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Californians Could Expand Property Tax Breaks Under Proposition 5

This report focuses on Proposition 5, which appeared on the 2018 general election ballot.

September 2018 | By Sara Kimberlin, Jonathan Kaplan, and Chris Hoene

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Proposition 5, which will appear on the November 6, 2018 statewide ballot, would make significant changes to California’s local property tax system. Local property taxes provide resources that go to support a broad range of local services and systems across our state. Prop. 5 would expand special rules that allow certain property owners to lower their property taxes. The reduced property tax revenue under Prop. 5 over time would result in losses of approximately $1 billion annually for cities, counties, and special districts and similar reductions in state funding available for public services and supports in most years, other than for K-14 education (K-12 schools and community colleges). In addition, Prop. 5 would reduce local funding for some K-14 districts. The ultimate effect of Prop. 5 would be to expand tax breaks for older, wealthier California homeowners at the expense of other homeowners, including those who are younger and less affluent. Prop. 5 is sponsored by the California Association of Realtors and supported by the Howard Jarvis Taxpayers Association. This Issue Brief provides an overview of the measure; discusses what it would mean for homeowners, housing supply and affordability, and funding for public services; and examines other policy issues the measure raises in order to help voters reach an informed decision.

What Would Proposition 5 Do?

Prop. 5 would amend both the state Constitution and state law to expand special rules for assessing certain property values that are the basis for calculating property taxes. Property taxes support services provided by local governments, such as cities, counties, special districts, and school districts. When local governments levy taxes on property owners, these taxes equal the taxable value of the property multiplied by a property tax rate. Prop. 13, approved by California voters in 1978, capped property tax rates at 1%, with limited exceptions, and replaced the practice of reassessing the taxable value of property each year at fair market value (what the property could sell for) with a system based on cost at acquisition (what the owner paid for the property).[1] Under Prop. 13, increases in the taxable value of property are limited to an annual inflation factor of no more than 2%, and property is only assessed at market value for tax purposes when it changes ownership.

In the 40 years since Prop. 13 passed, California voters have approved several ballot measures that apply special property tax rules (some of which are described in the following section) to certain types of property owners. Beginning on January 1, 2019, Prop. 5 would expand several of these special rules and apply them to:

  • Homes purchased or constructed by existing California homeowners who are age 55 or older or who are severely disabled.
  • Any property purchased or constructed to replace property substantially damaged or destroyed by a disaster.[2]
  • Any property purchased or constructed to replace “qualified contaminated property,” such as property that is no longer habitable or usable due to the presence of toxic or hazardous materials.[3]

Proposition 5 Would Expand Special Rules for Certain Homeowners

Currently, special rules allow California homeowners who are age 55 or older or who are severely disabled to transfer the taxable value of a home they sell to a new home within the same county, provided that the market value of the new home is the same or less than the market value of the home they sold.[4] California counties also may allow older or disabled homeowners to transfer the taxable value of homes sold in a different county to a home purchased in their county. Currently, 11 counties accept these inter-county transfers.[5] Older homeowners who transfer the taxable value of existing property to new homes purchased within or across counties may only do so once in their lifetime.[6] In most cases, these special rules mean that homeowners age 55 or older who purchase a new home pay less in property taxes than a younger person would pay for the same home, because its market value is often greater than the taxable value of the home sold by the older homeowner.

Prop. 5 would expand the special rules for California homeowners who are age 55 or older or who are severely disabled. Specifically, Prop. 5 would allow these homeowners to:

  • Purchase or construct a new home that is more expensive than the home they sell, but pay property taxes that are tied to the taxable value of the old home.
  • Purchase or construct a new home that is less expensive than the home they sell and reduce the taxable value of the new home below the taxable value of the old home.
  • Transfer the taxable property value under Prop. 5’s special rules anywhere in the state, regardless of whether the county where the new home is located currently allows such transfers.
  • Transfer the taxable property value under Prop. 5’s special rules to new homes an unlimited number of times, rather than just once per lifetime as under current law.

Proposition 5 Would Expand Special Rules for Any Owner of Contaminated Property or Property Destroyed by a Disaster

Under current law, special rules allow any owner of contaminated property or any owner of property that is substantially damaged or destroyed by a disaster to transfer its taxable value to a replacement property — regardless of whether this property is acquired or newly constructed — within the same county based on certain conditions. Owners of contaminated property may transfer its taxable value to a replacement property if the market value of the replacement property is the same or less than the market value of the contaminated property, assuming the property had not been contaminated.[7] Owners of property destroyed by a disaster may transfer its taxable value to a replacement property assuming the replacement property is comparable in size, utility, and function to the property it replaces and does not exceed 120% of the market value of the replaced property in its pre-damaged condition.[8]

Prop. 5 would expand the special rules for owners of contaminated property or property that is substantially damaged or destroyed by a disaster. Specifically, Prop. 5 would allow owners of contaminated property to purchase or build replacement property that is more expensive than the contaminated property, but pay property taxes that are tied to the taxable value of the contaminated property. Prop. 5 also would expand the special rules for owners of property destroyed by a disaster and allow them to transfer the taxable value of the destroyed property to any replacement property regardless of its size or value. Prop. 5 also would allow the assessment of the value of contaminated or destroyed property under its special rules to be transferred anywhere in the state regardless of whether the county where the new property is located allows such transfers from other counties.

Proposition 5 Would Provide Additional Tax Breaks for Eligible Properties

Prop. 5 would establish two formulas to calculate the taxable value of an eligible property. (As previously described, an eligible property is a new home purchased by an older or disabled homeowner or a property that replaces a contaminated property or property destroyed in a disaster.) Both formulas would tie the taxable value of an eligible property to the owner’s prior property.

The property tax formulas established by Prop. 5 would be based on three factors: the prior property’s market value (the price it sold for), the eligible property’s market value (what it was purchased for), and the prior property’s taxable value. One formula would apply when the market value of the eligible property is greater than the prior property, and the other formula would apply when the market value of the eligible property is less than the prior property.

Prop. 5 Would Establish a Formula That Reduces the Taxable Value of an Eligible Property if It Is More Expensive Than the Prior Property

If an eligible property is more expensive than the prior property, the taxable value of the eligible property would equal the difference between the eligible property’s market value and the prior property’s market value, added to the taxable value of the prior property.

Prop. 5 Would Establish a Formula That Reduces the Taxable Value of an Eligible Property Below the Taxable Value of the Prior Property if the Eligible Property Is Less Expensive Than the Prior Property

If an eligible property is less expensive than the prior property, the taxable value of the eligible property would equal the market value of the eligible property divided by the market value of the prior property, multiplied by the taxable value of the prior property.

What Would Proposition 5 Mean for Homeowners?

Proposition 5 Would Expand Tax Advantages for Older Homeowners

Under current law, special rules provide a tax break to California homeowners who are age 55 or older by allowing them to transfer the taxable value of a home they sell to a new home they purchase, but only if the market value of the new home is the same or less than the market value of the home they sold.[9] These rules usually provide a tax advantage for older homeowners, who pay less in property taxes than a younger person would pay for the same home. This is because the market value of the home that is purchased by the older homeowner is often much greater than the taxable value of the home that is sold.

Prop. 5 would expand this annual tax break in two ways. Prop. 5 would:

  • Increase the annual tax break for older homeowners who purchase homes that are worth the same or less than the market value of the home they sold. Under current law, an older Californian who sells a home that has a taxable value of $200,000 and purchases a new home for $450,000 pays $2,000 in property taxes ($200,000 x 1%) annually as long as the prior home sold for more than $450,000.[10] In comparison, people under the age of 55 would pay $4,500 in property taxes ($450,000 x 1%) annually for the same home. Prop. 5 would establish a new formula that would actually increase this $2,500 annual tax advantage for older homeowners. For example, under the new formula, an older Californian who sells a $500,000 home that has a taxable value of $200,000 and purchases a new home for $450,000 would pay $1,800 in property taxes annually, increasing the tax break under current law by $200 annually (see Figure 1).
  • Allow older homeowners to purchase a new home that is more expensive than the home they sell and tie the property taxes for the new home to the taxable value of the old home. For example, an older Californian who sells a $1.4 million home with a taxable value of $200,000 and purchases a new home for $1.5 million would only pay $3,000 in property taxes annually, a $12,000 tax advantage compared to someone under the age of 55 who would pay $15,000 in property taxes annually ($1,500,000 x 1%) for the same home (see Figure 2). In other words, in this example, the older homeowner could purchase a home with a value more than seven times larger than the taxable value of the current home, with only a relatively modest increase in property taxes.

The expansion of these tax breaks under Prop. 5 would provide even more substantial benefits to older homeowners who already, under current law, receive preferential treatment that allows them to pay far less in annual property taxes than younger homeowners.

Figure 1

Figure 2

Proposition 5’s Annual Tax Breaks Would Increase as the Market Value of a Prior Home Increases

Whether older homeowners purchase property that is more or less expensive than the market value of their prior home, the tax break provided by Prop. 5 would increase as the market value of the prior property increases. Using the prior example, under Prop. 5 an older Californian who sells a home that has a taxable value of $200,000 and purchases a new home for $450,000 would pay $1,800 in property taxes annually if they sold their prior home for $500,000. However, if the same homeowner sold their prior home for $1.4 million, they would pay less than $650 in property taxes annually (see Figure 1). Similarly, under Prop. 5, an older Californian who sells a $500,000 home with a taxable value of $200,000 and purchases a new home for $1.5 million would pay $12,000 in property taxes annually, whereas if the same homeowner sold their prior home for $1.4 million, they would pay $3,000 in property taxes annually (see Figure 2). As a result, Prop. 5 would most benefit Californians who have seen substantial increases in their home values, such as people from areas of the state where home values have increased rapidly relative to other areas and those who have owned their properties for longer periods of time.

Proposition 5 Would Provide Larger Tax Breaks for Older, Wealthier Californians Who Can Afford More Expensive Homes

The tax breaks Prop. 5 proposes for California homeowners who are age 55 or older would be larger for newly purchased homes that are more expensive than prior homes than they would be for newly purchased homes that are less expensive than prior homes. For example, under Prop. 5 an older Californian who sells a home with a market value of $500,000 and a taxable value of $200,000, and then purchases a new home for $450,000 would receive an annual tax break of $200 compared to current law (see Figure 1). By contrast, the annual tax break would be far larger — $3,000 — if the same Californian purchased a new home for $1.5 million (see Figure 2). As a result, Prop. 5 would provide larger tax breaks to wealthier Californians who are able to afford more expensive homes.

Proposition 5 Disadvantages Younger, Less Wealthy Homeowners

As noted in the sections above, Prop. 5 would expand tax advantages for older homeowners, allowing them to pay less in annual property taxes for a newly purchased home than younger homeowners would pay for the same home. These new tax advantages would be larger for older homeowners whose prior home has experienced the most substantial gains in value prior to being sold. The annual tax advantages would be larger for older, wealthier homeowners able to purchase more expensive homes. Prop. 5 also would remove limits on how many times eligible homeowners can transfer the taxable value of their home. In other words, eligible homeowners could carry forward the tax break to all future home purchases.

Younger, less wealthy homeowners, would also be adversely affected by a potential increase in home prices that could result from Prop. 5.[11] This is because the tax advantage provided to older, wealthier homeowners means that they would have more annual resources at their disposal to use in negotiating the purchase price of new homes. Using the earlier example, an older Californian who sells a $1.4 million home with a taxable value of $200,000 and purchases a new home for $1.5 million would pay only $3,000 in property taxes annually. Someone under the age of 55 would pay $15,000 in property taxes each year — a $12,000 annual tax advantage for the older homeowner. That annual tax advantage would likely be used in negotiating the purchase price of new homes, particularly in highly competitive housing markets, and could result in an increase in housing prices.

Prop. 5 would also reduce local property tax capacity, as noted in the section below on local government implications. As a result, local governments would necessarily rely more heavily upon younger and less wealthy homeowners to pay for local services, including the costs of infrastructure financed through local government general obligation bonds that are also tied to local property values.[12]

Characteristics of Eligible Homeowners Under Proposition 5

Homeowners who would be eligible for the special property tax rules under Prop. 5 include people age 55 or older as well as those with severe disabilities.[13] Of these two major eligible groups, older homeowner households make up by far the largest share. Statewide, about 4.1 million older or disabled homeowner households would be eligible under Prop. 5, of which 4.0 million are age-eligible (97.4%) and roughly 100,000 are eligible due to disability only (2.6%), according to a Budget Center analysis.[14]

In fact, a majority of California’s 7.0 million homeowner households (59.6%) would meet Prop. 5’s eligibility criteria. In a given year, however, only a small fraction of these eligible homeowners would be expected to sell their homes, buy new homes within California, and claim the new property tax reductions that would be allowed under Prop. 5.[15]

Homeowner households that would be eligible for special property tax rules proposed by Prop. 5 are relatively advantaged. Their median household income of $77,000 is 14.9% greater than the overall statewide median household income ($67,000). Moreover, eligible homeowner households headed by someone who is younger than the traditional retirement age — those with household heads under age 65 — have a median household income of nearly $100,000 ($98,900), meaning that about half have annual incomes greater than $100,000. These relatively high incomes translate into relatively low poverty rates, as well. While about 1 in 5 heads of household in California overall (19.0%) are in poverty based on the California Poverty Measure (CPM) — an improved poverty measure that accounts for housing costs — only about 1 in 9 homeowner household heads eligible under Prop. 5 (11.8%) are in poverty under the same measure.[16] In terms of sources of income, about 1 in 7 eligible homeowner households (15.0%) receive more than $15,000 in annual investment income. Moreover, only 11.6% of Prop. 5-eligible households depend on fixed retirement or disability payments from Social Security and/or Supplemental Security Income (SSI) for more than three-quarters of their total household income.

The characteristics of Prop. 5-eligible homeowner households contrast sharply with those of older renter households in California, who are much less economically secure. Renter households headed by individuals age 55 or older have a median income of only $32,900, roughly half the overall statewide median household income. Older renter households also have a much higher poverty rate, with 1 in 3 (33.3%) older renter household heads living in poverty based on the CPM (see Figure 3). They are much more likely to rely on fixed Social Security or SSI payments than Prop. 5-eligible homeowners, with more than 1 in 4 older renter households (27.3%) relying on Social Security and/or SSI for more than three-quarters of their household income, including 43.7% of renters with a head of household age 65 or older.

Figure 3

In terms of race and ethnicity, the homeowners eligible under Prop. 5 are primarily white. Nearly two-thirds (64.0%) of eligible household heads are white (and not Latino). In contrast, less than half of all California households (48.3%) are headed by someone who is non-Latino white, while the majority (51.7%) are headed by a person of color. Older renter households are largely similar to California households overall in terms of race and ethnicity.

The advantaged position of Prop. 5-eligible households is perhaps clearest, however, when examining their wealth in the form of the value of their homes. Most are long-term homeowners who have had the opportunity to accrue significant home equity as California’s housing prices have grown over time. About half of eligible homeowner households have lived in their homes for at least 20 years, during which time the median price of a single-family home in California has increased by 280%, or 1.8 times the rate of inflation, according to a Budget Center analysis of home price data from the California Association of Realtors. More than a quarter of eligible households (26.1%) have lived in their homes for at least 30 years.

In terms of the value of their homes, about half of eligible homeowner households (47.7%) own homes worth a half-million dollars or more. About 1 in 7 (13.9%) own homes worth $1,000,000 or more. Furthermore, nearly 4 in 10 eligible homeowners (38.8%) own their homes free and clear, with no mortgage, so that they stand to receive the full appreciated value of their homes if they sell. The typical home values of eligible homeowners vary by region, but home values are relatively high in the top two regions with the largest number of eligible homeowners: Los Angeles and the South Coast, and the San Francisco Bay Area (see Table 1).

Table 1

Because so many of the homeowners eligible under Prop. 5 have lived in their homes for many years, their property taxes tend to be significantly lower than the property taxes paid by younger homeowners who would not be eligible for special property tax rules under Prop. 5. This is because Prop. 13 (1978) caps the allowed increase in annual property taxes at a rate that is typically lower than the annual increase in a home’s market value, as described above. As a result, in 2016 the older and disabled homeowner households who would be eligible under Prop. 5 paid median property taxes of $2,950, equal to only about three-quarters of the median taxes paid by younger homeowners ($4,050).

In summary, taken as a whole the older and disabled homeowner households who would be eligible for special property tax rules under Prop. 5 have higher incomes and lower poverty rates than California households overall, and much higher incomes and lower poverty rates than older renter households. Prop. 5-eligible households are also more likely to be headed by white individuals and much less likely to be headed by people of color than California households overall. Most are long-term homeowners, and nearly half own homes worth a half-million dollars or more. At the same time, their current typical property tax payments are significantly lower than the typical property taxes paid by younger homeowners, who would not be eligible for the special tax advantages provided by Prop. 5.

Though Prop. 5-eligible homeowners as a group are relatively well-off economically, there are some older and disabled homeowners, and homeowners affected by unexpected disasters, with low fixed incomes who would be unable to pay higher property taxes out of their existing incomes if they moved. As a result, they may feel “stuck in place” in homes that are larger than they need or not as close to family or other supports as they would prefer. However, many of these homeowners could likely take advantage of existing special property tax rules for older and disabled homeowners and find suitable new homes of equal or lesser market value within the county where they currently live, or within one of the counties that allows for inter-county transfer of existing property taxes for older and disabled homeowners under current law (as described above). As a result, they could meet their housing needs without the new tax advantages that would be created by Prop. 5. Moreover, many of these homeowners have built up significant home equity over time, and could reasonably afford to pay higher property taxes by withdrawing some of their equity when selling their homes and using some of those funds each year to cover the cost of higher property taxes for their new homes.

For the small number of older, disabled, and disaster-affected homeowners who are truly “stuck in place” — those with low fixed incomes and limited home equity who cannot find a suitable new home where they can carry over their current property tax amounts within the geographic limits allowed by current law — more narrowly targeted policies could be developed that would help these homeowners specifically. Better targeted policy approaches, such as tax credits for homeowners who meet specific income and asset limits as well as criteria related to age, disability, and/or disaster, would allow for more efficient use of limited public resources, and would be preferable to Prop. 5, which offers tax breaks to many homeowners who do not need public financial assistance, at the expense of local and state government budgets and the key services they support. Alternatively, if the policy goal is to address the housing needs of older Californians with low or fixed incomes, focusing on older renter households would make much more sense than focusing on older homeowners, since older California renters, as a group, face much greater economic insecurity.

How Would Proposition 5 Affect Housing Mobility, Supply, and Affordability?

Many parts of California face a range of housing affordability challenges, including a lack of supply to meet the demand for housing, higher housing prices resulting from increased competition for available housing, and a lack of housing mobility because people are less able to afford changing homes and/or are unable to find available housing. How would extending tax breaks to older homeowners affect these forces?

As noted earlier, Prop. 5 could lead to an increase in home prices. [17] The annual tax advantage for older homeowners would likely be used in negotiating the purchase price of new homes. Because Prop. 5 changes existing law to allow older homeowners to base their property tax bill for a more expensive newly purchased home on their prior home, the effect on home prices might be particularly notable for already higher-priced markets. In addition, as noted earlier, the tax advantages from Prop. 5 will largely accrue to wealthier, older homeowners who can already afford to move.

In terms of housing supply and mobility, the Legislative Analyst’s Office (LAO) projects that the number of potential movers as a result of Prop. 5 could increase by “a few tens of thousands” and that there could be some effect on home building.[18] But, the potential impact would be small relative to the total number of homeowners in California and the demand for housing. California has 7 million homeowner households and the state Department of Housing and Community Development estimates that California needs 1.8 million new homes to meet demand by 2025.[19] If some increase in home building results from increased demand from Prop. 5-eligible homeowners, this additional supply would simply be meeting a corresponding increase in demand that is also due to Prop. 5 — in other words, Prop. 5 would do little to address the state’s current shortage of housing. In short, Prop. 5’s effects on housing supply and mobility would be marginal, and largely accrue to a set of homeowners in California who can already afford to move.

What Would Proposition 5 Mean for Public Services?

Proposition 5 Would Reduce Funding for Local Governments

Prop. 5 would reduce funding for local governments including cities, counties, and school districts. This is because the measure would reduce the taxes paid from people who would have moved anyway. The LAO notes that, at current, about 85,000 homeowners who are 55 and older move to different homes each year without receiving the tax break provided by Prop. 5, resulting in these homeowners paying higher property taxes.[20] Prop. 5 would reduce their property taxes and, therefore, reduce property tax revenue available to local governments. Prop. 5’s tax break would result in more people moving, with the number of movers increasing by “a few tens of thousands,” and could also have some effect on home prices and home building that would lead to more property tax revenue.[21] Since Prop. 5 would increase home sales it would also affect local property transfer taxes collected by cities and counties, likely in the tens of millions of dollars per year. The LAO analysis finds that the potential revenue losses from people who would have moved anyway are larger than the gains from higher home prices and home building. As a result, property tax revenues available to local governments would be reduced. In the first few years, the losses would be over $100 million per year for local governments and over $100 million per year for school districts, growing to approximately $1 billion annually for both over time.[22]

Reductions in local property tax revenue caused by Prop. 5 would decrease the amount of funding available for an array of local government services including schools, police, fire services, housing, infrastructure, and human services. The reduction in local property tax revenues would also lower local governments’ bonding capacity — the ability to issue bonds to finance local infrastructure projects.

What Would Proposition 5 Mean for Total K-14 Education Funding?

Prop. 5 would reduce the amount of annual property tax revenue available to K-12 school and community college districts by about $1 billion over time, according to the LAO.[23] In most years, however, the total amount of dollars provided to K-14 education statewide would not be affected by this reduction in local property tax revenue, due to provisions in California’s Constitution — added by Prop. 98 in 1988 — that guarantee K-14 education a minimum level of funding each year.

Under the Prop. 98 guarantee, two revenue sources together fulfill the state’s funding requirement for K-14 education: local property tax revenue and state General Fund dollars.[24] In most years, property tax revenue represents the first dollars applied toward meeting the Prop. 98 minimum guarantee, and the state’s General Fund fills the gap between the property tax revenue and the minimum funding level.[25] In such years, reductions to local property taxes under Prop. 5 would not affect the total amount of K-14 education funding statewide. This is because any reduction in property taxes would be offset by a corresponding increase in the amount of state General Fund dollars used to fulfill the Prop. 98 guarantee. In these years, the fiscal effects of extending property tax advantages to older homeowners under Prop. 5 would come at the expense of other vital state services that are supported with state General Fund dollars.

In certain other years, however, total K-14 education funding declines dollar for dollar with any reduction in property tax revenue. In these years, an alternative provision of Prop. 98 (known as “Test 1”) requires the state to provide K-12 schools and community colleges with a specific percentage of total General Fund revenue regardless of the amount of local property taxes that K-14 districts receive.[26] As a result, to the extent that Prop. 5 reduces local property tax revenue in Test 1 years, the total Prop. 98 funding level for K-14 education would fall because the state would not be required to spend General Fund dollars to make up the difference. Moreover, any reduction to local property tax revenue in a Test 1 year could affect calculations of the Prop. 98 guarantee in future years because the base for calculating the guarantee in most years is the prior-year Prop. 98 funding level.

Proposition 5 Would Reduce Funding for Some K-12 School and Community College Districts

While Prop. 5 would reduce local property taxes for K-14 education statewide, total annual revenue for most individual districts would not change. This is due to the difference between formulas in the state Constitution that determine the annual Prop. 98 funding guarantee for K-14 education and other formulas in state law that determine the amount of dollars allocated to individual K-12 school and community college districts. Annual revenue for a large majority of the state’s individual K-14 districts comes from a combination of sources that include local property taxes and the state budget. For these districts, reductions in local property taxes are backfilled by the state.[27] As a result, most California K-14 districts would not experience a change in their total revenue if Prop. 5 reduces the amount they receive from local property taxes.

In contrast, reductions in local property taxes under Prop. 5 would decrease funding for a small but significant share of K-12 and community college districts. Roughly 10% of California’s K-14 districts receive local property tax revenue beyond the amount of funding to which they are entitled based on formulas in state law.[28] The state does not backfill reductions in local property tax revenue for these so-called “excess tax” districts.[29] As a result, any decline in local property taxes caused by Prop. 5 would mean a dollar-for-dollar reduction in funding for K-12 school and community college “excess tax” districts.

What Would Proposition 5 Mean for the State Budget?

Prop. 5 would increase state spending to support K-14 education and, in turn, reduce the amount of General Fund dollars available for other state budget priorities. Over time, the LAO estimates that the measure would cause annual state spending for K-14 districts to increase by about $1 billion, though without raising the total amount of funds available to schools and community colleges.[30] This is because, as described above, Prop. 5 would reduce the amount of property tax revenue received by K-14 districts, which in most years would require the state General Fund to backfill the local property tax shortfall dollar-for-dollar up to the total funding level required by the Prop. 98 funding guarantee.[31] In these years, reductions in local property tax revenue caused by Prop. 5 would reduce funding available for programs other than K-14 education, such as health care, housing, human services, and higher education.

What Do Proponents Argue?

Proponents of Prop. 5, which is sponsored by the California Association of Realtors, include the Howard Jarvis Taxpayers Association, Californians for Disability Rights, Inc., and the California Senior Advocates League. Proponents argue that the measure “gives all seniors (55+) and severely disabled the right to move without penalty” and “empowers retirees living on fixed incomes.”[32] They state that “Prop. 5 helps Californians who want the opportunity to move,” “does not take funding away from public schools,” and “does not take funding away from public safety.”[33]

What Do Opponents Argue?

Opponents of Prop. 5 include the California State Association of Counties, Middle Class Taxpayers Association, National Housing Law Project, California Alliance for Retired Americans, and the League of Women Voters of California. Opponents argue that Prop. 5 will “further raise the cost of housing,” and “lead to hundreds of millions of dollars and potentially $1 billion in local revenue losses” and that it “gives a huge tax break to wealthy Californians.”[34] Opponents state that “Prop. 5 does nothing to help most low-income seniors but does help corporate real estate interests who are funding it.”[35]

Conclusion

Prop. 5 would make changes to California’s local property tax system by significantly expanding tax breaks for certain property owners. These tax breaks would provide advantages to older, wealthier homeowners at the expense of younger, less affluent homeowners and would do little to address the state’s current housing shortage. Voters should weigh Prop. 5’s tax breaks against annual revenue losses that would reduce funding available for local services and state programs. Prop. 5 would reduce annual funding for local governments by $1 billion over time, dollars that would no longer be available to support an array of local services including schools, police, fire services, housing, infrastructure, and human services. Another important consideration is the measure’s impact on the state budget. Prop. 5 in most years would reduce funding available to the state by $1 billion over time for key programs such as health care, housing, human services, and higher education.

Endnotes

[1] For a comprehensive discussion of Prop. 13, see California Budget & Policy Center, Proposition 13: Its Impact on California and Implications (April 1997).

[2] A property is considered substantially damaged or destroyed if the physical damage it sustains is more than 50% of its value immediately before the disaster. California Constitution, Article XIIIA, Section 2(f)(1).

[3] For a detailed definition of “qualified contaminated property,” see California Constitution, Article XIIIA, Section 2(i)(2).

[4] California Constitution, Article XIIIA, Section 2(a).

[5] The 11 counties that allow inter-county transfers are Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura. However, El Dorado County repealed its acceptance of inter-county transfers effective November 7, 2018.

[6] SB 1692 (Petris, Chapter 897 of 1996) created one exception to this one-time limit by allowing homeowners age 55 or older who transfer the taxable value of existing property to a new home to do so twice in a lifetime if they subsequently become disabled.

[7] California counties also may allow owners of contaminated property to transfer their taxable value from another county to a property that is acquired or newly constructed in their county.

[8] Property owners can still transfer the assessed value of a damaged or destroyed property to a replacement property that is greater than 120% of the market value of the destroyed property, but any amount over the 120% threshold is assessed at the full market value and added to the taxable value of the destroyed property.

[9] As noted above, these rules apply to homes purchased in the same county and in 11 California counties that allow older homeowners to transfer the taxable value of homes sold in a different county to a home purchased in their county.

[10] The taxable value of property typically increases each year based on an inflation adjustment that Prop. 13 limits to no more than 2% annually. This Issue Brief does not include annual inflation adjustments in calculations of annual property taxes in order to simplify the discussion.

[11] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[12] Office of the State Treasurer, California Bonds 101: A Citizen’s Guide to General Obligation Bonds (2016), p. 1.

[13] As noted earlier, owners of property that has been substantially damaged or destroyed by disaster or contamination would also be eligible for the special property tax rules under Prop. 5. However, these owners would likely make up a very small share of the total number of eligible property owners. For example, the 2017 Tubbs Fire in Napa and Sonoma counties — the most destructive in California history as of August 2018 — destroyed 5,636 structures, a tiny number compared to the 4.0 million households estimated to be eligible under Prop. 5 due to the age of the homeowner.

[14] Unless otherwise indicated, all statistics in this section are from a Budget Center analysis of US Census Bureau, American Community Survey data for 2016.

[15] The Legislative Analyst’s Office (LAO) notes that about 85,000 homeowners age 55 or older currently move to different homes each year without receiving a tax break, and estimates that the number moving might increase by “a few tens of thousands” if Prop. 5 were to pass. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, pp. 36-37.

[16] The California Poverty Measure (CPM) is a state-specific measure of poverty modeled on the US Census Bureau’s Supplemental Poverty Measure. The CPM provides a more accurate measure of economic hardship than the official federal poverty measure and is particularly appropriate to measure poverty for this analysis, because it accounts for local differences in the cost of housing and differences in housing costs across renters, homeowners with mortgages, and homeowners without mortgages, among other improvements. See https://inequality.stanford.edu/publications/research-reports/california-poverty-measure.

[17] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[18] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[19] Department of Housing and Community Development, California’s Housing Future: Challenges and Opportunities (February 2018), p. 5.

[20] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 36.

[21] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[22] The LAO’s long-term estimates reflect inflation-adjusted figures. Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 36.

[23] The LAO’s estimate reflects annual property tax losses adjusted for inflation. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[24] Prop. 98 states that K-14 education is guaranteed an annual funding level that is the greater of a fixed percentage of state General Fund revenues (Test 1) or the amount that K-12 schools and community colleges received in the prior year, adjusted for enrollment and changes in the state’s economy (Test 2 and Test 3). For an explanation of the Prop. 98 guarantee, see California Budget & Policy Center, School Finance in California and the Proposition 98 Guarantee (April 2006).

[25] In Test 2 and Test 3 years, the state is required to provide General Fund dollars equal to the funding level guaranteed under Prop. 98 less local property tax revenue provided to K-12 schools and community colleges.

[26] Test 1 has been operative five times since the Prop. 98 guarantee was established in 1988-89 and ties the minimum funding level for K-14 education to a percentage of General Fund revenue, which has ranged from 35% to 41%. For a description of the history of Prop. 98, see Legislative Analyst’s Office, A Historical Review of Proposition 98 (January 2017).

[27] Under current formulas in state law, reductions in local property taxes for individual K-14 districts are backfilled by the state even in Prop. 98 Test 1 years when reductions in overall statewide local property tax revenue cause the Prop. 98 guarantee to fall.

[28] In 2017-18, so-called “excess tax” districts, excluding county offices of education, comprised 10.6% of K-12 school districts and 9.7% of community college districts.

[29] Similarly, any boost to the amount of property taxes that “excess tax” districts receive results in a dollar-for-dollar increase in their total funding.

[30] The LAO’s estimate reflects annual state spending for K-14 education adjusted for inflation. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.

[31] As noted above, in Prop. 98 Test 2 and Test 3 years the state is required to provide General Fund dollars equal to the funding level guaranteed under Prop. 98 less local property tax revenue provided to K-12 schools and community colleges.

[32] “Argument in Favor of Proposition 5,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 38.

[33] “Rebuttal to Argument Against Proposition 5,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 39.

[34] “Argument Against Proposition 5,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 39.

[35] “Rebuttal to Argument in Favor of Proposition 5,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 38.

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The California Budget & Policy Center continued our Policy Perspectives Speakers Series with Key Statewide Measures on the November Ballot and What They Could Mean for Housing, Transportation, and Our Communities.

This half-day event in Los Angeles at the Joan Palevsky Center for the Future of Los Angeles looked at five important ballot measures: Prop. 1 (affordable housing bond), Prop. 2 (mental health dollars for homelessness), Prop. 5 (expanding local property tax breaks), Prop. 6 (curtailing transportation funding), and Prop. 10 (rent control).

View full webinar recording:

Click here to get the slide deck presented at the event.

Our analyses discussed at the event:

Proposition 2: Should California Sell Bonds Backed by County Mental Health Funds to Develop Supportive Housing for Homeless Residents With Mental Illness?

Proposition 5: Should Californians Expand Property Tax Breaks for Older, Wealthier Homeowners at the Expense of Other Homeowners and Public Services?

Proposition 6: Should Californians Eliminate Recently Enacted Funding for Road Repairs and Transportation Infrastructure?

Proposition 10: Should California Allow Cities to Apply Rent Control Policies to More Rental Housing?

 

This event included two sessions:

Part I: What These Measures Do and the Issues They Raise
The Budget Center team gave an overview of Propositions 1, 2, 5, 6, and 10 based on our analyses.

  • Chris Hoene, Executive Director, California Budget & Policy Center
  • Jonathan Kaplan, Senior Policy Analyst, California Budget & Policy Center
  • Sara Kimberlin, Senior Policy Analyst, California Budget & Policy Center

Part II: Panel Discussion and Q&A
An expert panel discussed the pros and cons of each proposition and why they matter for Los Angeles and our state.

  • Veronica Carrizales, Policy and Campaign Development Director, California Calls
  • Cathy Choi, Director of Programs, The Eisner Foundation
  • Shane Murphy Goldsmith, President/CEO, Liberty Hill Foundation
  • Pete White, Founder & Executive Director, Los Angeles Community Action Network (LA CAN)
  • Chris Hoene, Executive Director, California Budget & Policy Center

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Also, watch our video on Proposition 6.

Proposition 6, which will appear on the November 6, 2018 statewide ballot, would eliminate taxes and fees that California enacted in 2017 to fund transportation infrastructure and also would amend the state Constitution to require voter approval of any future fuel and vehicle-related tax and fee increases. Eliminating the new revenues enacted in 2017 would result in the loss of $5.1 billion annually for transportation infrastructure. Requiring voters to approve increases in fuel and vehicle-related taxes and fees would make it more difficult to fund transportation improvements. Moreover, any future increases in transportation funding could come at the expense of other vital public systems and supports, such as education, public safety, and health and human services. Prop. 6 qualified for the ballot with key support from members of California’s Republican congressional delegation; Republican gubernatorial candidate John Cox; and Carl DeMaio, chairman of Reform California. This Issue Brief provides an overview of the measure, discusses what it would mean for transportation and other public services, and examines other policy issues the measure raises in order to help voters reach an informed decision.

What Would Proposition 6 Do?

Prop. 6 would 1) eliminate transportation funding approved by the Legislature and Governor Brown as part of the Road Repair and Accountability Act of 2017 (also known as Senate Bill 1, or SB 1) and 2) amend the California Constitution to require the Legislature to submit any measure enacting taxes or fees on gas or diesel fuel, or related to the operation of a vehicle on public highways, to voters for approval.[1] Specifically, Prop. 6 would:

  • Eliminate recently enacted funding for roads, highways, and public transportation. Prop. 6 would reduce funding for highway and road maintenance/repair and transit programs by more than $5 billion annually by eliminating the fuel and vehicle-related taxes and fees established by SB 1.[2]
  • Require the Legislature to obtain voter approval of fuel and vehicle-related taxes. Prop. 6 would amend the California Constitution to require the Legislature to obtain voter approval of new or increased taxes on the sale, storage, use, or consumption of gasoline or diesel fuel, as well as for taxes paid for the privilege of operating a vehicle on public highways. The Legislative Analyst’s Office (LAO) notes that requiring voter approval would make it more difficult to enact fuel and vehicle-related taxes, potentially resulting in less revenue for transportation purposes in the future. The amount by which revenues would be reduced is unknown, as it would depend upon future actions of the Legislature and voters.[3]

What Did Last Year’s Transportation Package (SB 1) Do?

Governor Brown and the Legislature enacted SB 1, the Road Repair and Accountability Act of 2017, in April 2017, allocating more than $5 billion per year for transportation infrastructure improvements.[4] This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, and projects to improve conditions for pedestrians and bicyclists as well as to facilitate the movement of goods. The revenue comes from both higher fuel taxes and new vehicle-related fees, with a key component being the increase to the state’s base excise tax on gasoline (the “gas tax”).[5] Prior to being raised in 2017, this tax had been frozen since 1994, with the result that revenues from the gas tax were unable to keep up with demands for transportation improvements.

In total, SB 1 seeks to address billions of dollars in deferred maintenance by restoring the purchasing power of the gas tax and boosting other fuel taxes and vehicle-related fees. The transportation package is projected to generate:

  • $2.5 billion per year from increased state taxes on gasoline, primarily from a 12-cent per gallon increase in the state’s base gas tax, which took effect on November 1, 2017.
  • $1 billion per year from a 20-cent increase in the state’s excise tax on diesel fuel and a 4 percentage point increase in the diesel fuel sales tax, both of which took effect on November 1, 2017.
  • $1.7 billion per year from a new annual transportation improvement fee, which took effect on January 1, 2018. This fee ranges from $25 to $175 per vehicle based on the value of the vehicle. For instance, a vehicle valued at less than $5,000 would incur a fee of $25, while a vehicle valued at $60,000 or more would incur a $175 fee.
  • $19 million per year from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.

These taxes and fees will be annually adjusted for inflation to prevent them from losing value over time. The transportation improvement fee will be adjusted starting on January 1, 2020; the gas and diesel fuel excise taxes will be adjusted starting on July 1, 2020; and the zero-emission vehicle fee will be adjusted starting on January 1, 2021.

SB 1’s initial allocations are already reflected in the state budget. For example, in its first (partial) year of implementation, the state budget for 2017-18 (the fiscal year that ended on June 30, 2018) allocated over $2.8 billion for SB 1 transportation improvements, with half going to state projects and half to local projects. The 2018-19 state budget allocates $4.6 billion for SB 1 transportation improvements, with half going to state projects and half to local projects.[6] By 2020, when all of SB 1’s taxes and fees are fully in effect and the inflation adjustments begin, the state expects the annual allocation to be $5.1 billion, split evenly between state and local projects.

The revenues raised by SB 1 support a variety of state highway, local road, transit, and other transportation improvements. Annual funding is allocated as follows:[7]

  • $1.9 billion per year for state highway and bridge repairs.
  • $1.8 billion per year for local road repairs.
  • $750 million per year for public transit and intercity rail.
  • $310 million per year to improve trade corridors.
  • $250 million per year to reduce congestion on major commute corridors.
  • $100 million per year for bicycle and pedestrian projects to better link travelers to transit facilities.
  • $170 million per year for a range of smaller programs, including freeway service patrols, local planning grants, university transportation research, and parks and agricultural programs.

What Would Passage of Proposition 6 Mean for Transportation and Other Public Services?

If California voters approve Prop. 6, the implications for public services would include:

  • Reduced funding for road, highway, and transit improvements. In the current state fiscal year (2018-19), Prop. 6 would eliminate $2.4 billion in transportation funding. By 2020-21, Prop. 6 would mean a reduction of $5.1 billion annually in funding for road and transit improvements.[8]
  • Decreased ability to raise state revenues for transportation infrastructure in the future. Prop. 6 would require the Legislature to obtain voter approval for all future increases in fuel and vehicle-related taxes and fees. While the actual revenue impact of this provision would depend on future legislative actions and the will of California voters, requiring voter approval would undoubtedly make it harder to raise revenues for transportation infrastructure.[9]
  • Increased pressure on state and local budgets to finance future public transportation improvements. The combination of reducing state funds for transportation infrastructure and making it more difficult to raise revenues for transportation projects in the future would put the state, as well as local governments, under increasing pressure to fund future transportation investments from their general funds, from which they must also pay for an array of other vital public systems and supports. Demands for transportation investments would, as a result, compete with needed investments in education, public safety, housing, and health and human services.
  • Reduced ability to keep up with critical public transportation needs in the future and reduced safety levels. The increased difficulty of raising dedicated state revenues for transportation, coupled with competition for state and local general fund support, would make it harder for state and local governments to keep up with the demand for transportation improvements in the future. California’s state and local governments already confront a large backlog of deferred maintenance (see more on this topic in the next section). The costs of maintenance and repairs rise the longer they are deferred due to increasing decay and the likelihood that facilities may need to be fully replaced. Putting off maintenance and repairs also increases the safety risk of the state’s transportation facilities — roads, highways, bridges, and transit facilities.
  • Fewer jobs and slower economic growth. Reduced transportation funding would mean fewer jobs and less economic activity in communities across California. The state estimates that there are more than 4,000 local transportation projects already receiving SB 1 funding, including projects in every county in the state. Those projects generate jobs and economic activity. For instance, the White House Council of Economic Advisors has estimated that every $1 billion in highway and transit investment supports 13,000 jobs.

Does California Need Additional Funding for Transportation?

California has a vast state and local transportation infrastructure that encompasses a state highway system with 50,000 lane-miles, 300,000 miles of locally owned roads, 25,000 bridges (13,000 state, 12,000 local), and 200 local transit agencies that operate bus, light rail, and subway systems.[10] The California Department of Finance notes that “[e]fficient operation of this vast network is vital to the state’s continued economic growth and also serves much of the country, with nearly 20 percent of the goods imported to the United States moving through California ports, highways, and railways. Bottlenecks in the state’s trade corridors constrain economic growth and reduce quality of life when Californians spend hundreds of hours in traffic.”[11]

Approximately $35 billion is spent each year on transportation in California, including $16 billion from local sources, $12 billion from state sources, and $7 billion from federal sources.[12] Local sources come from local sales taxes (which are closely restricted by state law), transit fares, and local government general funds that must also fund other vital programs and services such as public safety, housing, and health and human services. Federal funding primarily comes from federal fuel taxes, including the federal excise tax on gasoline. The federal gas tax is not automatically adjusted for inflation each year to account for the rising costs of goods and services. This means that Congress and the President must agree to raise the federal gas tax rate. However, federal policymakers have not increased this rate since 1993, leaving the federal Highway Trust Fund (the primary source of federal funding for state and local transportation) unable to keep pace with demands for new facilities or for maintaining and repairing existing highways, roads, bridges, and other facilities.[13]

State transportation funding primarily comes from fuel taxes and vehicle-related fees. Until the passage of SB 1, California had not increased its gas tax rate since 1994, leaving the state unable to keep up with demands for transportation improvements.[14] As a result, California has faced a significant deficit in transportation funding to pay for infrastructure improvements and deferred maintenance — a deficit that has been exacerbated by inadequate federal funding. In its 2017 “Infrastructure Report Card” assessing the state of the nation’s infrastructure, the American Society of Civil Engineers estimated that 50% of California’s public roads are in poor condition, that 5.5% (1,388) of the state’s bridges are structurally deficient, and that Californians pay $844 per driver annually for the costs of driving on poorly maintained roads.[15] As recently as the 2016-17 state budget, Governor Brown’s Administration estimated that California confronts $57 billion in total deferred maintenance needs related to transportation.[16]

The SB 1 transportation package aims to address the state’s transportation infrastructure needs by providing more than $5 billion in additional annual funding. As noted above, about half of this funding comes from the increase to the state’s base gas tax rate, which had been frozen since 1994. If the 1994 rate ($0.18 per gallon) had been adjusted each year to account for changes in the cost of living, it would have risen to $0.32 per gallon by 2018 — slightly higher than the current rate of $0.30 per gallon established by SB 1 (see chart below). In other words, SB 1 nearly restores the purchasing power of the gas tax to fund transportation improvements. Moreover, by annually adjusting all of the fuel and vehicle-related taxes and fees for inflation, SB 1 ensures that the state’s sources of funding for transportation infrastructure will be better able to keep up with future needs.

Is the Gas Tax a Fair Tax?

Whenever increases in the gas tax are considered, questions are raised about the fairness of the tax. There are different ways to assess the fairness of taxes, but most people agree that a fair tax system asks taxpayers to contribute to the cost of public services based on their ability to pay. When lower-income households spend a larger share of their budgets on taxes, such as for transportation, than do higher-income households, those taxes are considered to be regressive. Conversely, taxes that impose a relatively greater cost on higher-income households are considered to be progressive.[17] In this respect, gas taxes are often thought to be regressive because all households pay the same rate regardless of their income.

However, it is important to put the gas tax in the broader context of overall funding for the transportation package. State leaders structured the transportation improvement fee on vehicles — another key piece of the package’s revenue mix — so that it is based more on people’s ability to pay, with the fee increasing relative to the value of the vehicle.

Moreover, the critique that the gas tax has a greater impact on low-income households would be more concerning if this tax were chosen over other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, as outlined above, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that households and businesses pay to use highways, roads, transit facilities, ports, airports, and so on. While usage-based taxes and fees may be mostly regressive, they can be considered fair, to a degree, in that they are paid as the cost of using the service. Even alternative transportation funding options — toll roads and fees based on vehicle miles traveled, for instance — raise revenues based on people’s use of highways and roads, and not with regard to users’ incomes. Another potential alternative, the carbon tax — a tax imposed on the burning of carbon-based fuels such as coal, oil, and gas — would still generate revenues based on the demand for, and use of, those fuels.

Another option would be to fund transportation improvements from the state’s General Fund, or through general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because most state General Fund revenues come from California’s progressive income tax. However, as noted above, relying on the state General Fund would put transportation investments in competition with other vital public systems and supports for limited state funding.

Usage-based taxes and fees also make sense as a source of transportation funding because they can be structured in ways that meet other policy goals. For instance, because driving creates emissions that harm the environment, taxes and fees can be designed to encourage transit use and alternative forms of transportation.

Concerns about how particular taxes affect lower-income individuals can be addressed by providing offsets. For instance, California could expand its state Earned Income Tax Credit (the CalEITC) — a refundable credit for low-income working Californians — as a means of offsetting increased gas costs.[18] The Institute for Taxation and Economic Policy recommends that states modernize their gas taxes by increasing gas tax rates to reverse long-term declines (relative to inflation), structuring gas taxes so that their rates keep up with rising costs, and creating or enhancing tax credits, like the EITC, for low-income families to offset the impact of gas tax increases.[19]

Are SB 1 Revenues Required to Be Spent on Transportation Improvements?

One of the questions raised about the SB 1 transportation package is whether the funds are assured to go toward transportation improvements. In fact, SB 1 dedicates approximately two-thirds of its revenues to highway and road repairs and the remainder to other transportation improvements, such as public transit, according to the LAO.[20] In addition, the SB 1 transportation funding package included a set of accountability provisions designed to ensure that the revenues are spent as intended.[21] Among these was a constitutional amendment on the June 2018 statewide ballot (Prop. 69, approved by 4 in 5 voters) that prevents SB 1 funds from being used for anything other than specified transportation purposes.[22]

What Do Proponents Argue?

Proponents of Prop. 6, including Republican gubernatorial candidate John Cox, the Howard Jarvis Taxpayers Association, and the National Federation of Independent Business, argue that the measure would “immediately lower the price” of gasoline and that much of the funds from state fuel and vehicle-related taxes and fees are “used for programs other than streets, roads and highways.”[23]

What Do Opponents Argue?

Opponents of Prop. 6, including the League of California Cities, the California State Association of Counties, associations representing first responders and public safety personnel, and the California Chamber of Commerce, argue that Prop. 6 “eliminates funding for more than 6,500 road safety and transportation improvement projects,” “threatens public safety,” and “eliminates thousands of jobs and hurts our economy.”[24]

Conclusion

Prop. 6 would eliminate recently enacted funding for transportation infrastructure by repealing certain fuel and vehicle-related taxes and fees. The measure would also amend the state Constitution to require the Legislature to obtain voter approval of any future increases in fuel and vehicle-related taxes and fees. The fiscal impact of Prop. 6 would be to eliminate $5.1 billion in annual revenues used to fund highway and road maintenance and repairs, transit, and other transportation programs. Requiring voters to approve future fuel and vehicle-related taxes and fees would make it more difficult to fund transportation infrastructure improvements in the future.

Prop. 6 presents California voters with a choice as to whether they are willing to support continued investments in California’s transportation infrastructure. Approving Prop. 6 would undo recent increases in fuel and vehicle-related taxes and fees and significantly decrease funding available for transportation infrastructure. Rejecting Prop. 6 would allow California to continue to invest in highways, roads, bridges, transit, and other transportation improvements.

Endnotes

[1] Secretary of State’s Office, California General Election Tuesday November 6, 2018: Text of Proposed Laws, downloaded from https://vig.cdn.sos.ca.gov/2018/general/pdf/topl.pdf on August 21, 2018. See also Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 40.

[2] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.

[3] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.

[4] For an overview of SB 1, see Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017).

[5] In addition to the “base” excise tax, the state has a separate excise tax on gasoline known as the “swap” excise tax. For a description of the swap excise tax, see Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017), pp. 2-3.

[6] Department of Finance, California State Budget 2018-19 (June 2018), p. 84, downloaded from http://www.ebudget.ca.gov/2018-19/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf on August 21, 2018.

[7] For an overview of how SB 1 funding is generated and allocated, see the Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017).

[8] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.

[9] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.

[10] Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017), p. 1.

[11] Department of Finance, California State Budget 2018-19 (June 2018), p. 81, downloaded from http://www.ebudget.ca.gov/2018-19/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf on August 21, 2018.

[12] For a discussion of transportation infrastructure funding in California see Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 40.

[13] Department of Finance, California State Budget 2018-19 (June 2018), p. 82, downloaded from http://www.ebudget.ca.gov/2018-19/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf on August 21, 2018.

[14] Department of Finance, California State Budget 2018-19 (June 2018), pp. 82-83, downloaded from http://www.ebudget.ca.gov/2018-19/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf on August 21, 2018.

[15] American Society of Civil Engineers, 2017 Infrastructure Report Card: Infrastructure in California, downloaded from https://www.infrastructurereportcard.org/state-item/california/ on August 21, 2018.

[16] For a discussion of California’s deferred maintenance see Legislative Analyst’s Office, The 2016-17 Budget: Governor’s General Fund Deferred Maintenance Proposal (February 12, 2016), p. 2.

[17] For a discussion of California’s tax system, including state and local sales taxes and other sources of revenue, see Jean Ross, Alissa Anderson, and Samar Lichtenstein, Principles and Policy: A Guide to California’s Tax System (California Budget & Policy Center: April 2013).

[18] For an overview of California’s EITC see Alissa Anderson, How Much Do Working Families and Individuals Benefit From the CalEITC? (California Budget & Policy Center: February 2018).

[19] Institute for Taxation and Economic Policy, Building a Better Gas Tax: How to Fix One of State Government’s Least Sustainable Revenue Sources (December 2011).

[20] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, pp. 40-41.

[21] For an overview of the accountability provisions in SB 1 see Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017), p. 6 and pp. 8-9.

[22] Proposition 69 was approved on June 5, 2018 (81% yes, 19% no). See Secretary of State’s Office, Statewide Direct Primary Election – Statement of the Vote, June 5, 2018: State Ballot Measures (Propositions 68-72) by County, downloaded from https://elections.cdn.sos.ca.gov/sov/2018-primary/sov/132-ballot-measures.pdf on August 22, 2018.

[23] “Argument in Favor of Proposition 6,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 42. See also “Rebuttal to Argument Against Proposition 6,” p. 43.

[24] “Argument Against Proposition 6,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 43. See also “Rebuttal to Argument in Favor of Proposition 6,” p. 42.

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For the Center on Budget and Policy Priorities’ annual state policy conference, IMPACT 2017: Building Power, Advancing Equity, Executive Director Chris Hoene delivered a presentation for: “Taking a Page Out of a Better Book: How to Make the Case for Public Investment over Tax Cuts.”

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The 2017-18 state budget package negotiated by Governor Brown and legislative leaders resolves a months-long disagreement over how to spend new Proposition 56 tobacco-tax revenues that go to Medi-Cal, which provides health coverage for more than 13 million Californians. Approved by voters last November, Prop. 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases, which took effect on April 1, will generate nearly $1.3 billion in new funding for Medi-Cal in 2017-18, according to state projections.

At the moment, the Prop. 56 compromise is included in two bills: Assembly Bill 120 and Senate Bill 105. The Legislature will approve — likely later today — one of these bills as part of the state’s overall spending plan for the 2017-18 fiscal year, which begins on July 1. The Prop. 56 compromise includes the following elements:

  • Of the $1.3 billion in Prop. 56 revenues that are projected to flow to Medi-Cal in 2017-18, up to $546 million could go to doctors, dentists, and certain other Medi-Cal providers as “supplemental payments.” These payments would be divided among five groups of providers: up to $325 million for physicians; up to $140 million for dentists; up to $50 million for women’s health providers; up to $27 million for providers serving people with developmental disabilities; and up to $4 million for providers caring for people with HIV/AIDS. This use of Prop. 56 revenues — which lawmakers promoted, but the Governor initially resisted — reflects the measure’s requirement that the tobacco-tax dollars directed to Medi-Cal be used “to increase funding for the existing [program]…by providing improved payments for all healthcare, treatment, and services.”
  • The state Department of Health Care Services (DHCS) will determine the rules for allocating these supplemental payments. These rules must be posted on the DHCS website by July 31, 2017. The legislation does not require DHCS to solicit public input in developing the rules, although it seems likely that the Department will reach out to key stakeholders for feedback.
  • Prop. 56-funded supplemental payments will be disbursed only if:
  • California receives “all necessary federal approvals” in order to ensure that federal Medicaid matching funds will be available to the state. Supplemental payments would be independently allocated by provider type as federal approval is received for that category of providers. At a Senate Budget and Fiscal Review Committee hearing on June 13, Senator Holly Mitchell — the committee chair — indicated that the intent is to provide supplemental payments retroactive to July 1, 2017, even if federal approval were received much later in the fiscal year.
  • The federal government does not cut funding for Medi-Cal. Supplemental payments would not go into effect (or would be suspended) if the federal government reduces support for Medi-Cal below the level projected in the state budget. (The Governor’s Department of Finance would make this determination.) While President Trump and Republicans in Congress are attempting to make deep cuts to Medicaid, it’s unclear whether those cuts will be approved and, if they are, how soon they would take effect.

What comes next? On the state front, once the Prop. 56 compromise is signed into law, attention will turn to DHCS as it moves swiftly to develop the rules that will apply to supplemental payments. Medi-Cal provider payment increases that are funded with Prop. 56 dollars must be based — according to the measure — on criteria that include 1) ensuring timely access to care, 2) bolstering the quality of care, and 3) addressing provider shortages in various parts of the state. By seeking input from key stakeholders, DHCS can help to ensure that supplemental payments are structured in a way that will actually achieve these important goals, thereby improving Medi-Cal for the millions of children, seniors, people with disabilities, and other Californians who rely on it.

At the same time, however, anyone who cares about the future of Medi-Cal, and health care in our state in general, will be keeping an eye on federal deliberations and the actions of California’s congressional delegation. If President Trump and Republicans in Congress succeed in scaling back federal support for Medicaid, California would lose billions of dollars that fund Medi-Cal each year. This massive cost-shift would force state policymakers to make difficult choices regarding Medi-Cal coverage and benefits — and would almost certainly undo any progress on provider payments afforded by Prop. 56 revenues.

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Spending on K-12 schools is one of the most critical public investments we make. California voters’ approval of Proposition 30 in November 2012 has provided more dollars for the state to support schools and helped the state gain on the rest of the US in K-12 spending per student.

  • In 2012-13, the gap between California’s spending per student and the rest of the US had grown to its widest point. The drop in state revenue due to the Great Recession led to dramatic cuts to state spending on K-12 schools. As a result, the gap between California spending per K-12 student and the rest of the US grew to more than $2,600, the widest in at least 45 years, even after adjusting for inflation.
  • California’s spending per K-12 student has increased relative to the rest of the US since voters passed Prop. 30. California spent an estimated $2,000 more per K-12 student in 2015-16 than in 2012-13, inflation-adjusted. Largely as a result, the gap in spending per student between California and the rest of the US narrowed from more than $2,600 in 2012-13 to roughly $1,000 in 2015-16 (see chart).
  • Voter approval of Prop. 55 in November would extend a key component of Prop. 30 and provide significant funding for schools. Prop. 30 boosted state revenues by raising the state sales tax rate by one-quarter cent through 2016 and personal income tax rates for very high-income Californians through 2018. Prop. 30 revenues will decline starting in the current fiscal year (2016-17) as the measure’s tax rate increases begin to expire. Voter approval of Prop. 55, which appears on the November 8, 2016 statewide ballot, would extend Prop. 30’s personal income tax rates on the wealthiest Californians, thereby maintaining a revenue source that has helped narrow the gap between California spending per K-12 student and the rest of the US.
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Endnotes are available in the PDF version of this Issue Brief.

Proposition 57, which will appear on the November 8, 2016 statewide ballot, would amend the California Constitution to give state officials new policy options for reducing incarceration. The measure also would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court. This Issue Brief provides an overview of this ballot measure as well as its potential impact on the state correctional system and the state budget. The California Budget & Policy Center neither supports nor opposes Prop. 57.

What Would Proposition 57 Do?

Prop. 57, “The Public Safety and Rehabilitation Act of 2016,” would amend the California Constitution to give state officials new flexibility to reduce the number of people incarcerated by the state. The measure would (1) create a new parole consideration process for people convicted of a nonviolent felony offense who are sentenced to state prison and (2) provide state corrections officials with new authority to award certain credits that reduce the length of state prison sentences. In addition, Prop. 57 would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court for prosecution.

Proposition 57 Would Create a New Parole Consideration Process for People Convicted of a Nonviolent Felony Offense

Under current state law, most people convicted of an offense that results in a state prison term receive either a determinate sentence or an indeterminate sentence.

  • A determinate sentence is a prison term with a specified release date. Once individuals have completed their sentence, they are automatically released to parole, meaning that they are supervised in the community for a set period by state parole agents or county probation officers.
  • An indeterminate sentence does not have a specified release date. Instead, individuals serve a life term with the possibility of parole. After serving a minimum required number of years, individuals go before the Board of Parole Hearings, which determines “if or when an offender can be returned to society.”

For each type of sentence, the length of the prison term handed down by a judge often reflects sentencing “enhancements” or alternative sentences that are required by state law. For example, under California’s “Three Strikes and You’re Out” law, a person with one prior conviction for a violent or serious felony who is convicted of any new felony — a “second-strike” offense — receives a prison term that is twice what it would otherwise be under state law. People with at least two prior “strike” convictions who are convicted of a new serious or violent felony — a “third-strike” offense — receive a life sentence with a minimum term of 25 years.

Prop. 57 would amend the state Constitution to create a new parole consideration process for people convicted of a “nonviolent felony offense” who are sentenced to state prison. An individual would be eligible for parole consideration “after completing the full term for his or her primary offense.” The measure defines “full term for the primary offense” as follows: “the longest term of imprisonment imposed by the court for any offense, excluding the imposition of an enhancement, consecutive sentence, or alternative sentence.” This new parole consideration process would apply to people serving determinate sentences as well as to some individuals serving indeterminate sentences. Prop. 57 would require the California Department of Corrections and Rehabilitation (CDCR) to adopt regulations implementing this provision and to certify that such regulations “protect and enhance public safety.”

Proposition 57 Would Give State Corrections Officials New Constitutional Authority to Award Sentencing Credits in Order to Reduce Prison Terms

Under current state law, certain incarcerated adults are eligible to earn sentencing credits to reduce their prison terms. For example, state law gives the CDCR the authority to award a specific amount of credits to individuals who exhibit good behavior and/or complete “approved rehabilitative programming,” such as academic coursework, vocational training, and substance use disorder treatment. In addition, state law limits the amount of credits that prisoners may earn, outlines circumstances under which individuals may lose or be denied credits, and prohibits some individuals — including those convicted of murder — from earning any credits at all.

Prop. 57 would amend the state Constitution to give the CDCR authority “to award credits earned for good behavior and approved rehabilitative or educational achievements.” This new authority would be in addition to any authority granted to the CDCR through state law. Prop. 57 would require the CDCR to adopt regulations implementing this provision and to certify that such regulations “protect and enhance public safety.”

Proposition 57 Would Require Youth to Have a Hearing in Juvenile Court Before They Could Be Transferred to Adult Court

Under current state law, youth ages 14 to 17 who are accused of certain crimes can be tried in adult court. In some circumstances, state law requires the juvenile to be tried as an adult. In other situations, prosecutors have the discretion to directly file charges against a youth in adult court. In the remaining cases, a juvenile court judge decides — if so requested by a prosecutor — whether a youth should be transferred to adult court.

Prop. 57 would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court for prosecution. As a result, under Prop. 57, “the only way a youth could be tried in adult court is if the juvenile court judge in the hearing decides to transfer the youth to adult court,” according to the Legislative Analyst’s Office (LAO). In addition, the measure would allow prosecutors to seek transfer hearings only for 16- and 17-year-olds accused of committing a felony, or for 14- and 15-year-olds accused of committing certain crimes outlined in state law, including murder, kidnapping, arson, and certain sex offenses.

Future Amendments to Proposition 57 Would Require Voter Approval in Some Circumstances

Both the statutory and the constitutional provisions of Prop. 57 could be amended:

  • Statutory provisions. The statutory provisions of Prop. 57 revise the process by which youth may be transferred to adult court. Changes to these provisions that “are consistent with and further the intent of” Prop. 57 could be approved in a bill passed by a majority vote of each house of the Legislature and signed by the Governor. The Legislature and the Governor could approve other types of changes to these provisions, but any such changes would also require voter approval.
  • Constitutional provisions. The constitutional provisions of Prop. 57 create a new parole consideration process and give state officials new authority to award sentencing credits. These provisions could be amended only by a subsequent vote of the people.

California Has Substantially Reduced Incarceration in Recent Years, But Significant Challenges Remain

In recent years, California has made significant progress in reducing the number of people involved with the state correctional system. The number of adults incarcerated by the state, which peaked at more than 173,600 in 2007, has declined to roughly 128,900, a reduction of more than one-quarter. This decrease resulted largely from criminal justice reforms adopted by state policymakers and by the voters in the years following a 2009 federal court order requiring California to reduce prison overcrowding to no more than 137.5 percent of the prison system’s capacity. These reforms were largely aimed at keeping people convicted of “lower-level” felonies out of state prisons, while also boosting opportunities for rehabilitation.

Despite this substantial decline in state-level incarceration, significant challenges remain. Specifically:

  • California’s prison system remains severely overcrowded. California currently houses more than 113,600 adults in 34 state prisons designed to hold a total of about 84,300 people.This means that the state prison system is operating at approximately 135 percent of capacity, which is just below the court-ordered prison population cap (137.5 percent of capacity). The state also houses about 10,800 people in “contract” facilities, including out-of-state private prisons. California contracts for bed space because the prison population cap prevents the CDCR from increasing the level of crowding in state prisons beyond the limit set by the court.
  • The number of adults incarcerated by the state is expected to increase modestly in the coming years, reaching a projected 132,070 by mid-2020. Even as the total number of adults in state custody has declined over the past few years, the number of adults “with relatively long sentences” has continued to grow. The CDCR projects that within the next year, the increase in the number of individuals with relatively long sentences “will outpace population reductions being achieved within the lower-level offender population.”
  • Spending on state corrections remains persistently high. The CDCR is slated to receive $10.5 billion from the state’s General Fund in the current fiscal year (2016-17) — the third consecutive year that state support for the CDCR will exceed $10 billion, after adjusting for inflation. The CDCR’s current share of total General Fund spending — 8.5 percent — is more than twice as high as its share was in 1980-81 (2.9 percent).

These facts suggest that additional reforms are needed in order to further decrease incarceration at the state level and substantially reduce the cost of the state correctional system.

Proposition 57 Would Likely Further Reduce the Number of People Incarcerated by the State

If approved by the voters, Prop. 57 would help to restore California’s momentum in reducing incarceration. By requiring juvenile court judges to decide whether a youth should be tried in adult court, Prop. 57 would likely reduce the number of juveniles who end up in the adult criminal justice system, thereby promoting better outcomes for youth who are sentenced for committing a crime. Moreover, the measure’s new rules regarding parole and sentencing credits could result in many prisoners being released on an accelerated timeline. Experts note that scaling back the length of prison terms is crucial to reducing correctional populations, and that doing so has little to no impact on either crime rates or recidivism. Yet, while Prop. 57 would allow prison terms to be reduced, it would not require state officials to take such a course of action. Therefore, the extent of any decrease in incarceration would depend on how state officials interpret and implement the measure.

Some People Convicted of Nonviolent Offenses Could Be Released From Prison More Quickly Due to the New Parole Consideration Process

Prop. 57 would require the state parole board to conduct parole consideration hearings for prisoners who were convicted of a nonviolent felony offense and who have completed the full term for their primary offense. In other words, individuals would be considered for release from prison prior to serving time for other offenses and/or for any sentencing enhancements that may have been added to their base term. This new parole consideration process would apply to roughly 30,000 current prisoners as well as to about 7,500 of the individuals who are expected to enter state prison each year, according to the LAO.

Yet, although the parole board would have to conduct potentially thousands of additional parole consideration hearings, board commissioners — who are appointed by the Governor — would not be required to grant early release to any state prisoners who would be affected by Prop. 57. Decisions about which prisoners to release presumably would adhere to the parole board’s current guidelines, under which commissioners determine if an individual poses “a current, unreasonable risk” of danger to the public. Still, it is likely that some people affected by Prop. 57 would be found to meet these guidelines and thus would be released from prison earlier than their full sentence requires.

Some People Could Be Released From Prison More Quickly Due to the CDCR’s New Authority to Award Sentencing Credits

Prop. 57 would give state corrections officials broad new discretion to award sentencing credits for good conduct and rehabilitative or educational achievements in order to reduce the amount of time that people spend in prison. The CDCR could award more credits than currently allowed and/or provide credits to prisoners who are otherwise prohibited from earning credits. For example:

  • State law generally allows eligible prisoners to earn one day of credit for each discipline-free day that they serve. Under Prop. 57, state corrections officials could — but would not have to — provide additional credits for each day of good behavior.
  • State law also allows eligible prisoners to earn credits for successfully completing rehabilitative programs. However, these “milestone” credits may reduce a prisoner’s sentence by no more than six weeks in a 12-month period. Under Prop. 57, state corrections officials could — but would not have to — lift this six-week limitation and allow individuals who earn sufficient milestone credits to further reduce their prison terms within a 12-month period.
  • State law prohibits some prisoners, including those convicted of specified violent offenses, from earning credits for completing rehabilitative programs. Under Prop. 57, the CDCR could — but would not be required to — allow these individuals to earn credits for participating in rehabilitative programs, thereby reducing the length of their terms and increasing the chances that they will be able to successfully integrate back into their communities when they are released.

Because the CDCR is part of the Governor’s administration, Governor Brown and his successors would ultimately determine whether, or by how much, to increase the amount of credits that state prisoners could earn for good conduct and/or for completing rehabilitative activities. If voters approve Prop. 57, Governor Brown could implement expansive new credit-earning opportunities aimed at promoting rehabilitation and substantially reducing the state prison population. Alternatively, he could take a more limited approach that only modestly increases credits beyond the levels already provided. Moreover, whatever decisions Governor Brown makes could be maintained, modified, or rescinded by subsequent governors.

Proposition 57 Would Likely Generate Annual State Savings

The various provisions of Prop. 57 are expected to result in state budget savings. The LAO projects that net state savings would likely be “in the tens of millions of dollars annually,” while also acknowledging that their estimates “are subject to significant uncertainty.” Most of these savings are attributed to the provisions of Prop. 57 that apply to adults in state prison: the new parole consideration process and the new authority for state corrections officials to award sentencing credits. However, it is not known how state officials would interpret and implement Prop. 57’s new options for reducing incarceration. Therefore, annual state savings could be higher or lower than the LAO projects.

What Do Proponents Argue?

Proponents of Prop. 57, including Governor Brown and the Chief Probation Officers of California, argue that the measure focuses “resources on keeping dangerous criminals behind bars, while rehabilitating juvenile and adult inmates and saving tens of millions of taxpayer dollars.” They further argue that “without a common sense, long-term solution, we will continue to waste billions and risk a court-ordered release of dangerous prisoners.”

What Do Opponents Argue?

Opponents of Prop. 57, including the San Francisco Police Officers Association and the California District Attorneys Association, argue that the measure will allow “state government bureaucrats to reduce many sentences for ‘good behavior,’ even for inmates convicted of murder, rape, child molestation, and human trafficking.” Prop. 57, they argue, “will likely result in higher crime rates as at least 16,000 dangerous criminals…would be eligible for early release.”

Conclusion

Prop. 57 would provide California officials with new policy tools to address ongoing overcrowding in state prisons. Under the measure, thousands of individuals who were convicted of a nonviolent felony offense would go before the state parole board each year to be considered for release from prison prior to serving their complete sentence. In addition, state corrections officials would gain broad new authority to award sentencing credits in order to reduce the amount of time that people spend in prison. Finally, Prop. 57 would require juvenile court judges to decide whether youth should be tried in adult court. This change would likely reduce the number of juveniles who end up in the adult criminal justice system, thereby promoting better outcomes for youth who are sentenced for committing a crime.

Prop. 57 would not reform California’s complex and often draconian Penal Code, which continues to overly rely on incarceration as the consequence for committing a crime, rather than promoting community-based interventions that could provide better avenues for rehabilitation. Consequently, the measure would not directly reduce the number of people who are sentenced to prison in the first place. However, Prop. 57 would provide new opportunities for state officials to mitigate the impact of California’s sentencing laws by accelerating the release of individuals who merit such consideration, particularly where doing so would promote rehabilitation, public safety, and the cost-effective use of limited public resources. Yet, while Prop. 57 would allow prison terms to be reduced, it would not require state officials to take such a course of action. Therefore, the extent of any decrease in incarceration would depend on how state officials interpret and implement the measure.

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