. Increased supportive housing and access to treatment facilities is crucial for Californians. Capital funds accessed through the bond portion of Prop. 1 will slightly impact the state’s ability to make budgetary decisions year-to-year. However, the capacity of the state to issue future voter-approved bonds will decrease because California has a limited ability to finance bond measures.

Changes to the MHSA will impact a system that currently supports all Californians with behavioral health conditions. In contrast, the bond focuses on individuals with behavioral conditions who are at risk of or experiencing homelessness, which is a smaller portion of the unhoused population.

As thousands of Californians across the state experience the devastating effects of homelessness and barriers to behavioral health care, policymakers are asking Californians to consider if redirecting MHSA funds and authorizing a new general obligation bond is the right approach to addressing the state’s behavioral health and homelessness crises.

What Problem Is Prop. 1 Trying to Address?

Prop. 1 aims to support Californians who are most affected by severe behavioral health conditions (mental illness and substance use disorders) and homelessness. This initiative is designed to create designated funding for mental health services and housing or treatment units for people with behavioral health conditions who are or at risk of experiencing homelessness.

In early 2023, over 181,000 Californians were counted as experiencing homelessness — the traumatic effects of which can seriously harm individuals’ well-being. Research suggests the trauma of experiencing homelessness can cause people to develop mental health problems and worsen existing behavioral health challenges and coping behaviors like substance use.

There are data challenges in quantifying exactly how many unhoused Californians have a mental health condition or substance use disorder. The 2023 homelessness point-in-time count showed 25% of the 181,399 people experiencing homelessness in California had a severe mental illness and 24% had a substance use disorder. However, while there is likely overlap between these individuals, the full extent is not reported.

Access to mental health care and substance use disorder treatment can be challenging for Californians who are unhoused. A recent statewide study found that nearly 4 in 5 unhoused Californians surveyed reported experiencing a serious mental health condition at some point in life, and those with current mental health conditions reported limited access to treatment. Additionally, 1 in 5 unhoused Californians who reported regular substance use and wanted treatment were not able to receive it.

These challenges are compounded by California’s shortage of adult psychiatric and community residential beds, which prevents Californians with serious behavioral health conditions from accessing critical behavioral health services.

What Is the Mental Health Services Act?

In 2004, California voters approved the Mental Health Services Act (Prop. 63), which created a 1% surtax on personal incomes above $1 million to provide increased funding for mental health services. Its passage signified a commitment to improving mental health outcomes for Californians, with a focus on prevention, early intervention, and community-based care. This tax supports about one-third of the state’s public mental health system.

The Mental Health Services Act has five main goals:

How Are Mental Health Services Act Funds Used Today?

The majority of MHSA funding (95%) goes directly to counties, which have some flexibility in how to use these funds.

Under current law, a small percentage of MHSA dollars (5%) is reserved for state-level administration.

How Would Prop. 1 Change Mental Health Services Act Spending?

Prop. 1 proposes significant revisions to the Mental Health Services Act (MHSA). These include:

  • Changing its name to the Behavioral Health Services Act (BHSA),
  • Expanding its scope to encompass treatment for substance use disorders.

Additionally, it would modify how MHSA funds are allocated, and introduce changes related to oversight, accountability, and the community planning process. This overview will focus on outlining the new funding structure under Prop. 1.

Under Prop. 1, counties would continue to receive the bulk of BHSA funds (90%). However, the allocation across different spending categories would change, without an increase in revenues. Counties would allocate their BHSA funds as follows:

Prop. 1 could provide some exemptions for counties with a population of less than 200,000. In addition, during the first two years of implementation, counties might have the flexibility to transfer up to 14% of their funding between these categories, with a limit of 7% per category. However, this flexibility is still pending state approval and has not been confirmed.

Another notable change is that Prop. 1 would shift a small percentage of dollars from counties to the state (from about 5% of total MHSA funding to about 10%). This would result in about $140 million annually redirected to the state budget. However, this amount could be higher or lower depending on the total amount of revenue collected from the tax.

Prop. 1 would also revise the allocation of state-level funds:

  • At least 3% to the Department of Health Care Access and Information to implement a statewide behavioral health workforce initiative.
  • At least 4% to the California Department of Public Health for population-based mental health and substance use disorder prevention programs. A minimum of 51% of these funds must be used for programs serving Californians who are 25 years or younger.

It’s worth noting that Prop. 1 would not change the tax on people with incomes over $1 million per year. This means counties would be expected to expand their scope of services without an increase in revenue. In fact, county leaders have repeatedly raised concerns about the disruption that Prop. 1 could cause. Specifically, the MHSA restructuring could result in significantly less funding for core services, which could lead to counties:

  • Canceling contracts with community-based organizations. 
  • Closing programs that are currently serving Californians.
  • Reducing county staffing.

If passed, the exact impact of Prop. 1 will vary by county and depend on how much revenue is collected in any given year. It’s important to keep in mind that the MHSA funds services for Californians of all ages for a range of conditions — mild to moderate to severe. The restructuring of MHSA funding would target a subset of this population. Therefore, programs and services for prevention and early intervention in some counties, for instance, could experience disruptions due to the new prioritization of funding.

What Can We Expect from the Behavioral Health Infrastructure Bond?

The Behavioral Health Infrastructure Bond would create a $6.38 billion general obligation bond for:

  • Infrastructure development of treatment and residential care facilities,
  • Supportive housing units for veterans and other Californians with serious mental health conditions and substance use disorders.

These funds are estimated to create up to 4,350 housing units, with 2,350 set aside for veterans, and 6,800 mental health and substance use treatment places for an approximate total of 11,150 new behavioral health and supportive housing units statewide. An estimated 26,700 outpatient treatment slots will also be created that may serve thousands of Californians annually.

Projects funded by the Behavioral Health Infrastructure Bond will be eligible for local streamlined review processes if they meet select criteria. The bond funds will be allocated as follows:

First Look: Understanding the governor's 2024-25 state budget proposal

Learn about the key pieces of the 2024-25 California budget proposal, and explore how the governor prioritized spending and determined cuts amid a sizable projected state budget shortfall.

Read Report

What Would the Infrastructure Bond Mean for the State Budget?

Under Prop. 1, the state would issue up to $6.38 billion in general obligation (GO) bonds, with the funds going toward:

  • Grants or loans for vital treatment and residential care facilities,
  • Supportive housing units.

California voters have a record of funding large infrastructure projects through bonds as it does allow the state to access impactful funding amounts that are designed to serve public interests at large over many years.

In issuing bonds, the state must repay the bond debt service (which is the principal bond amount plus interest) through General Fund dollars. The most recent cost estimate assumes a 30-year debt service resulting in projected payments of roughly $310 million per year. Under this estimate, it would cost the state approximately $9.3 billion to repay the total bond debt, not including the cost of inflation. California currently spends roughly 2.5% of the state budget on repaying various bond obligations voters have decided on in the past.

While there are ways to equitably reform the state budget’s revenue streams, policymakers must balance the yearly limited discretionary flexible dollars in the General Fund. GO bonds in essence prioritize increased debt-service payments to be drawn from the General Fund over potential ongoing or one-time funding. Repaying the bond portion of Prop. 1 is a trade-off that will slightly reduce the flexible dollars left for other vital public services that may already serve Californians with behavioral health conditions and those at risk of or experiencing homelessness. It also challenges the state’s capacity to fund future voter-approved bonds since California has limitations on financing bond measures.

Another consideration is the ongoing operating costs that will be needed to adequately sustain the facilities produced through Prop. 1. As explained above, the MHSA restructuring does designate 30% to housing interventions which includes rental and operating subsidies. The funds can presumably help sustain facilities that are projected to be secured through the bond funding. However, it is uncertain whether these funds and those from other sources will be sufficient and accessed efficiently to ensure adequate upkeep, staffing, and proper care for the Californians receiving housing and services through these projects.

The infrastructure projects funded under the bond would build on existing state programs that received one-time funding through previous budget allocations or voter-approved bonds which are close to being depleted.

How Might Californians Be Impacted by Prop. 1?

The proposal presents various promising aspects. First of all, the expansion of services to substance use disorder treatment is positive. This broadened scope recognizes that mental health challenges and substance use disorders sometimes occur together. In fact, more than 1 in 4 adults living with a serious mental illness also have a substance use disorder. This underscores the importance of providing treatment for both conditions.

Another positive aspect of this proposal is the prioritization of treatment facilities and supportive housing infrastructure for Californians at risk of or experiencing homelessness with behavioral health conditions. Due to racism, ableism, and other forms of discrimination, some Californians are more likely to experience the devastating effects of homelessness at some point in their lifetime. This disparity is particularly stark for Black, Indigenous and Pacific Islander Californians, adults without children, older adults, and transgender and other LGBTQ+ individuals.

Notably, the new investments and prioritization of funds under Prop. 1 target a small but important share of the unhoused population. The majority of unhoused Californians face short-term homelessness (61%), for which deeply affordable permanent housing is needed. For those who are chronically homeless (39%) and may have behavioral health challenges, the increased supportive housing units are crucial if they are appropriately sustained with wraparound supportive services.

One concern about Prop. 1 is the restructuring of funding under the Mental Health Services Act (MHSA). While the exact consequences of this change are not entirely clear for each county, it could have adverse effects. The MHSA has been instrumental in providing innovative, community-based services for historically underserved communities, including people of color and LGBTQ+ communities. Given that county leaders have expressed that this initiative could result in less funding for core services, Prop. 1 could negatively impact services for Californians of color and LGBTQ+ communities that are currently supported by MHSA funding.

A key flaw of this initiative is that it expands the scope of the MHSA and prioritizes funding for people who are or at risk of experiencing homelessness without increasing the tax or providing new revenue to support existing county behavioral health programs. This approach is concerning, as it redirects funds originally allocated for a specific purpose to address a different need.

What Are Supporters and Opponents Saying?

supporters

Supporters claim that Prop. 1 would prioritize existing funds and generate new funds for Californians with the most severe behavioral health needs and those living in encampments. Other supporters assert that the proposition is a beneficial component in advancing the variety of interventions needed to address California’s housing and homelessness challenges. Supporters of Prop. 1 include California Big City Mayors as well as some behavioral health and housing advocates.

opponents

Opponents, including disability rights advocates and peer support advocates, argue that Prop. 1 represents a significant regression in the treatment of mental illness and substance use disorders, likening its impact to a 50-year setback. This perspective stems from allowing funding to be used for involuntary or forced treatment facilities. Opponents also claim that Prop. 1 could result in reduced mental health services for Black, Indigenous, and other people of color and LGBTQ+ Californians.

Ballot Propositions
Health & Safety Net

You may also be interested in the following resources:

Stay in the know.

Join our email list!

As one of the most complicated measures on the November 2020 state ballot, Proposition 19 would make significant changes to California’s residential property tax system. The proposition would expand a property tax loophole for older, mostly wealthier homeowners, while covering the cost by narrowing another special tax rule for inherited properties – and would then require state and local governments to track how much their tax revenues change as a result, requiring new administrative infrastructure. Altogether Prop. 19 would likely result in increased state and local revenues on net – but not for all counties – while most of the newly available state dollars would be restricted to a new special fund limited to use for supporting fire response. Prop. 19 includes some elements that policymakers could consider as part of more comprehensive tax reform, but its central proposal to expand tax breaks for older, mostly white, mostly economically advantaged homeowners would make California’s tax system less equitable. The complicated proposal would also do little or nothing to help the Californians most severely affected by the state’s housing affordability crisis, including renters, families with low incomes, and most Black and Latinx residents. This proposition was initiated by the California Association of Realtors and modified in negotiations with the Legislature.

Prop. 19 Expands Tax Breaks for Older, Mostly White Homeowners Who Tend to Be Economically Secure Already, Reducing the Equity of California’s Tax System

California already has special rules that allow homeowners who are age 55 or older or who are severely disabled to avoid paying higher property taxes if they sell their home and move to a new home under certain circumstances – and Prop. 19 would expand the special tax breaks for these same homeowners. About 4 million homeowners age 55 or older would be eligible to benefit from these new property tax breaks under Prop. 19, as well as a much smaller number of younger homeowners with disabilities, according to Budget Center analysis. Similar existing special rules apply to individuals whose homes have been damaged or destroyed by fire or other natural disasters, and these tax breaks would also be expanded, though homeowners affected by disasters who are not also eligible due to age or disability make up a tiny share – well under 1% – of the total number of homeowners eligible to benefit from Prop. 19, according to Budget Center analysis.

Generally, the homeowners who would be eligible to benefit from these new special property tax breaks under Proposition 19:

  • have higher incomes and are more economically secure than California household heads overall; 
  • have much higher incomes and are much less likely to be living in poverty than similarly-aged older renter household heads;
  • are long-term homeowners, many with access to substantial home equity, with more than half owning homes worth a half-million dollars or more, according to Budget Center analysis.

By expanding tax breaks for this economically advantaged group, Prop. 19 would make California’s tax system less progressive and more inequitable.

California Proposition 19 Eligible Homeowners Are Much Less Likely to Live in Poverty Than Older Renters of Californians Overall

Prop. 19-eligible homeowners are also substantially more likely to be white and much less likely to be Latinx or Black than the heads of California households overall, according to Budget Center analyses. Housing policy and tax policy have historically benefited white households most, including through policies with explicitly racist design and implementation that have blocked Black and brown Californians from homeownership opportunities. By directing additional tax benefits largely to white homeowners, Prop. 19 reinforces racial inequity within California’s tax system.

More Than 6 in 10 Proposition 18 Eligible Homeowners Are White, Versus Less Than Half of California Household Heads Overall

Prop. 19 Would Attempt to Pay for Expanding One Property Tax Break By Limiting Another – California’s Property Tax Inheritance Loophole

Prop. 19 would narrow California’s property tax inheritance loophole, which offers Californians who inherit certain properties a significant tax break by allowing them to pay property taxes based on the property’s value when it was originally purchased rather than its value upon inheritance. As outlined in an analysis by the Legislative Analyst’s Office (LAO), this loophole is costly, inequitable, and may exacerbate the state’s housing crisis. And since wealthy, white individuals are more likely to receive inheritances, this loophole likely exacerbates the racial wealth gap.

Prop. 19 would narrow California’s inheritance loophole by 1) requiring the inherited property be used as the child’s primary residence or as a family farm to qualify for the tax break and 2) limiting the tax savings for properties where the market value is at least $1 million higher than the taxable value prior to the transfer. These changes would lessen the inequities in California’s current property tax system and raise property tax revenue to support local services, but a more sound and less complicated policy would be to limit the inheritance loophole without linking it to the expansion of another inequitable tax break.

Prop. 19 Would Result in a Net Increase in Local and State Tax Revenues, While Narrowly Restricting Most State Revenue Gains to Use for Fire Response

The property tax changes proposed in Prop. 19 would likely raise local property tax revenues to support community services, but these gains are limited by the expansion of the special rules for certain homeowners and would vary significantly by county and year. Some counties may lose revenue in some years, though the measure would require that local agencies be at least partially reimbursed for the losses. In some years, most school districts would see no net gains in funding, as state funding for education would decrease to offset the property tax revenue gains.

The measure is also expected to result in some increased income tax revenue to the state due to increased home sales, as well as state budget savings due to a reduction in the state’s share of education funding under the Proposition 98 minimum funding guarantee. The majority of this additional revenue and savings – 75% of the net gains – would be earmarked for state and local fire suppression activities. While the state clearly has an urgent need for fire response resources, restricting funds to specific purposes compromises the state’s flexibility and ability to respond to changing circumstances.

Prop. 19’s Complex Scheme of Tax Break Tradeoffs and Funding Restrictions Misses the Mark for Equitable and Effective Public Policy

As California seeks to make equitable policy choices and advance budget decisions for people and their communities, the state cannot achieve those goals with complex schemes that needlessly combine efforts to increase state and local revenues – to address critical community needs – with substantial tax breaks for mostly wealthier California homeowners. A more just approach to reforming California’s tax system would keep the elements of Prop. 19 that increase revenues equitably without linking this change to expanded benefits for individuals who mostly have little need for additional tax cuts. A more effective policy design would also allow more flexible use of increased revenues – which could allow the opportunity to use funds to address the needs of Californians most affected by the state’s housing affordability crisis, such as those who rent their homes, those with lower incomes, and Black and brown Californians who have been blocked from homeownership opportunities and hit hardest by unaffordable housing costs. Overall, Prop. 19’s tax break giveaways and complexity limit its potential to make the state’s tax system more equitable and to effectively address Californians’ most urgent needs.

Ballot Propositions
Health & Safety Net

You may also be interested in the following resources:

Stay in the know.

Join our email list!

Local tax revenue reflects a community’s shared effort to support vital public services that all Californians need to live in our cities and counties, such as education for students in K-12 schools and community colleges, housing, health care, public parks, and libraries. When tax breaks provide advantages to some taxpayers over others, it not only creates inequities but can also lead to revenue losses that compromise the ability of schools and local communities to provide essential services for Californians. This is the case with commercial and industrial property taxes across California, and why voters will be asked in fall 2020 to vote on Proposition 15, an amendment to the state Constitution that would change how commercial and industrial properties are taxed to provide more revenue for schools and communities. 

Under Prop. 15, commercial and industrial properties would be taxed based on their market value rather than their purchase price. By moving from a property tax system based on purchase value to one based on market value, Prop. 15 would raise an estimated $6.5 billion to $11.5 billion annually in property tax revenues for K-12 schools and community colleges, counties, cities, and special districts, according to the Legislative Analyst’s Office.

Guide to Understanding Proposition 15

FAQ: Understanding Commercial Property Tax & Revenue in California

How Are Commercial and Industrial Properties Taxed Today? 
The general property tax rate for California commercial and industrial properties has been capped at 1% of assessed value since voters approved Prop. 13 in 1978. Counties determine the assessed value of commercial and industrial properties based on the property’s purchase price plus an annual adjustment for inflation not to exceed 2%. Counties collect property taxes and are generally only allowed to reassess properties to their market value when they undergo a change in ownership or new construction.

How Is Revenue From Commercial and Industrial Property Taxes Distributed Across California?
Revenue received from the taxes paid by commercial and industrial property owners is distributed to counties, cities, K-12 schools and community colleges, and special districts (such as public utility districts and fire protection districts) for services provided to Californians, based on complex state laws. The share of countywide property tax revenue going to each local entity is largely based on the distribution of these revenues dating back to the mid-1970s – before Prop. 13 was enacted and each local entity was able to set its own property tax rates. This means that there is wide variation among counties in the share of revenue going to – and the level of services provided by – each type of local government.

Why Are Commercial and Industrial Property Taxes Inequitable for Californians and in Need of Reform?
The property assessment limits set by Prop. 13 mean that an owner that purchased a commercial or industrial property several decades ago pays far lower taxes than an owner that recently purchased a similar property – leading to inequity among local businesses and a significant loss of revenue at the expense of schools and local community services. Schools and local communities are losing significant revenues every year as properties that have not changed ownership in many years are assessed at values much lower than their market values. Additionally, when a property changes hands, commercial and industrial property owners can more easily avoid reassessment than residential property owners due to the laws defining ownership changes and the complexity of business property ownership.

Report: Raising Revenue for Schools and Local Communities, Changing California’s Inequitable Taxing of Commercial Properties, and Understanding Proposition 15

Local tax revenue reflects a community’s shared effort to support vital public services that all Californians need to thrive in our cities and counties. This ranges from education for students in K-12 schools and community colleges to access to housing, health care, public parks, and libraries. These vital public services are supported by tax revenues from commercial and industrial properties – many of which are still taxed based on purchase prices that are more than four decades old. California voters will be asked in fall 2020 to vote on a measure known as Proposition 15, an amendment to the state Constitution that would change how commercial and industrial properties are taxed and provide more revenue for schools and local communities to support services Californians rely upon.

 

Download this report.

Infographic: California’s Inequitable Tax System Hurts Schools & Local Communities

Download this infographic.

Ballot Propositions
Health & Safety Net

You may also be interested in the following resources:

Stay in the know.

Join our email list!