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Californians Could Maintain Higher Taxes on Wealthiest With Proposition 55

This report focuses on Proposition 55, which appeared on the 2018 general election ballot.

September 2016 | By Scott Graves, William Chen, Chris Hoene, and Jonathan Kaplan

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Endnotes are available in the PDF version of this Issue Brief. 

Proposition 30, approved by voters in 2012, provided critical revenues to California at a time when the state faced daunting budgetary challenges. Prop. 30’s tax rate increases are scheduled to fully expire at the end of 2018. Prop. 55, which will appear on the November 8, 2016 statewide ballot, would extend for 12 years the Prop. 30 tax rate increases that affect very-high-income Californians. Revenues generated by Prop. 55 – a projected $4 billion to $9 billion per year from 2019 through 2030 – would go to K-12 public schools, community colleges, health care for low-income Californians, the state’s rainy day fund, state debt payments, and other state services. This Issue Brief provides an overview of Prop. 55 and the policy issues it raises. The California Budget & Policy Center neither supports nor opposes Prop. 55.

What Would Proposition 55 Do?

Prop. 55, “The California Children’s Education and Health Care Protection Act of 2016,” would amend the California Constitution to (1) extend Prop. 30’s personal income tax provisions for 12 years beyond their scheduled expiration at the end of 2018 and (2) create a formula to provide additional funding for Medi-Cal from the revenues raised by the measure. Moreover, existing provisions of the state Constitution would require Prop. 55 revenues to go to K-12 public schools, community colleges, the state’s rainy day fund, and state debt payments. Specifically, Prop. 55 would:

  • Extend Prop. 30’s personal income tax rate increases on very-high-income Californians. Prop. 55 would extend – from 2019 through 2030 – personal income tax rates enacted by Prop. 30. Extending these rates would raise between $4 billion and $9 billion each year (in today’s dollars), according to the Legislative Analyst’s Office (LAO). Prop. 55 would allow Prop. 30’s one-quarter cent increase in the state sales tax rate to expire at the end of 2016 as scheduled.
  • Create a new constitutional formula to increase funding for Medi-Cal, which provides health care services to Californians with low incomes. For each fiscal year from 2018-19 through 2030-31, the Governor’s Department of Finance would be required to estimate the amount of General Fund revenues – including those raised by Prop. 55 – that are needed to:
    • Meet the annual Prop. 98 minimum funding guarantee for K-12 schools and community colleges.
    • Fund the cost of services that were authorized as of January 1, 2016 (excluding Prop. 98 spending), as adjusted for population changes, statutory cost-of-living increases, federal mandates, and other factors.

If any Prop. 55 revenues are estimated to remain after meeting these combined expenditures, Medi-Cal would receive 50 percent of the excess, up to a maximum of $2 billion in any fiscal year. Revenues allocated to Medi-Cal under this provision would have to add to – rather than replace – existing General Fund support for the program.

  • Increase funding for K-12 schools and community colleges as compared to current law. The vast majority of funding for California’s K-12 schools and community colleges is provided by the Prop. 98 minimum funding guarantee. This guarantee is based on varying economic and fiscal conditions, including state General Fund revenue collections. Other things being equal, General Fund revenues from 2018-19 to 2030-31 would be higher if voters approve Prop. 55 than if the measure is rejected. This is because Prop. 55 would extend income tax rate increases that otherwise would expire at the end of 2018 under the provisions of Prop. 30. By increasing General Fund revenues relative to current law – which assumes the expiration of Prop. 30’s income tax rates – Prop. 55 would boost the amount of Prop. 98 funding that K-12 schools and community colleges would otherwise be expected to receive during the period that Prop. 55 is in effect. About half of the revenue raised by Prop. 55 would go to K-14 education, according to the LAO.
  • Increase deposits into the state’s rainy day fund and repayments of state budgetary debt as compared to current law. Under Prop. 2, which voters approved in 2014, California is required to set aside a certain share of General Fund revenues each year in order to build the state’s rainy day fund (the Budget Stabilization Account) and pay down state budgetary debts, including unfunded state pension liabilities. Because Prop. 55 would increase General Fund revenues relative to current law – as explained above – the measure would result in larger debt payments and bigger deposits into the rainy day fund compared to what would be expected if voters rejected Prop 55. The LAO estimates that Prop. 55 would provide an additional $60 million to approximately $1.5 billion each year for Prop. 2 purposes.
  • Allow state policymakers to use any remaining revenues raised by Prop. 55 for any budget priorities. Prop. 55 revenues that remain after (1) meeting the constitutional spending obligations described above and (2) helping to maintain state services that were in place as of January 1, 2016 could be used for any public systems and services funded through the state budget. For example, these excess Prop. 55 revenues could be used to raise the number of subsidized child care slots, increase cash assistance for low-income seniors and people with disabilities, and boost state support for the California State University (CSU) and the University of California (UC).

Whose Taxes Would Proposition 55 Affect?

As noted above, Prop. 55 would extend the personal income tax rate increases of Prop. 30, but not the sales tax rate increase. Prop. 30’s income tax rate increases are aimed specifically at the highest-income households. Of the total dollar increase in income taxes brought about by Prop. 30, the top 1 percent of households pay 98.6 percent, and the next 4 percent of households pay the remaining 1.4 percent, according to the Institute on Taxation and Economic Policy (Figure 1). Prop. 55’s income tax rate increases could be expected to have a similar effect.

prop-55-fig-1

Compared to those of Prop. 30, Prop. 55’s overall tax-rate changes would be even more progressive. This is because Prop. 55 would not extend Prop. 30’s quarter-cent sales tax increase, which has a disproportionate impact on households with lower incomes. Prop. 55 follows the equity principle of taxation, by which taxes are levied fairly, based on the ability to pay.

Currently, California’s lowest-income families pay the largest share of their incomes in state and local taxes, while the wealthiest, who substantially benefit from public investments and have the greatest ability to contribute, pay much smaller portions of their incomes in state and local taxes. In other words, California’s tax system as a whole is regressive, even with Prop. 30’s income tax increases on the wealthiest households. If voters reject Prop. 55, California’s tax system would become even more regressive because the highest-income households would contribute a smaller share of their income in taxes than if Prop. 55 were approved (Figure 2).

prop-55-fig-2

Furthermore, the top 1 percent of California households – those who would be most affected by Prop. 55’s tax rate increases – have seen their average income more than double since the late 1980s, after adjusting for inflation (Figure 3). In contrast, average inflation-adjusted incomes for the bottom 80 percent of California households have declined.

prop-55-fig-3

What Would Rejection of Proposition 55 Mean for Public Services?

If California voters do not approve Prop. 55, the personal income tax rate increases on very-high-income Californians enacted by Prop. 30 will expire at the end of 2018. The expiration of Prop. 30’s income tax rates would:

  • Result in a significant loss of General Fund revenues. Fiscal year 2018-19 would lose half a year of higher personal income tax revenues and 2019-20 would lose a full year of higher revenues – a projected $4.5 billion in 2018-19 and $7.7 billion in 2019-20, with annual revenue losses continuing thereafter (Figure 4).
  • Create a multi-billion dollar budget deficit that would likely result in cuts to state services. With the expiration of Prop. 30’s income tax rates, the loss of billions of dollars in General Fund revenues would lead to annual multi-billion dollar state budget deficits. Under such a scenario, state policymakers would likely need to reduce spending for critical services in order to help to help balance the budget.
  • Reduce the Prop. 98 funding guarantee for schools and community colleges. Changes in annual General Fund revenues tend to affect the Prop. 98 guarantee. If Prop. 30’s income tax rates are allowed to expire, the projected decline in annual General Fund revenue growth would reduce Prop. 98 funding for K-14 education compared to the funding that would be required if Prop. 30’s tax rates were extended. Specifically, the Prop. 98 funding level could fall by roughly $2 billion in 2018-19 and by roughly $4 billion in 2019-20 if voters reject Prop. 55.
  • Restrict the state’s ability to boost investments in a broad range of critical services and systems. These include:
    • The state’s child care and development system, which continues to provide tens of thousands fewer subsidized “slots” than in 2007-08, the year the Great Recession began.
    • The state’s higher education system – the CSU and UC – for which direct state General Fund support per student is down substantially since the early 2000s, after adjusting for inflation.
    • The CalWORKs welfare-to-work program, which provides a level of support that leaves families, including 1 million children, unable to afford even low-cost housing.
    • SSI/SSP cash assistance for seniors and people with disabilities, which leaves individuals living below the poverty line and struggling to afford housing, food, and other necessities.
  • Result in smaller deposits into the state’s rainy day fund and lower debt payments, leaving the state less prepared for the next economic downturn. Building up reserves and paying down budgetary debt gives state policymakers additional options – beyond spending cuts – for balancing the budget and maintaining services during an economic downturn. However, the expiration of Prop. 30’s income tax rates would reduce the amount of revenues that are available for deposit into the Budget Stabilization Account and to pay down budgetary debt. As a result, critical services would likely face larger cuts if a recession significantly reduced state revenues.

In summary, allowing Prop. 30’s income tax rate increases on very-high-income Californians to expire would eliminate billions of dollars from California’s revenue system. This would leave the state with less funding to invest in schools, community colleges, and other vital public services and systems as well as reduce the state’s ability to pay down debts and save for a rainy day.

prop-55-fig-4

Policy Issues Raised by Proposition 55

Prop. 55 raises key policy issues, including whether to add a new funding formula for Medi-Cal to the state Constitution and whether to use temporary revenues to support ongoing services.

Adding a New Funding Formula for Medi-Cal to the State Constitution Reflects “Ballot-Box Budgeting”

By creating a new constitutional spending requirement for Medi-Cal, Prop. 55 is an example of what is commonly called “ballot-box budgeting.” On the one hand, critics of ballot-box budgeting argue that the initiative process limits voters to an up-or-down choice in isolation from other potential uses of funds. They argue that earmarking the proceeds from a certain revenue source constrains the ability of the Governor and lawmakers to use the same source for other spending priorities, to make programmatic changes, or to modify spending in response to economic, budget, and demographic shifts.

On the other hand, proponents of initiative-based spending argue that the two-thirds vote requirement for legislative approval of tax increases makes it difficult, if not impossible, to raise revenues through the legislative process to support public services and systems. As a result, they maintain that it is appropriate to offer voters the ability to raise taxes to fund specific state budget priorities.

Proposition 55 Provides Temporary Funds for Ongoing Spending

Prop. 55 extends Prop. 30’s personal income tax rate increases through 2030, but does not make those higher rates permanent. In other words, the revenues raised by Prop. 55 would eventually disappear. Given the temporary nature of these revenues, relying on them to fund permanent, ongoing services – such as K-14 education and Medi-Cal – would mean that state policymakers (and possibly the voters) would again face the question of whether to extend these tax rates, make them permanent, or find a different source of funding. If such efforts failed, state budget shortfalls would likely emerge, meaning that state policymakers would face the prospect of reducing spending on vital public services and systems.

What Do Proponents Argue?

Proponents of Prop. 55, including the California State PTA, the California Teachers Association, and State Superintendent of Public Instruction Tom Torlakson, argue that the measure will prevent “billions in budget cuts without raising taxes by ensuring the wealthiest Californians continue to pay their share.” They state that money from the measure “goes to local schools” with strict accountability requirements that “ensure funds designated for education go to classrooms,” and further that the measure “expands health care access for children.”

What Do Opponents Argue?

Opponents of Prop. 55, including the Howard Jarvis Taxpayers Association, the National Federation of Independent Business/California, and retired Superior Court Judge Quentin L. Kopp, argue that voters supported Prop. 30’s tax rate increases only “because we were promised they’d be temporary.” They assert that funding for schools and other requirements is adequate, and state that “we can’t trust the politicians and special interests.”

Conclusion

Prop. 55 would extend – from 2019 to 2030 – the personal income tax rate increases on very-high-income Californians that voters approved by passing Prop. 30 in 2012. Prop. 55 would not extend Prop. 30’s quarter-cent increase in the state sales tax rate, which would be allowed to expire at the end of 2016 as scheduled. Prop. 55 is projected to generate between $4 billion and $9 billion per year, a range that brackets the roughly $7 billion to $8 billion per year that Prop. 30 has raised to date. Prop. 55’s revenues would be used to meet various constitutional spending obligations, such as for K-14 education and for Medi-Cal, as well as to help maintain services that were in place as of January 1, 2016. After meeting these spending requirements, any Prop. 55 revenues that remained could be used for any budget priorities, including boosting working families’ access to subsidized child care, making higher education more affordable, and improving safety-net services for low-income families with children.

With Prop. 55, voters have a choice to maintain a level of funding that has allowed California to begin reinvesting in its schools and other public services after years of disinvestment during and following the Great Recession. Rejecting Prop. 55, and thus allowing Prop. 30’s income tax rate increases to expire at the end of 2018, would result in reduced state revenues, less funding for schools and community colleges, smaller deposits to the state’s rainy day fund, less repayment of budgetary debt, and – quite possibly –  cuts to vital public services and systems. Moreover, California’s state and local tax system would become even more regressive because the wealthiest households – primarily the top 1 percent – would receive a substantial tax cut and thereby contribute less toward strengthening services that can promote economic security and opportunity for all Californians.

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State Policymakers Must Do More to Ensure the State’s Economy Works for Everyone

New Census figures released today show that millions of people in California continue to struggle to get by on extremely low incomes in spite of our state’s recent economic gains. Nearly 6 million Californians, including almost 2 million children, lived in poverty in 2015 based on the official poverty measure. In addition, poverty remained more widespread last year than it was in 2007 when the national recession began. Specifically, 15.3 percent of Californians had incomes below the official poverty line in 2015, down from a recent high of 17.0 percent in 2012, but still well above the state poverty rate in 2007 (12.4 percent). Also, more than 1 in 5 California children lived in poverty last year (21.2 percent), down from a recent high of 23.8 percent in 2012, but still well above the child poverty rate in 2007 (17.3 percent).

poverty-and-child-poverty-rate

The fact that millions of people lived in families that could not adequately support themselves in 2015 — six years after the end of the national recession — underscores the need for California to do more to ensure that all people can share in our state’s economic progress. This report highlights key findings from the data released today and outlines specific steps policymakers can take to increase economic security and opportunity in California.

Figures Based on Official Poverty Measure Understate Hardship in California

Although the newest Census figures show that poverty remains unacceptably high, they understate the number of Californians struggling to get by because they reflect an outdated measure of poverty. Figures released earlier this week based on an improved measure – the Supplemental Poverty Measure (SPM) – show that nearly 8 million Californians, 1 in 5 state residents (20.6 percent), could not adequately support themselves and their families, on average, between 2013 and 2015. California also stands out as having the highest poverty rate in the nation based on the SPM.

This report, however, focuses on the official poverty measure because this measure provides a comprehensive look at state poverty trends and poverty rates for specific groups.

Children — Particularly Children of Color — Are Especially Hard Hit by Poverty

The data released today show that although children make up less than one-quarter of California’s population (23.4 percent), they account for nearly one-third of those living below the official poverty line (32.3 percent). Furthermore, black and Latino children are about three times as likely as white children to live in poverty. Nearly one-third of black children (31.0 percent) lived in poverty in 2015, as did more than 1 in 4 Latino children (28.5 percent), compared to just 1 in 10 non-Latino white children (10.3 percent). If the official poverty rate for black and Latino children were equal to that of white children, nearly 950,000 fewer California children would live in poverty, and the state’s child poverty rate would be cut in half.

Research Strongly Supports Boosting Families’ Incomes to Improve Children’s Life Chances

All parents want a strong future for their children, but parents who struggle with inadequate incomes often face challenges in creating a better life for their kids. Research strongly supports making greater public investments to boost families’ well-being so that all children — including those whose families have historically faced the greatest barriers to opportunity — can have a stronger future. Compelling evidence from national studies shows that supplementing low-income families’ incomes can increase children’s life chances. Even modest increases in the incomes of low-earning families have been linked to improved health, greater academic achievement, and higher future earnings for those families’ children. The research also suggests that increases in income matter most during children’s first few years of life when their brains are developing rapidly, making them particularly vulnerable to the damaging effects of poverty.

State Leaders Can Strengthen California’s Future by Improving Children’s Opportunities

California’s future largely depends on children whose entire lives will be shaped by the extent to which our state invests in their education, health, and well-being. That’s why California’s leaders, together with parents and teachers, share in the responsibility for ensuring that our state’s children have the opportunity to reach their full potential. State policymakers can improve children’s life chances by:

  • Making sure that parents earn enough to support a family. Most families in poverty work, which means that low-wage jobs and not enough work hours prevent many people from getting ahead. California’s recent commitment to gradually raise the state’s minimum wage will restore decades of wage erosion, but policymakers should do more to help workers create a more secure future. Helpful steps would include strengthening California’s new tax credit for low-earning working families, the CalEITC, and giving workers the right to fair scheduling In addition, California could do more to protect people from predatory lending practices that often trap low-income borrowers in a cycle of debt.
  • Helping parents to afford high-quality child care so that they can work. High-quality, affordable child care is out of reach for many California families. The typical single mother would have to spend at least half of her income to afford center-based child care for two children in nearly every county in the state, according to our Women’s Well-Being Index, and California falls far short of providing enough affordable child care slots for families that need them. At a minimum, state policymakers should develop a multi-year plan for restoring all of the subsidized child care slots eliminated by budget cuts beginning in 2007-08. However, fully addressing families’ need for affordable child care will require a significant and sustained investment in a much bolder approach that aims to provide all families with access to high-quality child care and preschool.
  • Helping families to afford decent housing. The majority of low-income households in California spend over half of their incomes on rent making it difficult to afford other necessities and save for the future. Policymakers could begin addressing this problem by better targeting state spending on housing assistance to people who need it most. Currently, California spends 45 times as much on the mortgage interest deduction — a tax benefit that primarily benefits households with six-figure incomes — as it does on the state’s renters’ tax credit, which provides extremely limited assistance primarily to moderate-income renters.
  • Making sure that families can count on a strong safety net when they experience hard times. A majority of adults will face economic hardship for at least one year during their prime working years, and nearly half will turn to a major safety net program for help. This fact underscores the importance of making sure that our public supports allow people to meet their basic needs during tough times as well as prevent children from suffering the lasting consequences of poverty. Policymakers could begin to shore up California’s safety net by strengthening CalWORKs, the state’s welfare-to-work program, which has suffered from years of disinvestment. Helpful steps would include 1) raising grants so that CalWORKs at least lifts children out of deep poverty, 2) eliminating the “asset test” to qualify for CalWORKs assistance, which discourages low-income families from saving, and 3) restoring the maximum amount of time that parents can access welfare-to-work services to 60 months in order to increase their chances of securing stable employment.
  • Allowing families to save and build a more secure future. Nearly half of workers ages 25 to 64 are projected to struggle to make ends meet in retirement — a problem that partly reflects inadequate access to job-based retirement plans. State policymakers are on the verge of taking an important step to help more workers prepare for a secure future. Pending approval by the Governor, a bill passed by the Legislature last month would create a voluntary, portable retirement account for workers without access to workplace savings plans. As a next step, policymakers should shore up workers’ earnings and reduce pay disparities so that more people are better able to save for the future.

All Californians have a stake in policies that give children the chance to succeed, but children cannot thrive unless their families thrive. By investing in policies that increase families’ well-being, policymakers can create a stronger future for California’s children — and for all of us.

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State Leaders Must Do More to Promote Economic Security and Opportunity

Nearly 8 million Californians — 1 in 5 state residents (20.6 percent) — cannot adequately support themselves and their families. This is according to new Census figures released this morning based on the Supplemental Poverty Measure (SPM), a more accurate indicator of economic hardship than the official poverty measure. California also continues to have the highest poverty rate in the nation based on the SPM.

The new Census data also show that:

  • California’s high housing costs are a key obstacle preventing more people from getting ahead. The SPM improves on the official poverty measure by better accounting for differences in the cost of living across the US. When California’s high housing costs are factored in, a much larger share of the state’s population is living in poverty: 20.6 percent under the SPM, compared to 15.0 percent under the official measure. Accounting for housing costs boosts California’s poverty rate to the highest of any state, up from 17th highest under the official poverty measure.
  • Public investments improve the lives of millions of Californians. The SPM factors in a broader array of resources that people use to meet their basic needs, making it possible to gauge the extent to which public investments reduce poverty. Major federal and state programs — including Social Security, CalFresh food assistance, and tax credits for working families, such as the federal Earned Income Tax Credit (EITC) and child tax credit — lifted an estimated 4.9 million Californians, including 1.4 million children, above the poverty line each year, on average, between 2009 and 2012. Without these critical investments, millions more Californians would be struggling to get by.

California’s Leaders Can Do More to Promote Economic Security and Opportunity

The new poverty figures out today underscore the urgent need for California’s leaders to do more to help individuals and families who are struggling. In particular, the SPM shows that while public investments help to reduce hardship, they need to go further in a high-cost state like California where a majority of low-income residents spend over half of their incomes on housing. Policymakers can increase economic security and opportunity in our state by investing in good jobs, affordable housing, and a strong safety net; making it easier for people to save for emergencies and build a secure retirement; and allowing more families to access high-quality, affordable child care, preschool, and higher education so that children and youth have greater opportunities to move up the economic ladder. Prioritizing these types of investments would allow more people to fully contribute to our communities and economy and would lay the groundwork for a more prosperous future for California.

 *  *  *

About the Census Bureau Data Released Today

The state-level figures released today reflect average annual poverty rates during a three-year period, from 2013 to 2015.

The SPM addresses a number of shortcomings of the official poverty measure. One is the fact that under the official measure, the income threshold for determining who lives in poverty is the same in all parts of the US. For example, a parent with two children was considered to be living in poverty in 2015 if their annual income was below about $19,096, regardless of whether they lived in a low-cost place like rural Mississippi or a high-cost place like San Francisco. The SPM better accounts for differences in the cost of living by adjusting the poverty threshold to reflect differences in the cost of housing throughout the US.

Another shortcoming of the official poverty measure is that it fails to factor in the broad array of resources that families use to pay for basic expenses. The official measure only counts cash income sources, such as earnings from work, Social Security payments, and cash assistance from welfare-to-work programs. It does not take into account noncash resources, such as food or housing assistance, and it fails to consider how tax benefits, such as the federal EITC, increase people’s economic well-being. The SPM improves on the official measure by including these resources. It also better accounts for the resources people actually have available to spend by subtracting from their incomes what is needed to pay for necessary expenses, including work-related expenses, such as child care; medical expenses, such as health insurance premiums and out-of-pocket costs; and state and federal income and payroll taxes.

Although the SPM provides a more accurate picture of economic hardship in California, it does not indicate how much people need to earn to achieve a basic standard of living. Measures of what it actually takes to make ends meet in California show that families need incomes several times higher than the poverty line to afford basic necessities.

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Approved by California voters in 2014, Proposition 47 reclassified several nonviolent drug and property crimes from felonies to misdemeanors, with the result that state prison is generally no longer a sentencing option for these offenses. Instead, individuals convicted of a Prop. 47 offense serve their sentence in county jail and/or receive local probation. As a result, the reforms initiated by Prop. 47 are intertwined with local criminal justice funding and policy decisions.

Against this backdrop, the California Budget & Policy Center collaborated with Californians for Safety and Justice to create a guide to help local advocates promote criminal justice reforms through their own county’s budget process. In addition to explaining the basics of county budgeting, this guide provides a framework for investigating the impacts of Prop. 47 on county budgets. This framework highlights how recent criminal justice reforms — such as Prop. 47 — have affected county jails and probation departments and includes a series of questions that advocates can pose to county officials to help evaluate the impact of Prop. 47 at the local level.

Read the guide.

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Endnotes are available in the PDF version of this Issue Brief. 

Proposition 30, approved by voters in 2012, provided critical revenues to California at a time when the state faced daunting fiscal challenges. These revenues increased school funding and allowed for reinvestment in other public services after years of cuts. Prop. 30’s tax rate increases are scheduled to expire over the next several years. Although the state is in a much stronger fiscal situation now than it was in 2012, the phasing out of Prop. 30’s revenue boost would mean fewer resources available in the coming years to fund California’s various priorities.

This Issue Brief is the first of a two-part series in which we discuss what Prop. 30 has meant for California, and what extending a key component of it, as proposed by Prop. 55 on the November 2016 ballot, would mean for the state.

What Did Proposition 30 Do?

Prop. 30 raised the state sales tax rate by one-quarter cent through 2016 and added three new personal income tax (PIT) rates for very-high-income Californians through 2018:

  • A 10.3 percent tax bracket for single filers’ taxable income between $250,001 and $300,000 and joint filers’ taxable income between $500,001 and $600,000;
  • An 11.3 percent tax bracket for single filers’ taxable income between $300,001 and $500,000 and joint filers’ taxable income between $600,001 and $1 million; and
  • A 12.3 percent tax bracket for single filers’ taxable income above $500,000 and joint filers’ taxable income above $1 million.

The PIT and sales tax rate changes enacted by Prop. 30 have increased state revenues by $7 billion to $8 billion annually, with somewhat smaller gains projected for later years due to the expirations of the sales tax rate increase in 2016 and of the PIT rate increases in 2018.

Whose Taxes Does Proposition 30 Affect?

Everyone Pays the Sales Tax Rate Increase

Prop. 30’s quarter-cent sales tax rate increase affects all consumers. However, as a share of income, this increase has a larger impact on lower-income households than it does on higher-income households (Figure 1). This makes the tax “regressive,” as opposed to a “progressive” tax, which does the opposite — ask more of higher-income households than of lower-income households.

Prop 30 Fig 1

The Income Tax Rate Increases Affect the Wealthiest 1.5 Percent of Households

Prop. 30’s PIT rate increases are aimed at the highest-income households. Prop. 30’s PIT rates affect “roughly the 1.5 percent of taxpayers with the highest incomes,” according to the Legislative Analyst’s Office. Of the total annual dollar increase in income tax revenues raised by Prop. 30, the top 1 percent of households pay 98.6 percent, with the remainder paid by households in the next 4 percent, according to the Institute on Taxation and Economic Policy (ITEP) (Figure 2). Prop. 30’s PIT rate increases are very progressive.

Prop 30 Fig 2

Proposition 30 Overall Has a Progressive Effect

The revenues from Prop. 30’s higher PIT rates ($6.7 billion in 2015-16) are more than four times the revenues raised by the sales tax rate increase ($1.5 billion in 2015-16), according to the Department of Finance. This means that even though the sales tax component is regressive, Prop. 30 overall has a progressive effect on California’s tax system. Of the total revenue increase due to Prop. 30, the top 1 percent of families pay 77.2 percent, according to ITEP (Figure 3).

Prop 30 Fig 3

Asking the wealthiest Californians to contribute more follows the “equity” principle of taxation: that taxes should be levied fairly and based on ability to pay. Furthermore, the wealthiest Californians were the only ones to see growth in their average incomes over roughly the last quarter-century. The bottom 80 percent of Californians actually saw their average incomes decline between 1987 and 2014, after adjusting for inflation (Figure 4).

Prop 30 Fig 4

Proposition 30 Played a Critical Role in Stabilizing Public Investment Through California’s State Budget

Prop. 30 has had several notable budgetary impacts. It staved off substantial budget cuts in the 2012-13 fiscal year, as an additional $6 billion would have been cut from state support for programs in that year alone, had voters rejected the measure. Moreover, Prop. 30 has:

  • Helped the state to reinvest in preschool, K-12 schools, and community colleges. A growing economy and Prop. 30 worked together to boost Prop. 98 K-14 spending from $47.2 billion in 2011-12 to $71.9 billion in 2016-17. Since voters passed Prop. 30, Prop. 98 K-12 spending per student has increased by more than 14 percent — from $9,168 per student in 2012-13 to $10,493 in 2016-17, after adjusting for inflation (Figure 5). This increased support for California’s students followed a significant reduction in funding during and after the Great Recession. Furthermore, the average number of annual instructional days in California schools has increased and the number of K-12 students per teacher in California has decreased since voters approved Prop. 30 (Figure 6).
Prop 30 Fig 5
Prop 30 Fig 6
  • Allowed for some reinvestment in other public services after years of cuts. Prop. 30 provided space in the state budget to begin restoring funding to services outside of K-14 education. It did this by generating additional tax revenues that helped to fund the state’s share of the Prop. 98 guarantee, which in turn freed up General Fund dollars to support other services outside of K-14 education.
  • Boosted rainy day fund deposits and debt repayment. Prop. 2, approved by voters in 2014, requires the state to set aside at least 1.5 percent of General Fund revenues each year to both build up the state budget reserve and pay down budgetary debt. By increasing state revenues, Prop. 30 helped to boost deposits into the state’s rainy day fund and payments that reduce state debts. In 2016-17, for example, the state set aside $2.6 billion for Prop. 2 requirements and made an additional $2 billion deposit into the rainy day fund. These contributions would likely have been smaller in the absence of Prop. 30.

Proposition 30 Revenues Are Significant

Prop. 30 raises a significant amount of revenue. In 2016-17, Prop. 30 is projected to raise $7.7 billion — nearly equal to General Fund spending in the 2016-17 budget for the California State University (CSU), University of California (UC), and college financial aid combined ($7.9 billion) (Figure 7).

Prop 30 Fig 7

Alternatively, for more context on how much $7.7 billion represents, funding for key services and supports for seniors and people with disabilities is about $9.6 billion in the 2016-17 budget. This figure reflects combined General Fund support for the Supplemental Security Income/State Supplementary Payment (SSI/SSP) Program, which helps low-income seniors and people with disabilities to pay for rent, food, and other necessities; the In-Home Supportive Services (IHSS) Program, which helps low-income seniors and people with disabilities safely remain in their own homes rather than having to rely on more costly out-of-home care; and the Department of Developmental Services, which provides services and supports to people with developmental disabilities.

Conclusion

Prop. 30 helped California to begin reinvesting in its people and communities after the cuts made during and following the Great Recession. The looming loss of Prop. 30 revenues means California policymakers and voters must figure out how to fill the gap or face difficult choices about which public services and systems to prioritize and which to reduce or eliminate.

One initiative on the November 2016 ballot, Prop. 55, would maintain Prop. 30’s PIT rate increases beyond their scheduled expiration in 2018. In the forthcoming second part of this Budget Center series of briefs, we will discuss what Prop. 55 would do and what it would mean for the state.

Ballot Propositions
Taxes & Revenue

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