November 2017 | By Chris Hoene
Download Full PresentationFor 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.”
Join our email list!
The tax plan proposed by President Trump and Republican congressional leaders would among other provisions permanently repeal the federal estate tax, which affects only the very wealthiest Americans – those with estates valued in the top 0.2 percent. Eliminating the estate tax would reduce federal revenue at the same time that the President and Congress have proposed significant spending cuts that would harm many important public services and systems that improve the lives of individuals and families. Outright repeal of the estate tax would follow congressional actions that have eroded this tax over the past couple of decades. Since 2001, for example, Congress has cut the top rate for the estate tax from 55 percent to 40 percent, increased the size of estates that are exempt from the tax, and phased out the portion of the estate tax that is shared with states, a move that eliminated all estate tax revenue received by California.
To help shed light on what’s at stake with the proposed elimination of the federal estate tax, this post describes how this tax works, shows the very small share of Americans it affects, and discusses some fundamental concerns raised by its potential repeal.
The estate tax is levied on large accumulations of wealth that are transferred from the estate of a person who has died to the estate’s beneficiaries. The estate tax serves as a “back stop” to the income tax, ensuring that income that is not taxed during an individual’s lifetime, such as unearned capital gains, is taxed when it passes from one generation to the next.
The estate tax will raise an estimated $20 billion in 2017, according to the Tax Policy Center, and its repeal would reduce federal revenue by an estimated $240 billion over the next decade. While estate tax revenues are small in comparison to overall federal revenue, they provide funding for a range of essential public services and systems from health care to education to environmental protection. To put this in perspective: The estate tax will raise significantly more in a decade than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined, according to the Center on Budget and Policy Priorities. This is despite a decline in estate tax revenue since the late 1990s. For example, during the 10-year period from 1997 through 2006 the estate tax raised more than $300 billion, after adjusting for inflation. This is one-fourth more than the estate tax is projected to raise during the next decade.
In 2017, just 2 out of every 1,000 estates are estimated to owe any estate tax. This is one-tenth of the share of estates subject to the tax 20 years ago. In the late 1990s, more than 45,000 estates each year — around 2 percent of those who died — paid estate taxes, but that number is estimated to fall to 5,500 in 2017 (see chart below). This drop is due to a large increase in the size of estates that are exempt from tax. Congress increased the estate tax exemption from $650,000 per person ($1.3 million per couple) in 2001 to $5.49 million per person ($10.98 million per couple) in 2017. Moreover, large loopholes enable many estates to avoid taxes altogether. As a result, less than half of the estimated 11,300 estates that are expected to file an estate tax return will owe any taxes in 2017. And while estate tax opponents claim that the tax burdens small farms and businesses, just 80 of these entities are expected to pay any estate tax this year, according to Tax Policy Center estimates.
The federal government collects a much larger share of estate tax revenue from California than from any other state. Californians paid $3.9 billion in estate taxes — more than 20 percent of total federal estate tax revenue — in 2016, the most recent year for which IRS data are available. And more than 1 out of every 5 Americans who paid estate taxes last year resided in California.
Although the top estate tax rate is currently 40 percent, the Tax Policy Center estimates that in 2017 the average tax rate paid by the few estates subject to the tax will be less than half that amount (17.0 percent). Taxable estates worth between $5 million and $10 million will pay less than a 9 percent tax rate, on average, and those estates worth more than $20 million will pay an average estate tax rate of less than 20 percent. One reason for such a low tax rate is that estate taxes are levied only on the portion of an estate’s value that exceeds the exemption level. For example, the estate of a couple worth $12 million would owe taxes on only around $1 million, based upon the current $5.49 million exemption per person (nearly $11 million a couple). Moreover, policymakers have enacted generous deductions and other discounts that can shield a large portion of an estate’s remaining value from taxation.
The estate tax is the most progressive part of the US tax code because it affects only Americans who are most able to pay. As a result, the estate tax helps make the US tax system more equitable and fair. And the very wealthiest not only account for the largest share of the few Americans subject to the estate tax, but their estates account for the largest share of estate tax revenue. The top 10 percent of income earners account for two-thirds of all estates subject to tax and will pay 88 percent of all estate taxes in 2017, according to Tax Policy Center estimates. Further, the top one-tenth of 1 percent of income earners account for only 4 percent of taxable returns, but will pay $5.5 billion — more than one-quarter of all estimated estate tax revenue this year.
Repeal of the federal estate tax would provide a significant tax break to the very wealthiest Americans, including Californians, with this loss of revenue very likely paid for by cuts to vital services that help the less fortunate make ends meet and access greater opportunity. Although the estate tax affects only a small number of the very wealthy, it raises substantial revenue that supports key public systems and services. This makes the proposal to repeal the estate tax particularly unfair, as it comes at the same time that the President and Congress have proposed significant cuts to many of these important services. If Congress acts to eliminate the estate tax, less well-off taxpayers would have to make up for the lost revenue in order to help pay for these services, face reductions to these services, or bear the burden of increases in the national debt, which could eventually force cuts to health care, education, scientific research, and other vital programs.
Join our email list!
This post is the first in a California Budget & Policy Center series that will discuss the tax cuts proposed by President Trump and Republican congressional leaders and explore the implications for Californians and the nation.
Now that Republican leaders in Washington, DC, have moved on from their latest failed effort to repeal the Affordable Care Act, they have quickly turned their attention to a combination of tax cuts and deep spending reductions that together would have dire implications for many low- and middle-income people in California and across the nation. In September, the Trump Administration and leaders in the US House of Representatives and Senate unveiled their unified tax framework, which would provide significant tax cuts that predominantly benefit the wealthy.
Republican leaders are developing the full details of their tax plan in parallel with efforts to enact a budget for fiscal year 2018, and in order to offset the costs of tax cuts they are also seeking draconian cuts in spending on an array of critical programs and services. Congressional rules allow for a “fast track” process to pass tax cuts and certain spending reductions with a simple majority in the Senate (without needing any Democratic votes) — a process known as “reconciliation.” If GOP leaders pursue their proposed tax cuts, they will enact a massive redistribution of wealth that would be, in part, paid for through budget cuts to programs that help low- and middle-income families make ends meet and access greater economic opportunity.
Despite their stated goal of providing a tax cut for middle-class families, the latest GOP framework would provide the vast majority of its benefits to wealthier Americans and corporations. For instance, the current tax framework is most specific about repealing the estate tax; ending the Alternative Minimum Tax (AMT); cutting corporate tax rates; potentially lowering the highest income tax rates; and preserving tax preferences for mortgage interest — in short, a range of benefits that accrue disproportionately to wealthier households.
In contrast, the tax proposal’s benefits for working families are less explicit — and apparently far less substantial. Based on information released so far, the clearest proposals benefiting middle-class households are a doubling of the standard deduction and an unspecified increase in the Child Tax Credit, though the tax framework also includes some vague language about future “additional measures.” However, accounting for changes like the elimination of personal exemptions and an increase in the bottom marginal income tax rate for some filers, many low- and middle-income families could see little benefit, if any.
Though the President had promised that the rich “will not be gaining at all with this plan,” the numbers tell a different story. In fact, a recent analysis of the GOP tax package points to a vastly unfair distribution of its benefits. According to the nonpartisan Institute on Taxation and Economic Policy, the top 1 percent of households — a group whose annual incomes are at least $615,800 and average over $2 million — would receive over two-thirds of the tax cuts in 2018 (see chart below), an amount equivalent to 4.3 percent of this group’s pre-tax income. The bottom 60 percent of Americans, however, would receive 11.4 percent of the tax cuts, equal to a meager 0.7 percent of this group’s total income. What’s more, these Americans would be most likely to be affected by corresponding federal spending cuts that GOP leaders are proposing to offset the overall cost of the tax cuts.
In other words, the latest GOP tax plan is heavily skewed to benefiting the wealthiest households in the US, likely at the expense of many low- and middle-income households.
The regressive impacts of this tax framework may be even greater in some states. Here in California, an even larger share of the tax cuts — almost 82 percent — would go to just the top 1 percent of earners in 2018, with another 16.6 percent going to the next 4 percent, and the rest of the benefits spread across the remaining income levels (see chart below). The richest 1 percent of California earners — those making more than $864,900 a year — would receive an average tax cut of $90,160. In contrast, middle-income households — making between $47,200 and $75,500 a year — would receive a much smaller average tax cut of $470, and the lowest income households — those making less than $27,300 a year — would receive a tax cut of $120. For many of these low- and middle-income households the benefits of these marginal tax cuts would likely be offset by significant cuts to federal programs and services including health care, housing, food assistance, and job training assistance, among others.
The latest GOP plan would also come at a huge cost in lost revenues. Estimates of the resulting revenue loss vary from $2.2 trillion to $2.4 trillion over the next decade. While the plan purports to add $1.5 trillion to the federal debt over the next decade, yet-to-emerge details about the plan and likely compromises on some of the plan’s more controversial proposals (such as the elimination of the federal deduction for state and local taxes, widely known as the “SALT” deduction) could result in a much larger increase in federal debt.
The Trump Administration insists that the tax cuts will boost economic growth and pay for themselves, but analysts agree that this scenario is highly unlikely. Rather, in order to minimize the costs of the tax plan, the GOP would likely respond by attempting to further slash entitlement programs like the Supplemental Nutrition Assistance Program (SNAP), Medicaid, Medicare, and other parts of the federal budget that include funding for housing, job training, and other assistance. These cuts would likely have negative impacts on the economy by destabilizing economic conditions of millions of households who rely upon those programs to help make ends meet and to access greater economic opportunity.
The combination of GOP tax and budget proposals would be particularly harmful for many Californians and for the state of California.
In terms of budget cuts, the significant cuts to Medicaid and SNAP (Medi-Cal and CalFresh in California) would likely result in reduced or eliminated benefits for millions of Californians with low incomes — over 13 million (34.2 percent) who are enrolled in Medi-Cal and over 4 million (10.8 percent) who receive food assistance through CalFresh.
These cuts would also likely undermine California’s fiscal health, forcing state leaders to choose between destabilizing the state budget by trying to fill fiscal holes as a result of federal tax and budget cuts or, on the other hand, destabilizing vulnerable individuals and communities across the state by reducing benefits.
Some California taxpayers would also see significant increases in their tax bills. For instance, the majority of Californians earning $129,500 to $303,200 annually — which can actually be considered a “middle class” income in the many parts of California where costs of living are significantly higher than much of the country — would see a nearly $4,000 increase in their annual federal tax bills. This increase is largely the result of the repeal of the SALT deduction, mentioned earlier.
In short, the GOP tax and budget plans would increase the tax bills of some Californians, providing minimal tax cuts for many others, while reducing vital public assistance, all in pursuit of providing large tax cuts to the very wealthiest households and corporations.
Congress can still choose a more fiscally and economically responsible path. Instead of providing tax cuts that overwhelmingly go to the wealthiest households and corporations, cutting vital public programs and services, losing trillions of dollars in revenues, and adding significantly to the federal debt, Congress could seek to enact policies that move our nation in the right direction. Federal tax and budget policies should focus on making investments that enable our communities to thrive, help the most vulnerable, and broaden economic prosperity. Any federal tax cuts should be weighted toward those who need them most, and should be revenue-neutral, with lost revenues from tax cuts offset by other revenue increases (new taxes or closed loopholes) that are fairly distributed across the income spectrum.
It will be important to pay attention to which path our elected officials in Washington choose in the coming weeks and months. Their actions may mean that Californians would face the prospect of holding their congressional representatives accountable for decisions that would disproportionately — and negatively — impact our state.
Join our email list!
For the Bay Area Asset Funders Network’s “Public Policy Updates and the Implications on Asset Building for Low-Income Families,” Executive Director Chris Hoene delivered his presentation “The Implications of Federal Budget & Tax Proposals for California.”
Join our email list!
California’s 2017-18 budget agreement included a major advance for working families who struggle to get by on low incomes. A “trailer bill” included in the budget package significantly expands eligibility for California’s Earned Income Tax Credit, the CalEITC — a refundable state tax credit that helps people who earn little from their jobs to pay for basic necessities.[1] Specifically, this bill 1) allows previously ineligible self-employed workers to qualify for the CalEITC and 2) raises the credit’s income eligibility limits so that workers higher up the income scale can qualify for it. These changes could extend the credit to well over 1 million additional low-income working families beginning in tax year 2017.[2] This represents a significant expansion of the CalEITC given that around half a million families might have been eligible for it prior to the expansion and that roughly 360,000 have annually claimed the credit since it was established in 2015.[3]
This report provides an in-depth look at what the expanded CalEITC means for low-earning Californians. It finds that the higher income limits will allow many more workers living in or near poverty, including single parents working full-time minimum wage jobs, to become eligible for the credit. However, these newly eligible workers will qualify for very modest credits — less than roughly $230 for those with children and under about $84 for those without children. Thus, while the budget agreement makes an important advance for working families by greatly expanding access to the CalEITC, state policymakers could further strengthen this critical tax credit by increasing the benefit these newly eligible workers can receive in future years.
Prior to the expansion, the CalEITC was the only EITC in the nation that excluded many self-employed workers, such as small-business owners and independent contractors.[4] This exclusion undermined a fundamental purpose of the EITC: to encourage and reward work. The 2017-18 budget agreement ends this exclusion beginning in tax year 2017. As a result, all self-employed workers who meet all other requirements for the CalEITC will be able to benefit from the credit. This change better aligns California’s EITC with the federal EITC and ensures that the state credit incentivizes all types of paid work.
Prior to the expansion, many workers who struggled to get by were not eligible for the CalEITC because the income limits to qualify for the credit were extremely low. The budget agreement raises these limits in order to allow additional low-earning workers to qualify for the credit. For workers with qualifying children, the new income limit will be $22,300 beginning in tax year 2017 (Table 1). This is more than double the previous income limit for parents with one child and more than one-and-a-half times the previous limit for parents with two or more children. The budget agreement also more than doubles the income limit for workers without qualifying children, from about $6,700 in tax year 2016 to roughly $15,000 in tax year 2017.
The higher CalEITC income limits will allow more minimum wage workers to benefit from the credit. Prior to the expansion, many minimum wage workers earned too much to qualify for the credit, even though they earned too little to make ends meet given California’s high cost of living. For example, in tax year 2016, families with one child were not eligible for the CalEITC unless they earned less than about $10,000 a year, a salary that translates into working just 19 hours per week at the state minimum wage (Table 2).[5] Families with two or more children did not qualify for the credit unless they earned less than about $14,000 annually, equivalent to working 27 hours per week at the minimum wage. The CalEITC expansion will allow families to work up to 41 hours per week at the state minimum wage to benefit from the credit.[6] This means, for example, that the CalEITC will become available to single parents working full-time at the minimum wage (Figure 1).
For workers without qualifying children, the new CalEITC income limit will increase to $15,010. Since this is less than a full-time minimum wage salary, the credit will not be available to full-time minimum wage workers without qualifying children. Nevertheless, this higher threshold means that these workers will be able to work up to 27 hours per week at the minimum wage and still qualify for the credit, up from just 13 hours per week to qualify previously.[7]
Raising the income limits to qualify for the CalEITC will not only allow more minimum wage workers to benefit from the credit, but will also make the credit available to more workers living in or near poverty. Prior to the expansion, the CalEITC’s income limits fell well below the official federal poverty line. As a result, many workers living in poverty were not eligible for the credit. For example, single parents with one child had to earn less than about 62 percent of the poverty line to qualify for the credit. Beginning in tax year 2017, these parents can have incomes up to about 135 percent of the poverty line and still be eligible for the credit (Figure 2). Raising the income limits closer to or above the poverty line is important because many families with incomes this low struggle to afford basic expenses, particularly in high-cost areas of the state.
The size of the CalEITC for a particular family or individual depends on how much they earn and how many children they support. Specifically, the credit “phases in” (increases) for higher levels of earnings up to a certain maximum point, after which the credit “phases out” (decreases) for higher levels of earnings until it reaches $0. The budget agreement extends the CalEITC to workers higher up the income scale by phasing out the credit more slowly beginning at an income of $13,794 for workers with two qualifying children (Figure 3).[8] This is the income level at which these parents are estimated to qualify for a CalEITC of $250 in tax year 2017. For workers without qualifying children, the budget package phases out the CalEITC more gradually beginning at an income of $5,354 — the point at which these workers are estimated to qualify for a CalEITC of $100 in tax year 2017.
Most workers who previously qualified for the CalEITC will see no change in the size of the credit, while some will receive slightly larger credits. For example, there will be no change in the credit for parents with two qualifying children and earnings of up to $13,794 (Table 3). Those with incomes between $13,794 and $14,529 will qualify for slightly larger credits. For instance, a parent with two children and earnings of $14,000 will qualify for an estimated $244 from the CalEITC under the expansion, up from an estimated $180 if the credit had not been expanded. Workers with two children and incomes between $14,529 and about $22,300 will newly qualify for the CalEITC.
Workers who become eligible for the CalEITC because of the higher income limits will qualify for very modest credits. Those with qualifying children will be eligible for roughly $230 or less, depending on their earnings. For example, a worker with two children could qualify for about $214 if she earns $15,000 or $126 if she earns $18,000 (Figure 4). Workers without qualifying children who become eligible for the CalEITC under the expansion will be able to receive about $84 or less, depending on their earnings. For instance, these workers would be eligible for about $84 if they earn $7,000 annually or $52 if they earn $10,000 annually.
Viewed another way, families working a total of 30 hours per week in 2017 at the state minimum wage (earning an annual salary of $16,380) will be eligible for an estimated $115 from the CalEITC if they have one qualifying child, $174 if they have two qualifying children, or $176 if they have three or more qualifying children (Table 4).[9] If the CalEITC had not been expanded in this year’s budget agreement, these workers would not have qualified for the credit at all.
Creating the CalEITC was an important advance in how our state helps workers with low incomes to better afford basic necessities and move toward financial security. The 2017-18 budget agreement greatly strengthens this vital tax credit by extending it to well over 1 million additional low-income working families. Although many of the newly eligible workers will qualify for very modest credits, the budget deal lays the foundation for further strengthening the CalEITC, as state policymakers can build on these changes in coming years by increasing the size of the credit that newly eligible workers can receive.
[1] Senate Bill 106 (Committee on Budget and Fiscal Review, Chapter 96 of 2017).
[2] Institute on Taxation and Economic Policy (ITEP). ITEP’s estimate is subject to some uncertainty. This estimate is largely based on Internal Revenue Service (IRS) data on California tax filers who claim the federal EITC. However, only around 75 percent of Californians who are eligible for the federal EITC are estimated to actually claim the credit each year. This means that California’s federal EITC participation rate is implicitly assumed in ITEP’s estimate. In other words, this estimate may be understated to the extent that expanding the CalEITC encourages workers who qualify for the federal EITC, but who do not typically file their taxes, to file in order to benefit from the state credit. On the other hand, ITEP’s estimate could be overstated given that the CalEITC appears to be undersubscribed. ITEP estimates that 553,000 tax units could have claimed the CalEITC in 2016, but actual claims were around 360,000. This suggests that ITEP’s estimate of the number of families who could benefit from the expanded CalEITC could be too high if many workers who are eligible for the credit continue to miss out on it in coming years.
[3] It is not known exactly how many families are eligible for the CalEITC. Estimates prior to the expansion ranged from around 400,000 to 600,000. Soon after the credit was signed into law, the Franchise Tax Board estimated that roughly 600,000 families would likely be eligible for it. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data estimated that approximately 600,000 families would have been eligible for the CalEITC if it had been in place in tax year 2013. (Christopher Wimer, et al., Using Tax Policy to Address Economic Need: An Assessment of California’s New State EITC (The Stanford Center on Poverty and Inequality: December 2016).) A more recent Budget Center analysis of US Census Bureau data estimated that around 416,000 families might have been eligible for the credit in tax year 2015. Additionally, ITEP’s analysis of IRS data suggests that about 550,000 families were likely eligible in tax year 2016. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.)
[4] Prior to the expansion, families and individuals who had self-employment income in addition to “earned income” qualified for the CalEITC if their federal adjusted gross income (AGI) was below the income limit. (“Earned income” was defined as annual wages, salaries, tips, and other employee compensation subject to wage withholding pursuant to the state Unemployment Insurance Code. Federal AGI includes both earned income and self-employment income, as well as several other types of income.) For these tax filers, the size of the CalEITC was based on their “earned income” if their federal AGI was below the income level needed to qualify for the maximum CalEITC. In contrast, if their federal AGI was at or above this threshold, then the size of the CalEITC was based on either their “earned income” or their federal AGI, whichever resulted in a smaller credit. Prior to the expansion, self-employed workers who had no “earned income” were not eligible for the CalEITC. These workers will qualify for the CalEITC beginning in tax year 2017, as long as they meet all other requirements for the credit.
[5] Earnings refer to annual earnings for the entire family.
[6] This means that in a family with one working parent, that parent can work up to 41 hours per week and still qualify for the credit. Families with two married working parents who file joint tax returns could work a combined total of up to 41 hours per week at the minimum wage and still qualify for the credit.
[7] This means that single workers without qualifying children can work up to 27 hours per week at the minimum wage and still qualify for the credit, while married workers without qualifying children can work a combined total of up to 27 hours per week and still qualify for the credit. Most state EITCs base their credits on the same eligibility rules as the federal EITC, which means that all workers who qualify for the federal credit also qualify for the state credit. In contrast, prior to the expansion, the CalEITC was available to just a fraction of those who qualified for the federal EITC because the income limits to qualify for the state credit were extremely low. Beginning in tax year 2017, the new CalEITC income limit for workers without children will match the federal EITC threshold that applies to these workers (Table 1). As a result, all Californians without qualifying children who are eligible for the federal EITC will also be eligible for the CalEITC. The new CalEITC income limits for parents will also be closer to the federal EITC thresholds, which range from about $39,600 to about $48,300 for single parents, depending on the number of children they are supporting.
[8] For workers with three or more qualifying children, the credit begins to phase out more slowly at an income of $13,875 and for workers with one qualifying child, the credit begins to phase out more slowly at an income of $9,484. These income levels do not reflect the income levels specified in SB 106 due to errors in the bill. These income levels will be corrected in a subsequent bill later this fall. (Personal communication with the Department of Finance (DOF) on July 24, 2017.)
[9] Eligibility for the CalEITC is based on annual earnings for the tax filer (for unmarried workers) or the combined annual earnings of the tax filer and his or her spouse (for married couples filing taxes jointly). In other words, families will be eligible for an estimated CalEITC of $115 if they have one working parent who earns $16,380 or two married working parents who earn a combined total of $16,380.
Join our email list!
Senate Bill 562 (Lara and Atkins), which would establish a single-payer health care system with universal coverage in California, was approved by the state Senate in early June, but has stalled in the Assembly. Although it appears that SB 562 will not move forward in 2017, a single-payer proposal could be revived in 2018. This post is the first in a series examining key issues related to SB 562 and, more generally, to efforts to create a universal, single-payer health care system in California. Future posts in this series will examine estimates of how much a single-payer system could cost, proposals for raising the state revenues needed to fund such a system, and other issues.
As envisioned in SB 562, all Californians could enroll in a new “Healthy California” program that would provide a broad range of services, including health, dental, vision, mental health, chiropractic, and hospice care. Under this system, private health insurers and health care service plans generally would be prohibited from providing coverage for services available through Healthy California, and enrollees would pay no premiums, co-pays, or deductibles. Instead, the state — as the “single payer” — would fund the full array of services using both state and federal tax revenues.
Implementing the single-payer system envisioned in SB 562 would require state tax increases exceeding $100 billion, and possibly as high as $200 billion. SB 562 does not contain the state tax increases that would be needed to fully finance its proposed Healthy California program. Instead, the bill assumes that these tax increases would be approved at a later date. SB 562 also specifies that the Healthy California program would not be implemented until the necessary financing was in place.
The new state taxes needed to fund a single-payer health care system as envisioned in SB 562 could be raised in various ways. For example, the Legislature could pass a bill that increases taxes, which would require a supermajority (two-thirds) vote of each house as well as the Governor’s signature. Alternatively, single-payer proponents could use the initiative process to qualify a tax measure for the statewide ballot. A ballot initiative would require only a simple majority of California voters in order to pass.
As outlined in SB 562, state and federal revenues needed to finance the Healthy California program would be deposited into a new state special fund called the “Healthy California Trust Fund.” In other words, these revenues — including those raised by new state taxes — would not go into the General Fund, which contains state revenues that are not designated for a specific purpose.
Any effort to boost taxes in California must take into account certain provisions in the state Constitution that affect the state’s ability to raise and spend revenues. One of these provisions was discussed above: the two-thirds vote requirement for passing tax increases in the Legislature, which sets a high bar for raising taxes through legislation. Two other key constitutional provisions are:
In short, in the view of the Senate’s fiscal experts, lawmakers and the Governor could unilaterally create a single-payer system, but they could not implement such a system without asking the voters to resolve some fundamental issues.
The primary proponent of SB 562 is the California Nurses Association (CNA). In a rebuttal to a recent article on the politics of SB 562, the CNA makes the following assertion: “There are ways in the bill to address the constitutional issues posed by both Prop. 98 and the Gann Limit….[W]e are developing these legislative approaches.” In other words, the CNA implies that there is a strictly legislative solution to the issues raised by the Gann Limit and Prop. 98, and that voters don’t necessarily need to weigh in. The CNA does not explain how it reaches this conclusion, although the association indicates that it is consulting with “constitutional legal experts.”
In addition, former state Senator Sheila Kuehl — a longtime single-payer advocate — recently “rejected suggestions that lawmakers could not find creative ways to work within existing constitutional limits.” Kuehl is quoted as saying: “That theory won’t fly…I don’t think [the constitutional limits] would actually be a problem.”
In short, in the view of key single-payer advocates, the Legislature could not only create a single-payer system and raise the taxes needed to fund it, but could also as part of the same legislation address the constitutional constraints posed by the Gann Limit and Prop. 98 without seeking voter approval.
The short answer:
It’s very unlikely that single-payer advocates could address the obstacles posed by the nearly four-decade-old state spending limit without going to the voters.
The long answer:
The Gann Limit aims to “keep [inflation-adjusted] per capita government spending under the 1978-79 level,” according to the nonpartisan Legislative Analyst’s Office (LAO), which provides fiscal and policy advice to the Legislature. This spending limit applies to “appropriations from proceeds of taxes,” the LAO explains. “Essentially, this means that appropriations from tax levies are subject to the limit,” although several types of expenditures are exempt from the limit. These include, but are not limited to, appropriations for debt service or court-mandated costs as well as from certain gas tax revenues.
As noted above, implementing a single-payer system in California would require tax increases exceeding $100 billion, and possibly as high as $200 billion. These revenues would be considered “proceeds of taxes,” all of which would be used to fund (i.e., would be appropriated for) health care and related services through the new Healthy California program. Moreover, expenditures for a single-payer system would not be exempt from the Gann Limit as it is currently structured. Consequently, a tax increase of $100 billion or more would push state expenditures well beyond the Gann Limit threshold. (Currently, the state has only a few billion dollars in “room” under the limit.) Barring the discovery of a previously unidentified loophole, the only way to avoid exceeding the Gann Limit would be to exempt from that limit the new revenues intended to fund a single-payer system. This would require amending the state Constitution – something that only California voters could do.
The short answer:
In theory, the Legislature could pass — and the Governor could sign — a bill that raises taxes by $100 billion or more, with none of the new state revenues going to K-12 schools and community colleges via the Prop. 98 minimum funding guarantee. However, such an approach would leave the state vulnerable to legal challenges, and any resulting litigation would jeopardize some or all of the new state revenues needed to finance a single-payer system.
The long answer:
The state Constitution refers to “General Fund revenues” and “General Fund proceeds of taxes” in describing the calculations that help to determine K-14 education’s share of the state budget each year. In other words, special fund revenues are not explicitly mentioned as a factor in calculating the Prop. 98 minimum funding guarantee. This is a critical point: As noted above, SB 562 would deposit the tax revenues needed to support a single-payer system into a special fund, rather than into the state’s General Fund.
However, there is disagreement regarding the relationship between Prop. 98 and state tax revenues. There appear to be at least two competing schools of thought.
One school of thought suggests that state policymakers could — without violating Prop. 98 — raise taxes and deposit all of the revenues into a special fund without any of the new dollars going to K-14 education. This view is clearly expressed in a legal argument drafted in 2012 by the Brown Administration in response to a lawsuit filed by K-12 school officials. (This lawsuit was rendered moot by the passage of Prop. 30 in November 2012 and was therefore dismissed by an appellate court before being resolved.)
This lawsuit stemmed from the state’s decision to redirect a portion of sales tax revenues to counties in order to fund an array of services that were transferred — or “realigned”— to counties beginning in 2011. State policymakers shifted these sales tax revenues out of the General Fund and into a new special fund dedicated solely to the realigned programs. In doing so, the state excluded these revenues from the calculation of the Prop. 98 minimum funding guarantee.
The Administration’s argument in this case included the following assertions:
These are strong arguments, but they’re not the end of the story. There’s at least one other school of thought regarding the relationship between Prop. 98 and state revenues. This view holds that the term “General Fund,” as used in the state Constitution, should be understood to encompass a broader range of revenues than those that are deposited into the “General Fund” established by state law. This perspective appears to be based on a particular understanding of the intent of Prop. 98, one goal of which was to take “school financing out of politics,” according to the 1988 ballot argument. This view also seems to reflect concerns about the long-term funding prospects for K-14 education if the Legislature were to use its discretion to direct more and more revenues into special funds that are separate from the General Fund — and seemingly outside the purview of Prop. 98.
To some degree, this line of thinking was expressed by K-12 school officials in the 2012 lawsuit described above and surfaces from time to time in the Legislature. For example, this view is evident in the Senate Appropriations Committee analysis of SB 562, which declares that: “In the context of Proposition 98, the term ‘General Fund’ revenue refers to state tax revenues, not simply revenues that are deposited in the state’s General Fund. Any taxes raised to support [a single-payer system under SB 562] would be considered the proceeds of taxes and would be subject to the requirements of Proposition 98.”
Given these two competing interpretations, the state could be vulnerable to a lawsuit if policymakers raised taxes by $100 billion or more and deposited these revenues into a special fund, with none of these dollars going to K-14 education. Lawmakers could attempt to dissuade potential litigants by adding a so-called “poison pill” to the bill. Such a provision would trigger a severe consequence — such as automatically repealing the new taxes – if a court ultimately found the state’s use of the revenues to be in conflict with Prop. 98. The Legislature included Prop. 98-related poison pills in four bills in the late 1980s and early 1990s. For example, policymakers in 1991 raised the state sales tax rate by a half-cent and directed all of the revenues into a new special fund dedicated to counties. These revenues were — and continue to be — excluded from the Prop. 98 calculation. The bill included a poison pill that would end this tax increase “if a court ruled that the revenues counted toward” the Prop. 98 minimum funding guarantee, according to the LAO. In all four cases, “none of the consequences set forth in the poison pill provisions ultimately occurred,” the LAO notes.
So yes, there may be a way for single-payer advocates to address any constitutional obstacles posed by Prop. 98 solely through the legislative process, without going to the voters. However, this path would leave the state vulnerable to a lawsuit that could put at risk the tax revenues needed to fully finance a single-payer system in California.
In any state, efforts to create a single-payer health care system would encounter a number of policy, fiscal, and political challenges. In California, these inherent difficulties are magnified by the complex rules that voters have added to the state Constitution — rules that restrict state policymakers’ ability to increase revenues and expenditures as well as to prioritize how new tax dollars should be spent.
In the context of recent attempts to establish a single-payer system in California, there are two fundamental constitutional constraints: 1) the state spending limit known as the Gann Limit and 2) the Prop. 98 minimum funding guarantee for K-14 education. Some single-payer advocates have asserted that these obstacles could be overcome solely through the legislative process without consulting the voters. This is highly unlikely with respect to the Gann Limit, barring the discovery of some as-yet-unidentified loophole. The story is somewhat more complicated with respect to Prop. 98. In theory, state legislators and the Governor could raise taxes by $100 billion or more to support a single-payer system, with none of these revenues going to K-12 schools and community colleges. Yet, this approach would be highly vulnerable to legal challenges that would put at risk some or all of the new state revenues needed to finance a single-payer system.
Addressing these constitutional constraints without seeking voter approval would likely create an extremely shaky legal foundation for a new single-payer system. Even under the best of circumstances, implementing a single-payer model would be a highly complex undertaking. Restructuring California’s current health care system — which comprises one-seventh of the state’s economy — would involve many moving pieces and uncertainties, and the transition would likely need to be phased in over time. Unnecessarily exposing a single-payer system to litigation in its infancy would hamper efforts to ensure a smooth transition and could undercut the long-term success of this new, state-based health care financing model.
In short, rather than trying to devise a clever — and likely counterproductive — way to avoid going to the ballot, single-payer advocates would be well-advised to ask California voters to remove the key constitutional obstacles to the implementation of a single-payer system.
Join our email list!
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:
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.
Join our email list!
Does California need significant new investments in its transportation infrastructure? Given our state’s deteriorating highways, roads, bridges, and other transportation infrastructure, not to mention billions of dollars in deferred maintenance, the answer should clearly be “yes.”
Governor Brown and state legislative leaders agree. They recently enacted Senate Bill 1, the Road Repair and Accountability Act of 2017, allocating $54 billion over the next 10 years in a transportation package that is split equally between state and local investments. This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, improving conditions for pedestrians and bicyclists, and facilitating goods movement. The revenue to pay for these investments comes from a 12-cent increase in the state excise tax on gasoline (the “gas tax”), increased diesel fuel taxes, and new transportation improvement fees.
The new transportation package seeks to address billions of dollars in deferred maintenance and represents the culmination of deliberations that started in 2015, with an initial proposal from the Governor and a special legislative session on transportation funding that ran from June 2015 to December 2016.
While the overriding question should be whether California needs these transportation investments and improvements, much of the attention leading up to and following the enactment of the package has focused on questions about the fairness of the gas tax, whether the funds actually will be spent on transportation improvements, and whether the package was hastily passed without sufficient debate. After briefly recapping what the package actually includes — on both the spending and revenue sides — we examine each of these questions, in part by adding some much-needed context.
The funds from the $54 billion package will be split equally between state and local transportation programs.
Major state-level allocations include:
Major local-level allocations include:
The package generates $54 billion in new revenues over 10 years from a series of tax and fee increases:
In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting in 2020-21. Further, the base gas and diesel fuel excise taxes and new transportation improvement fee will be annually adjusted for inflation starting on July 1, 2020. The new road improvement fee will be annually adjusted for inflation starting on July 1, 2021.
Whenever increases in the gas tax are considered, issues are raised about the fairness of the tax. As noted in our primer on California’s tax system, there are different ways to assess the fairness of taxes. 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 than higher-income people do, we refer to those taxes as regressive. Conversely, taxes that require higher-income people to spend a larger share of their budgets on taxes are considered progressive. Lower-income households spend more of their incomes on daily necessities, such as basic transportation. In this respect, gas taxes are regressive.
However, this critique of the gas tax as a way to fund transportation improvements would be more concerning if we had other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that people pay to use highways, roads, transit facilities, ports and airports, and so on. While usage-based taxes and fees may be mostly regressive, they are fair in that they are paid as the cost of using the service. Even alternatives in transportation funding — toll roads and charges based on vehicle miles traveled (VMT), for instance — still 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.
Some people contend that transportation should be funded from the state’s General Fund, or by general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because the General Fund in California is largely reliant upon the state’s progressive income tax. However, this raises a major concern: Using General Fund dollars would put transportation investments in competition with other vital programs and services for limited state funding. General Fund dollars should be reserved for services for which lower-income households are especially burdened by the cost of the service (e.g., health insurance) or programs from which the entire society benefits and which we want to encourage (e.g., K-12 education).
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 are harmful to the environment, taxes and fees can be designed to encourage alternative forms of transportation. Further, concerns about the impacts on lower-income individuals can be addressed by providing offsets. For instance, California could expand its Earned Income Tax Credit (EITC) — a refundable credit for low-income Californians — as a means of offsetting increased gas costs.
There is another factor to consider as to the wisdom of the recently enacted increase in California’s gas tax: our state’s gas taxes have not been increased in 23 years. Since the state last increased the rate, the real (inflation-adjusted) buying power of the gas tax per mile driven has dropped significantly. (Miles driven is a good proxy for the deterioration of roads.) There are a few reasons for this. One is that the tax is not indexed to inflation. Second, it is imposed as a fixed amount per gallon, not a percentage of the sales price of gasoline, so it does not increase as gasoline prices increase. Finally, because cars are more fuel-efficient than years ago, drivers pay less per mile driven than they did in 1994, when the gas tax last rose. When gas tax revenues fail to keep up with both inflation and wear and tear, less money is available to maintain and build streets and highways, and a backlog of deferred maintenance accumulates. The cost of addressing the deferred maintenance on the state’s transportation assets (not even including local roads) is now $57 billion. The relatively large 12-cent-per-gallon increase in the gas tax, which represents an approximate 4 percent increase in the overall cost of gasoline, is partly the result of 23 years of no increases. Furthermore, since the new package starts to adjust the gas tax rate for inflation in 2020, it will result in much more gradual annual changes in the rate, in turn helping ensure that revenues keep up with ongoing needs.
Lastly, it is important to put the gas tax in the broader context of the transportation package overall. 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 abilities to pay, with the fee increasing relative to the value of the vehicle.
One of the other critiques offered about the new package is that the funds are not assured to go toward transportation improvements.
This critique is simply not based in fact. As noted in our quick summary above, the funds are all earmarked for state and local transportation investments. In addition, the package includes a set of accountability provisions designed to ensure that the revenues are spent as intended. Among these is a constitutional amendment (ACA 5) that will require voter approval on the June 2018 ballot. ACA 5 would 1) prohibit spending the funds on anything other than transportation and 2) create a state transportation inspector general within the California Department of Transportation (Caltrans) to ensure both that funds are spent as intended and that this spending complies with state and federal requirements.
Opponents of the package have also charged that the package was “rammed through,” without enough opportunity for deliberation.
This simply is not the case. Governor Brown initially proposed a similar package in early 2015 and called a special legislative session that ran from June 2015 through the end of 2016, without resolution. The Governor then outlined the contours of a new package in his proposed budget for 2017-18, released in January, and state legislative leaders crafted alternative proposals in the weeks that followed. So, at a minimum, the new transportation package represents deliberations that had been underway for more than two years. And, given that the state has not increased the gas tax in 23 years, while billions of dollars in deferred maintenance has mounted, enacting a new transportation funding package was long overdue.
Ultimately, the most important question is whether California needs to invest more in its transportation infrastructure, improving its highways, roads, public transit and other alternative transportation options, and its ability to move people and goods efficiently. Years of neglect and billions of dollars in deferred maintenance, exacerbated by a lack of political will to increase taxes and fees, mean that the answer to that question is clearly “yes,” and that the recently enacted transportation package is a significant advance for California.
Join our email list!
|
|
|
|