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.
Senate Bill 562’s Vision for Single-Payer Health Care in California
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 a Single-Payer System in California Would Require Large State Tax Increases
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.
Revenues to Support a Single-Payer System in California Would Be Deposited Into a Special Fund, Not the General Fund
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.
The State Tax Increases Required to Implement a Single-Payer System in California Would Face Constitutional Obstacles
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:
Proposition 4 of 1979. Prop. 4 established a constitutional state spending limit that is known as the “Gann Limit.” The original Gann Limit was later modified by two ballot measures: Prop. 98 of 1988 and Prop. 111 of 1990. According to the state Senate Appropriations Committee analysis of SB 562, “the very large tax revenues that this bill would require…would clearly exceed the Gann Limit.” Overcoming this obstacle would require the voters to either repeal the Gann Limit or exempt the new taxes from the limit, the Senate analysis suggests.
Prop. 98 of 1988. Prop. 98, as modified by Prop. 111 of 1990, constitutionally guarantees a minimum level of funding for K-12 schools and community colleges. The state Senate Appropriations Committee analysis of SB 562 declares that, “Any taxes raised to support this bill would be considered the proceeds of taxes and would be subject to the requirements of Proposition 98.” This would result in some of the new tax revenues going to K-14 education. In order to avoid this outcome, California voters would have to exempt the new taxes from Prop. 98, the Senate analysis suggests.
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.
Key Single-Payer Proponents: Voter Approval May Not Be Necessary to Address the Obstacles Posed by the Gann Limit and Prop. 98
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.
Could Single-Payer Proponents Address the Obstacles Posed by the Gann Limit Solely Through the Legislative Process, Without Going to the Voters?
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.
Could Single-Payer Proponents Address Any Obstacles Posed by Prop. 98 Solely Through the Legislative Process, Without Going to the Voters?
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:
The sales tax revenues dedicated to the 2011 realignment “are not General Fund revenues. They are never deposited into the General Fund, and unlike General Fund revenues they are not available for general appropriations.”
“Revenues that are never part of the General Fund cannot be treated as ‘General Fund revenues.’”
“Special funds with dedicated revenue streams…have historically not been treated as General Fund revenue, and are excluded from the Prop. 98 calculation.”
“It would be an unprecedented transgression on the Legislature’s authority for a court to decree that funds designated as special fund revenues be treated as ‘General Fund revenues’ for any purpose, including the calculation required by Prop. 98.”
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.
Concluding Thoughts
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.
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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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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.
How Will the Money Be Spent?
The funds from the $54 billion package will be split equally between state and local transportation programs.
Major state-level allocations include:
$15 billion for highway repairs.
$4 billion in bridge repairs.
$3 billion to improve trade corridors.
$2.5 billion to reduce congestion on major commute corridors.
Major local-level allocations include:
$15 billion for local road repairs.
$8 billion for public transit and intercity rail.
$2 billion for local “self-help” communities that are making their own investments in transportation improvements.
$1 billion for active transportation projects to better link travelers to transit facilities.
How Will the Money Be Generated?
The package generates $54 billion in new revenues over 10 years from a series of tax and fee increases:
$24.4 billion from a 12-cent increase in the base gas excise tax starting November 1, 2017.
$10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting November 1, 2017.
$16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range 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.
$200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.
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.
The Question of Fairness: Gas Taxes and Vehicle Fees Are How We Fund Transportation
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.
The Question of Accountability: Funding Is Dedicated to Transportation and Related Activities
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.
The Question of Timing: State Leaders Have Been Working on a Transportation Package for Over Two Years
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.
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The California Earned Income Tax Credit (CalEITC), established in 2015, is a refundable state tax credit that helps low-earning workers and their families make ends meet and build toward economic security.[1] Yet, fewer than 1 in 5 visitors to county human services offices who were likely eligible for this new tax credit had heard of it, according to a Budget Center survey.[2] (County office visitors were surveyed because many would likely be eligible for the CalEITC or know people who are eligible for it.) In addition, only half of respondents who were likely eligible for the CalEITC filed their taxes for tax year 2015. These findings suggest that California needs to do more to raise awareness of the credit in order to boost participation.[3] The survey also found that most people who were likely eligible for the CalEITC and did file their taxes paid a tax preparer even though they would have qualified for free tax assistance. This means that many people did not get the full benefit of the CalEITC because they paid tax preparation fees. This report recommends strategies to maximize the success of the CalEITC, including by supporting research to better assess CalEITC utilization gaps and determine which outreach strategies are most effective, bolstering efforts by community organizations and county offices to promote the credit, and expanding and promoting free tax preparation services.
What Is the CalEITC and How Does It Work?
The CalEITC is a refundable state tax credit, modeled after the federal EITC, that helps working families who earn very little to better afford the basics. (Refundable credits allow people whose credit is larger than the amount of income taxes they owe to get the difference in a tax refund. This means that people who do not owe state income taxes, but who do pay other taxes, like the sales tax, can benefit from the credit.)
People qualify for the CalEITC based largely on how much they earn and how many qualifying children they are supporting. Families with multiple children qualify for the credit for tax year 2016 if they have earnings that do not exceed $14,161, while those with just one child qualify if their earnings do not exceed $10,087. Individuals without qualifying children can benefit from the CalEITC if their earnings do not exceed $6,717.
The size of the credit people can receive from the CalEITC also depends on how much they earn and how many children they are supporting. Working families with three or more qualifying children can receive up to $2,706 for tax year 2016, those with two children can receive as much as $2,406, and those with one child can receive up to $1,452. Individuals who do not have qualifying children are eligible for a much smaller credit — a maximum of $217.
The CalEITC is designed to build on federal working-family tax credits. Families with three or more children who qualify for the maximum CalEITC, for example, can see their incomes rise by as much as 92 percentfrom the CalEITC, in combination with the federal EITC and federal child tax credit. In this way, the CalEITC may enhance the federal EITC’s well-documented benefits to children, families, and communities.
Very Few People Who Were Likely Eligible for the CalEITC Had Heard of the Credit
Promoting the CalEITC will be key to its success because this new tax credit targets workers who — due to their very low earnings — are not required to file state personal income taxes and may not realize that they can receive cash back if they do.[4] However, a Budget Center survey of visitors to county human services offices found that:
Just 18 percent of those who were likely eligible for the CalEITC had heard of the credit (Figure 1).[5] Similarly, just 15 percent of all respondents had heard of the credit.
Among all respondents, Latinos were far less likely to have heard of the CalEITC. Only 10 percent of Latinos surveyed had heard of the credit compared to 25 percent of white respondents.[6]
Only Half of People Who Were Likely Eligible for the CalEITC Filed Their Taxes
Just half (50 percent) of people surveyed who were likely eligible for the CalEITC filed their taxes for tax year 2015 — the first year the credit was available (Figure 2).[7] In other words, a large number of workers may have missed out on hundreds or thousands of dollars in tax credits, not only from the CalEITC, but also from the federal EITC. (As noted earlier, many people who qualify for the CalEITC are not required to file state income taxes.)
These are dollars that are clearly needed. The vast majority of respondents who were likely eligible for the CalEITC (80 percent) had faced at least one major hardship in the past year, such as not being able to afford enough food, falling behind on rent or on utility bills, or having to forego necessary health care due to a lack of money.
The Majority of Tax Filers Who Were Likely Eligible for the CalEITC Paid a Tax Preparer
Seven in 10 people surveyed who were likely eligible for the CalEITC and filed their taxes in 2015 (70 percent) paid a tax preparer even though they would have qualified for free tax assistance given their extremely low incomes (Figure 3).[8] This suggests that many workers did not receive the full benefit of the CalEITC or other tax credits because some of their tax refund went to tax preparation fees.
Although tax preparation fees are rarely transparent and can vary widely, studies suggest that they tend to range in the low hundreds of dollars. For example, the US Government Accountability Office found, in one metro area, fees ranging from $160 to $408 for a single mother with one child who qualified for the federal EITC in tax year 2013.[9] Also, a national survey of tax preparers found that the average fee charged for filing a federal and state tax return without any itemized deductions was $176 in 2016.[10] By comparison, heads of household with one child received an average CalEITC of $610 during the credit’s first year, according to state data.[11] This suggests that tax preparation fees could have substantially reduced the benefit of the CalEITC for many low-earning workers.
Few Tax Filers Who Were Likely Eligible for the CalEITC Knew That Free Tax Preparation Services Were Available
Lack of awareness of free tax preparation services may help explain why many workers who were likely eligible for the CalEITC paid to file their taxes. Only 25 percent of tax filers surveyed who were likely eligible for this credit knew of a free tax preparation service in their community (Figure 4).[12]
High use of paid tax preparers may also reflect insufficient access to free tax services. California has over 900 Volunteer Income Tax Assistance (VITA) sites, which provide free tax preparation services by volunteers who are trained and certified by the Internal Revenue Service (IRS).[13] However, nearly half of the ZIP codes with the highest percentages of households that are potentially eligible for the CalEITC have no VITA sites at all, according to United Ways of California.[14] In addition, many VITA sites lack the capacity to meet the need for free tax preparation.[15]
Only About 2 in 5 People Who Were Likely Eligible for the CalEITC Had Heard of the Federal EITC
Just 42 percent of people surveyed who were likely eligible for the CalEITC had heard of the federal EITC, even though most of them likely qualified for it (Figure 5).[16] By contrast, awareness of the federal EITC among very-low-income parents nationwide ranges between 55 percent and 66 percent.[17]
Latino respondents were far less likely to have heard of the federal EITC than were other survey respondents. This is similar to national surveys, which find lower rates of awareness among Latinos, and particularly those who completed surveys in Spanish.[18]
Policy Options for Maximizing the Success of the CalEITC
Findings from the Budget Center’s survey suggest that California needs to do more to raise awareness of the CalEITC and to connect tax filers to free tax preparation services so that they can get the full benefit of their tax refunds. Such efforts could also increase federal EITC claims, drawing additional federal dollars into the state that would both help working families make ends meet and boost California-based businesses and the state economy.[19] Specifically, state policymakers could:
Use state data to more precisely assess CalEITC utilization gaps as well as evaluate the effectiveness of targeted outreach strategies. While the survey findings described in this report, together with other research, suggest that many eligible Californians may have missed out on the CalEITC in its first year, a precise participation rate is not known. This is because, as discussed earlier, the CalEITC targets workers who are not required to file state personal income taxes, which means that tax filer data alone cannot be used to determine how many people likely qualify for the credit.[20] California could better assess CalEITC utilization — overall and across demographic groups — by linking data across state agencies. For example, California could pursue a data-sharing effort similar to one undertaken by Virginia, which facilitated a collaboration between that state’s tax board and social services department to produce a more accurate picture of federal EITC participation among people receiving major public benefits.[21] Specifically, Virginia used a combination of state tax filer and social services data to estimate which public benefits participants were likely eligible for the EITC, and then determined how many of those participants actually filed their taxes and claimed the credit. This revealed that 34 percent of public benefits participants who were likely eligible for the EITC did not claim the credit in 2006, largely because those individuals did not file their taxes.[22] More importantly, these data allowed Virginia to target EITC outreach efforts specifically to this group of nonfilers and to measure the effectiveness of these efforts by tracking whether they boosted EITC participation over time.[23] A similar data-sharing effort in California — potentially linking the Medi-Cal Eligibility Data System (MEDS) to Employment Development Department (EDD) and Franchise Tax Board (FTB) data — could provide valuable information that would help better tailor CalEITC outreach strategies to groups who are less likely to claim the credit and to learn which strategies work best in boosting claims.[24]
Increase support for community-based efforts to promote the CalEITC. The 2016-17 budget agreement included $2 million for grants to help communities expand their efforts to raise awareness of the CalEITC. However, the Governor’s proposed budget for 2017-18 (the state fiscal year that begins on July 1, 2017) does not include funding to maintain or expand these efforts. Given that awareness of the CalEITC appears to be low, state policymakers could continue, and potentially expand, this grant program so that community groups can maintain their promotional efforts year-round and build on the educational strategies that they have developed.[25] Indeed, efforts to raise awareness of the CalEITC need to be ongoing because the workers who qualify for the credit will likely change from year to year.[26] In addition, because little is known about which educational strategies are most effective, policymakers could require a more robust evaluation of the strategies supported by this grant program.[27]
Provide support to expand promotional efforts at county human services offices. County offices are ideally positioned to promote the CalEITC because they serve families and individuals with low incomes, many of whom likely qualify for the new credit. Yet many counties lack the resources to undertake robust promotional efforts. California could allow counties to expand their efforts by establishing a state-funded competitive grant program in which counties could apply to participate. The funds provided through this program could support a range of activities to raise awareness of the CalEITC, the federal EITC, and free tax preparation services. For example, funds could:
Support an EITC coordinator to facilitate efforts to raise awareness of the state and federal EITCs among county clients and connect them to free tax preparation services.
Support peer-to-peer learning opportunities, where counties could share best practices and learn to replicate effective promotional strategies. For instance, some counties train CalWORKs participants to be Volunteer Income Tax Assistance (VITA) tax preparers as part of their welfare-to-work plans, either as volunteer work experience or as subsidized employment. These workers help to both expand the capacity of local VITA sites and promote tax credits and free tax services in their communities. Counties that have established such programs could provide technical assistance to other counties interested in developing similar programs.
Help counties operate VITA sites at their offices to facilitate free tax preparation for their clients. For example, state funds could cover the costs of keeping county offices open outside of standard business hours in order to provide tax services. Alternatively, counties could partner with local VITA programs.
Support the development and implementation of assisted self-filing workshops where clients learn how to set up free, online tax filing accounts and receive technical assistance with filing their taxes.[28] Such workshops could be easier to establish than VITA sites.[29] Moreover, they would provide a valuable service because many adults — particularly those with low incomes — lack the literacy skills needed to file their taxes on their own.[30]
Finance text messaging services to notify clients about tax credits and free tax services.
Cover outreach costs, such as printing flyers to be included in required mailers to clients.
Strengthen and expand free tax preparation services. Workers with incomes low enough to qualify for the CalEITC struggle to pay for basic expenses and cannot afford to lose part of their tax refunds by paying tax preparers.[31] Although these workers qualify for free tax services, VITA programs that run sites lack the capacity to meet the need and increasing demand for free tax preparation.[32] State funds could help expand the number of VITA sites in high-need communities and enable existing sites to serve more clients.[33] State support could also help VITA programs promote their services and better compete with marketing by paid tax preparers.[34] In addition, state funds could help communities assist people with filing their taxes on their own.[35] Self-filing assistance could be easier for some communities to provide because it would not require as many highly trained and certified volunteers as VITA sites require.[36]
Promote free tax filing services, particularly targeting “nonfilers” who could benefit from the CalEITC and federal EITC.[37] One of the key challenges to maximizing participation in the CalEITC is that this credit targets workers who are not required to file state income taxes, as discussed earlier. This means that the credit’s success largely depends on encouraging “nonfilers” to file. Two research projects underway at Stanford University are testing whether mailing postcards with information about free tax filing services increases the use of those services.[38] If these mailings appear to be effective, California could consider promoting free tax filing services through mailers, particularly targeting people who are likely eligible for the CalEITC and federal EITC, but who have not recently filed state income taxes.[39] In addition, California could consider expanding the existing requirement that employers notify workers of their potential eligibility for the CalEITC and federal EITC to include information about accessing free tax filing services.[40] Under current law, this notification is not required to include specific information about how workers can claim these credits.
Overview of the Budget Center’s Survey
The Budget Center surveyed 938 visitors to county human services offices in eight counties during the fall of 2016. The primary purpose of the survey was to determine whether the visitors had heard of the CalEITC, since many would likely be eligible for the credit or know people who are eligible for it.
Budget Center staff designed the survey in consultation with academic researchers and other experts, and whenever possible utilized questions from long-standing national surveys. Initial drafts of the survey were pilot-tested in the late summer of 2016, and several questions were revised based on this testing.
Thirteen counties volunteered for the survey and, of these, the Budget Center selected the following eight to participate: Contra Costa, Los Angeles, Merced, Orange, San Bernardino, Stanislaus, Tehama, and Yolo. These counties were chosen in order to include communities in most major regions of the state as well as ensure a mix of urban and rural locations.
Surveys were administered between August and November 2016 on days that the counties identified as likely to have a high volume of walk-in traffic. All people who visited the county offices on those days were asked to participate in the survey. (It was not possible for the counties to identify in advance which of their clients were most likely to be eligible for the CalEITC. Therefore, eligibility had to be estimated through the survey using respondents’ self-reported earnings and family characteristics.)
Participation in the survey was voluntary and, when feasible, respondents were given a $5 gift card for their time. Most surveys were completed online using computers in the county offices. In a few counties that could not accommodate an online survey, Budget Center staff and volunteers distributed paper surveys to county visitors. Respondents could choose to take the survey in either English or Spanish.
While the number of survey respondents is large, and large samples increase the reliability of the survey results, the survey was not designed to be representative of all county human services clients or of all people who are eligible for the CalEITC. Also, many of the analyses reported are based on small subsets of the respondents. For example, just over one-quarter of the respondents (266 out of 938) appeared to be eligible for the CalEITC.
Determining Whether Respondents Were Likely Eligible for the CalEITC
An estimated 28 percent of survey respondents were likely eligible for the CalEITC for tax year 2015. This determination was based on respondents’ estimated annual earnings from work and the number of children they were living with and financially supporting, which are two key factors that determine eligibility for the credit. Respondents who reported that they lived with their spouse and that someone else in the household worked in 2015 were assumed to not be eligible for the CalEITC in case their spouses had earnings that would have disqualified them for the credit.[41] In addition, a small number of respondents who reported hourly wages below the 2015 statewide minimum wage were assumed to not be eligible for the CalEITC in case these respondents were being paid under the table. (To qualify for the CalEITC, workers must have earnings subject to wage withholding.) The survey did not collect any information about the immigration status of respondents or their family members, and therefore it is not possible to determine whether some of those who otherwise appeared to be eligible for the CalEITC did not actually qualify for the credit. (To qualify for the CalEITC, all family members reported on the tax form must have valid Social Security numbers.) Also, in order to keep the survey short and simple, respondents were not asked to report how much of their earnings came from self-employment, and since self-employment earnings are not counted in determining eligibility for the CalEITC, it is possible that some respondents’ assumed eligibility status is incorrect.
Determining Whether Respondents Had Heard of State and Federal Tax Credits
The survey asked respondents whether they had heard of the federal EITC, child tax credit, CalEITC, and a fictitious tax credit, the Family Support Tax Credit (FSTC). The share of people who reported that they had heard of the CalEITC and the federal EITC excludes all of those who reported having heard of the FSTC. This fictitious credit was included on the survey in order to identify potential “false positive” responses. (Respondents may report having heard of a credit when they actually had not because, for example, they believe that an affirmative answer is the response that researchers are looking for.)
Respondents were not asked whether they actually received the CalEITC or other tax credits. According to experts who have conducted similar surveys, such questions do not tend to provide accurate information because tax filers often do not know exactly which tax credits they received.
The survey also collected information regarding how people learned about the CalEITC. However, so few respondents had heard of the CalEITC that it was not possible to reliably report the most common ways that clients learned about the credit.
Characteristics of Respondents
Three-quarters of the survey respondents were women (75 percent) and the majority of all respondents were living with and financially supporting children (76 percent). The majority of respondents had worked in 2015 (58 percent), and these respondents had median annual earnings of $13,173.[42] Four in 10 of the respondents (40 percent) were the only workers in their household, and another 19 percent reported that they and others in their household worked.[43] Nearly half of the respondents (47 percent) were Latino, close to one-quarter (23 percent) were white, and 11 percent were black. The remaining 19 percent were of another race or ethnicity or reported multiple races or ethnicities. Respondents’ ages ranged from 17 to 80, with an average age of 35.
[1] This new credit is modeled after the federal EITC, which has provided extensive benefits to families, children, and communities, according to decades of research. For a summary of this research, see Alissa Anderson, State Earned Income Tax Credits (EITCs) Build on the Well-Documented Success of the Federal EITC (California Budget and Policy Center: March 9, 2017).
[2] The Budget Center surveyed 938 people who visited county human services offices in eight counties during the fall of 2016 to gauge awareness of the CalEITC. Of these individuals, just over one-quarter (266) appeared to be eligible for the CalEITC based on their estimated annual earnings from work as well as the number of children they were living with and financially supporting (see survey methodology for more information). Most people who participated in the survey reported that they visited the county office to apply for or renew benefits or to access employment services. The vast majority of respondents reported that they and/or their spouse and/or children currently participate in a major public program, such as Medi-Cal, CalFresh, or CalWORKs.
[3] CalEITC claims also suggest that many people who were eligible for the credit did not claim it. About 385,000 tax filers benefited from the CalEITC for tax year 2015. It is not possible to determine a precise participation rate because it is not known how many “tax units” (families) are eligible for the credit. In 2015, the Franchise Tax Board estimated that around 600,000 families would be eligible. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data also estimated that roughly 600,000 families would be eligible. (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).) However, other estimates suggest that only about 466,000 families would be eligible. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.) This suggests that between 64 percent and 83 percent of those who were eligible for the CalEITC claimed it in tax year 2015. By comparison, around 75 percent of California families that are eligible for the federal EITC are estimated to claim it each year. However, EITC eligibility estimates have limitations. For more information, see Alan Berube, Earned Income Credit Participation: What We (Don’t) Know (Brookings Institution: February 15, 2005) and Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date).
[4] It is likely that the majority of people who are eligible for the CalEITC are not required to file state personal income taxes. Personal communication with the Franchise Tax Board on April 7, 2017.
[5] Just over one-quarter of the people surveyed were likely eligible for the CalEITC. See survey methodology for more information.
[6] Since few respondents who were likely eligible for the CalEITC had heard of the credit, it is not possible to reliably report demographic information for this group. Therefore, these figures refer to the share of all people surveyed who had heard of the CalEITC, regardless of whether they were likely eligible for the credit. In this report, white respondents and Latino respondents are mutually exclusive groups and refer to people who said that they identify with only one race or ethnicity. Data for other race and ethnic groups could not be reported individually due to the small number of respondents in each of those groups.
[7] For simplicity, the survey asked, “Did you or your spouse file income taxes this year?” without asking respondents to specify the tax year, or whether they filed state or federal income taxes or both.
[8] By comparison, 65 percent of Californians who claimed the federal EITC paid a tax preparer in tax year 2014, according to Internal Revenue Service data compiled by the Brookings Institution. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[9] US Government Accountability Office, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, testimony presented to the US Senate Committee on Finance (April 2014).
[10] National Society of Accountants, 2016-2017 Income & Fees of Accountants and Tax Preparers in Public Practice Survey Report (no date). Some tax preparers charge tax filers per form, which means that fees would be higher for people who claim credits like the federal EITC and CalEITC because claiming these credits requires additional paperwork.
[11] Personal communication with the Franchise Tax Board on November 15, 2016.
[12] Surprisingly, awareness of free tax preparation services did not always translate into use of those services. More than one-third of all tax filers surveyed who knew of a free tax preparation service in their community (37 percent) paid a tax preparer when they filed for tax year 2015.
[13] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. Only 2.3 percent of California tax filers who claimed the federal EITC filed their taxes at a free tax preparation site such as VITA in 2014. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[14] Personal communication with United Ways of California on March 8, 2017.
[15] For example, United Ways of California, which supports member United Ways that operate many VITA sites, reports that the majority of California VITA sites offer services for limited hours during the week, many lack enough volunteers to meet the demand for services, and that few sites have full-time, paid coordinators who can help the sites run more efficiently. In addition, some sites report that appointments often fill up quickly, limiting their ability to accept additional clients. Personal communication with United Ways of California on March 22, 2017 and April 5, 2017.
[16] A slightly smaller share of all people surveyed (37 percent) had heard of the federal EITC.
[17] Percentages refer to parents with incomes below half of the official federal poverty line (FPL) and those with incomes between 50 percent and 100 percent of the FPL, respectively. See Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001), Table 1. Another national survey found that around 58 percent of low-income parents had heard of the federal EITC. See Elaine Maag, Disparities in Knowledge of the EITC (Urban Institute and Brookings Institution Tax Policy Center: March 14, 2005).
[18] Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001).
[19] Estimates suggest that roughly 1 in 4 eligible California families or individuals do not claim the federal EITC each year, depriving California of more than $1 billion in federal funds annually. See Internal Revenue Service, EITC Participation Rate by States, downloaded from https://www.eitc.irs.gov/EITC-Central/Participation-Rate on March 1, 2017 and Antonio Avalos, The Costs of Unclaimed Earned Income Tax Credits to California’s Economy: Update of the “Left on the Table” Report (Commissioned by the California Department of Community Services and Development: March 2015). Studies suggest that workers who are eligible for, but do not claim, the federal EITC tend to have lower incomes than eligible workers who do claim this credit. Since the CalEITC is available only to workers with extremely low incomes, this group likely includes people who are missing out on the federal EITC. In other words, promoting the CalEITC provides an ideal opportunity to raise awareness of the federal EITC.
[21] See Erik Beecroft, EITC Take-Up by Recipients of Public Assistance in Virginia, and Results of a Low-Cost Experiment to Increase EITC Claims (Virginia Department of Social Services: May 2012) and Erik Beecroft, To What Extent Do VDSS Clients Claim the Federal Earned Income Credit? (Virginia Department of Social Services: January 31, 2008).
[22] Indeed, national estimates suggest that almost two-thirds of people who were likely eligible for the federal EITC, but who did not claim it, did not file federal income taxes, underscoring the need to target outreach strategies to “nonfilers.” Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date), Table 8.
[23] Specifically, Virginia’s social services department conducted a “random assignment” study to test whether mailers and automated phone calls boosted EITC claims. Researchers, sometimes in collaboration with the Internal Revenue Service, have conducted similar studies to evaluate EITC outreach efforts nationwide. See, for example, work by Day Manoli at http://www.daymanoli.com/researchpapers/ .
[24] Specifically, California could explore the possibility of linking MEDS, a database of people participating in major public programs, to wage withholding data from the EDD in order to identify public benefits recipients who are potentially eligible for the CalEITC based on their earnings from work. This information could then be shared with the FTB to determine which of these individuals did not file state income taxes in the prior year. These “nonfilers” who are potentially eligible for the CalEITC could then be targeted for direct outreach on the credit, and the effectiveness of this outreach could be evaluated by tracking whether these individuals eventually filed their state taxes and claimed the CalEITC. See endnotes 38 and 40 for information about researchers who have conducted, or are currently conducting, such evaluations.
[25] Currently, these grants support CalEITC promotional efforts for a limited time, from November 2016 through May 2017. For more information about this grant program, see Department of Community Services and Development, Notice of Funding Availability (NOFA) California Earned Income Tax Credit Education and Outreach Grant: 2016 Cal EITCNOFA (August 15, 2016).
[26] Research shows that many people at the low-end of the income scale experience large swings in their incomes from year to year. See, for example, Andrew Stettner, Michael Cassidy, and George Wentworth, A New Safety Net for an Era of Unstable Earnings (The Century Foundation: December 15, 2016). In addition, studies find that a sizeable share of the US population falls into poverty for short periods of time. See Bernadette D. Proctor, Jessica L. Semega, and Melissa A. Kollar, Income and Poverty in the United States: 2015 (US Census Bureau: September 2016), p. 3 and Robin J. Anderson, Dynamics of Economic Well-Being: Poverty, 2004-2006 (US Census Bureau: March 2011).
[27] The Legislature could direct the Department of Community Services and Development, which administers the current grant program, to contract with an independent, research-based institution with expertise in program evaluation. The Legislature has required such evaluations in the past. See, for example, SB 1041 (Committee on Budget and Fiscal Review, Chapter 47 of 2012), which required the Department of Social Services to contract with a research organization to evaluate changes in the California Work Opportunity and Responsibility to Kids (CalWORKs) program.
[28] There are many free online filing programs that could be used in these workshops, including: MyFreeTaxes.org, which is operated by United Ways of California; Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS; and CalFile (https://www.ftb.ca.gov/online/calfile/), a free, online filing program operated by the Franchise Tax Board that allows tax filers to automatically import information from their W-2 forms, which summarize workers’ annual wages and the amount of taxes withheld from their paychecks.
[29] Self-filing workshops would not require as many volunteers as VITA sites require, and the volunteers would not necessarily need to be as highly trained. VITA sites typically provide one-on-one tax preparation services by volunteers who must be certified by the IRS after completion of a tax-training course and passage of an exam.
[30] Research suggests that “a substantial majority of [federal] EITC filers have such limited literacy as to seriously compromise their capacity to prepare their own tax return.” See Michael I. O’Conner, Tax Preparation Services for Lower-Income Filers: A Glass Half Full, or Half Empty? (Tax Notes: January 8, 2001), p. 8. An estimated 40 million to 80 million Americans lack the skills necessary to fill out IRS forms. Edward E. Gordon and Elaine H. Gordon, Literacy in America cited in Joseph Bankman, Simple Filing for Average Citizens: The California ReadyReturn (State Tax Notes: June 13, 2005). Also, more than one-quarter of adults living in households with annual incomes below $10,000 lack basic literacy skills. Mark Kutner, et al., Literacy in Everyday Life: Results From the 2003 National Assessment of Adult Literacy (US Department of Education: April 2007), p. 32.
[31] The majority of Californians who claim the federal EITC pay to have their taxes prepared in spite of their modest incomes (see endnote 8), and many people who claimed the CalEITC in 2015 also appear to have paid to file.
[32] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. According to United Ways of California, the majority of California VITA sites offer services for limited hours during the week, many sites lack enough volunteers to meet the demand for services, and few have full-time, paid coordinators who can help them run more efficiently. Also, as noted earlier, many communities where large shares of households are likely eligible for the CalEITC lack VITA sites altogether.
[33] State support could allow VITA sites to hire a full-time coordinator, train additional volunteers, and expand their hours of service. Iowa and Virginia have provided state funds to support EITC outreach and expand free tax preparation services. For more information, see National Conference of State Legislatures, Tax Credits for Working Families: Earned Income Tax Credit (EITC) (February 21, 2017).
[34] Tax preparation fees are rarely transparent, as discussed earlier. Therefore, it would also be useful for California to require tax preparers that charge for their services to specify their fees before tax filers begin the process of preparing their taxes. For example, preparers could be required to display their fees for each tax form and service they provide. See Chi Chi Wu, It’s a Wild World: Consumers at Risk From Tax-Time Financial Products and Unregulated Preparers (National Consumer Law Center: February 2014), pp. 18-19.
[35] These services could be provided at various community locations, such as schools, libraries, food banks, and one-stop centers, which offer employment-related services to people who are searching for work.
[36] VITA sites typically provide one-on-one tax preparation by volunteers who must complete a tax-training course, pass an exam, and be certified by the IRS. Communities that have difficulty establishing or expanding these services could consider establishing self-filing assistance programs, in which volunteers help clients file their taxes on their own using free, online tax filing software. Some VITA sites provide such self-filing services, called Facilitated Self-Assistance (FSA), in order to expand their capacity without having to recruit additional IRS-certified volunteers. See Shervan Sebastian, Ezra Levin, and David Newville, Strengthening VITA to Boost Financial Security at Tax Time & Beyond (CFED: June 2016) and Rebecca Thompson, Learn More About Facilitated Self Assistance for Your Clients! (CFED: February 22, 2017).
[37] Free tax filing programs are underutilized, suggesting a need to better promote these services. For example, less than 2 percent of the nation’s tax returns in 2016 were filed through Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS, even though this service is available to 70 percent of tax filers. See Jessica Huseman, “Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It,” ProPublica (March 20, 2017).
[38] These two projects are being conducted by Jacob Goldin, an assistant professor of law at Stanford University. The first study, which is being conducted in Colorado in collaboration with the Colorado United Way Network, is testing the effect of sending postcards promoting United Way’s free, online tax service, MyFreeTaxes, to a random sample of households in low-income neighborhoods. The second study, which is being conducted in collaboration with the US Treasury Department and the IRS, is testing the effect of sending postcards promoting various types of free tax preparation services to people who are likely to qualify for these services and who prepared their own tax returns in the prior year. The preliminary results of this research should be available in the late spring or early summer of 2017.
[39] The data-sharing project discussed earlier would make it possible to identify “nonfilers” who are likely eligible for the CalEITC. Notices about free tax preparation services could also be mailed to a broader group of individuals with low incomes — not just those who qualify for the CalEITC — given that use of paid preparers is high among this group. The Employment Development Department (EDD), for example, could mail such notices to workers with low earnings based on their wage withholding statements or to people who apply for unemployment insurance. The EDD is currently required by law to notify unemployment insurance claimants that they may be eligible for the CalEITC and federal EITC, but the notification does not have to include information about free tax preparation services.
[40] AB 650 (Lieu, Chapter 606 of 2007) requires most employers to notify their employees that they may be eligible for the federal EITC. This notification must occur within one week of providing an annual wage statement, such as a W-2 or 1099 form. (The specific statement employers are required to provide is posted on this website: http://www.edd.ca.gov/Payroll_Taxes/Year-End_Notification_Requirements.htm.) AB 1847 (Stone, Chapter 294 of 2016) requires this notification to include information about the new CalEITC. However, the current notification is not required to include information about how to access free tax filing assistance. Providing this information could help encourage people who do not have a filing requirement to file. California could also consider simplifying the information that employers are required to provide. A recent study tested the impact of mailing various types of notifications to more than 35,000 California tax filers who appeared to be eligible for, but did not claim, the federal EITC in tax year 2009. The study found that simple notices that included how much tax filers might receive from the EITC were most effective in boosting EITC claims. Examples of these notifications can be found in Saurabh Bhargava and Dayanand Manoli, “Psychological Frictions and the Incomplete Take-Up of Social Benefits: Evidence From an IRS Field Experiment,” American Economic Review 105:11 (2015), pp. 3489-3529.
[41] In order to keep the survey short and simple, the survey did not ask respondents to report earnings from spouses or anyone else in their household. This means that some respondents’ estimated eligibility for the CalEITC could be incorrect. For example, some respondents who did not work, and therefore were assumed to be ineligible for the credit, may actually have been eligible if their spouse had earnings that would have qualified the family for the credit.
[42] Respondents were considered to have worked in 2015 if they reported a positive number for at least one of two questions: the number of months they worked in 2015 and/or the number of hours they usually worked per week during those months. Due to incomplete information, annual earnings could be estimated for only 80 percent of respondents who worked in 2015. Annual earnings were estimated based on respondents’ hourly pay, usual hours worked per week, and total months worked in 2015. Respondents’ estimated annual earnings ranged widely, from $6,890 at the 25th percentile to $22,741 at the 75th percentile.
[43] Another 13 percent reported that they did not work, but someone else in their household did, while 28 percent of respondents reported that no one in their household worked.
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The Department of Community Services and Development (CSD) joined the State Franchise Tax Board, CalEITC4Me, and United Ways of California in hosting a stakeholder event to promote awareness of the California Earned Income Tax Credit (CalEITC). As part of this event, California Budget & Policy Center Senior Policy Analyst Alissa Anderson presented on the importance of the CalEITC and the federal EITC.
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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 PDFversion of this Issue Brief.
Proposition 30, approved by voters in 2012, provided critical revenues to California at a time when the state faced daunting budgetary challenges. Prop. 30’s tax rate increases are scheduled to fully expire at the end of 2018. Prop. 55, which will appear on the November 8, 2016 statewide ballot, would extend for 12 years the Prop. 30 tax rate increases that affect very-high-income Californians. Revenues generated by Prop. 55 – a projected $4 billion to $9 billion per year from 2019 through 2030 – would go to K-12 public schools, community colleges, health care for low-income Californians, the state’s rainy day fund, state debt payments, and other state services. This Issue Brief provides an overview of Prop. 55 and the policy issues it raises. The California Budget & Policy Center neither supports nor opposes Prop. 55.
What Would Proposition 55 Do?
Prop. 55, “The California Children’s Education and Health Care Protection Act of 2016,” would amend the California Constitution to (1) extend Prop. 30’s personal income tax provisions for 12 years beyond their scheduled expiration at the end of 2018 and (2) create a formula to provide additional funding for Medi-Cal from the revenues raised by the measure. Moreover, existing provisions of the state Constitution would require Prop. 55 revenues to go to K-12 public schools, community colleges, the state’s rainy day fund, and state debt payments. Specifically, Prop. 55 would:
Extend Prop. 30’s personal income tax rate increases on very-high-income Californians. Prop. 55 would extend – from 2019 through 2030 – personal income tax rates enacted by Prop. 30. Extending these rates would raise between $4 billion and $9 billion each year (in today’s dollars), according to the Legislative Analyst’s Office (LAO). Prop. 55 would allow Prop. 30’s one-quarter cent increase in the state sales tax rate to expire at the end of 2016 as scheduled.
Create a new constitutional formula to increase funding for Medi-Cal, which provides health care services to Californians with low incomes. For each fiscal year from 2018-19 through 2030-31, the Governor’s Department of Finance would be required to estimate the amount of General Fund revenues – including those raised by Prop. 55 – that are needed to:
Meet the annual Prop. 98 minimum funding guarantee for K-12 schools and community colleges.
Fund the cost of services that were authorized as of January 1, 2016 (excluding Prop. 98 spending), as adjusted for population changes, statutory cost-of-living increases, federal mandates, and other factors.
If any Prop. 55 revenues are estimated to remain after meeting these combined expenditures, Medi-Cal would receive 50 percent of the excess, up to a maximum of $2 billion in any fiscal year. Revenues allocated to Medi-Cal under this provision would have to add to – rather than replace – existing General Fund support for the program.
Increase funding for K-12 schools and community colleges as compared to current law. The vast majority of funding for California’s K-12 schools and community colleges is provided by the Prop. 98 minimum funding guarantee. This guarantee is based on varying economic and fiscal conditions, including state General Fund revenue collections. Other things being equal, General Fund revenues from 2018-19 to 2030-31 would be higher if voters approve Prop. 55 than if the measure is rejected. This is because Prop. 55 would extend income tax rate increases that otherwise would expire at the end of 2018 under the provisions of Prop. 30. By increasing General Fund revenues relative to current law – which assumes the expiration of Prop. 30’s income tax rates – Prop. 55 would boost the amount of Prop. 98 funding that K-12 schools and community colleges would otherwise be expected to receive during the period that Prop. 55 is in effect. About half of the revenue raised by Prop. 55 would go to K-14 education, according to the LAO.
Increase deposits into the state’s rainy day fund and repayments of state budgetary debt as compared to current law. Under Prop. 2, which voters approved in 2014, California is required to set aside a certain share of General Fund revenues each year in order to build the state’s rainy day fund (the Budget Stabilization Account) and pay down state budgetary debts, including unfunded state pension liabilities. Because Prop. 55 would increase General Fund revenues relative to current law – as explained above – the measure would result in larger debt payments and bigger deposits into the rainy day fund compared to what would be expected if voters rejected Prop 55. The LAO estimates that Prop. 55 would provide an additional $60 million to approximately $1.5 billion each year for Prop. 2 purposes.
Allow state policymakers to use any remaining revenues raised by Prop. 55 for any budget priorities. Prop. 55 revenues that remain after (1) meeting the constitutional spending obligations described above and (2) helping to maintain state services that were in place as of January 1, 2016 could be used for any public systems and services funded through the state budget. For example, these excess Prop. 55 revenues could be used to raise the number of subsidized child care slots, increase cash assistance for low-income seniors and people with disabilities, and boost state support for the California State University (CSU) and the University of California (UC).
Whose Taxes Would Proposition 55 Affect?
As noted above, Prop. 55 would extend the personal income tax rate increases of Prop. 30, but not the sales tax rate increase. Prop. 30’s income tax rate increases are aimed specifically at the highest-income households. Of the total dollar increase in income taxes brought about by Prop. 30, the top 1 percent of households pay 98.6 percent, and the next 4 percent of households pay the remaining 1.4 percent, according to the Institute on Taxation and Economic Policy (Figure 1). Prop. 55’s income tax rate increases could be expected to have a similar effect.
Compared to those of Prop. 30, Prop. 55’s overall tax-rate changes would be even more progressive. This is because Prop. 55 would not extend Prop. 30’s quarter-cent sales tax increase, which has a disproportionate impact on households with lower incomes. Prop. 55 follows the equity principle of taxation, by which taxes are levied fairly, based on the ability to pay.
Currently, California’s lowest-income families pay the largest share of their incomes in state and local taxes, while the wealthiest, who substantially benefit from public investments and have the greatest ability to contribute, pay much smaller portions of their incomes in state and local taxes. In other words, California’s tax system as a whole is regressive, even with Prop. 30’s income tax increases on the wealthiest households. If voters reject Prop. 55, California’s tax system would become even more regressive because the highest-income households would contribute a smaller share of their income in taxes than if Prop. 55 were approved (Figure 2).
Furthermore, the top 1 percent of California households – those who would be most affected by Prop. 55’s tax rate increases – have seen their average income more than double since the late 1980s, after adjusting for inflation (Figure 3). In contrast, average inflation-adjusted incomes for the bottom 80 percent of California households have declined.
What Would Rejection of Proposition 55 Mean for Public Services?
If California voters do not approve Prop. 55, the personal income tax rate increases on very-high-income Californians enacted by Prop. 30 will expire at the end of 2018. The expiration of Prop. 30’s income tax rates would:
Result in a significant loss of General Fund revenues. Fiscal year 2018-19 would lose half a year of higher personal income tax revenues and 2019-20 would lose a full year of higher revenues – a projected $4.5 billion in 2018-19 and $7.7 billion in 2019-20, with annual revenue losses continuing thereafter (Figure 4).
Create a multi-billion dollar budget deficit that would likely result in cuts to state services. With the expiration of Prop. 30’s income tax rates, the loss of billions of dollars in General Fund revenues would lead to annual multi-billion dollar state budget deficits. Under such a scenario, state policymakers would likely need to reduce spending for critical services in order to help to help balance the budget.
Reduce the Prop. 98 funding guarantee for schools and community colleges. Changes in annual General Fund revenues tend to affect the Prop. 98 guarantee. If Prop. 30’s income tax rates are allowed to expire, the projected decline in annual General Fund revenue growth would reduce Prop. 98 funding for K-14 education compared to the funding that would be required if Prop. 30’s tax rates were extended. Specifically, the Prop. 98 funding level could fall by roughly $2 billion in 2018-19 and by roughly $4 billion in 2019-20 if voters reject Prop. 55.
Restrict the state’s ability to boost investments in a broad range of critical services and systems. These include:
The state’s child care and development system, which continues to provide tens of thousands fewer subsidized “slots” than in 2007-08, the year the Great Recession began.
The state’s higher education system – the CSU and UC – for which direct state General Fund support per student is down substantially since the early 2000s, after adjusting for inflation.
The CalWORKs welfare-to-work program, which provides a level of support that leaves families, including 1 million children, unable to afford even low-cost housing.
SSI/SSP cash assistance for seniors and people with disabilities, which leaves individuals living below the poverty line and struggling to afford housing, food, and other necessities.
Result in smaller deposits into the state’s rainy day fund and lower debt payments, leaving the state less prepared for the next economic downturn. Building up reserves and paying down budgetary debt gives state policymakers additional options – beyond spending cuts – for balancing the budget and maintaining services during an economic downturn. However, the expiration of Prop. 30’s income tax rates would reduce the amount of revenues that are available for deposit into the Budget Stabilization Account and to pay down budgetary debt. As a result, critical services would likely face larger cuts if a recession significantly reduced state revenues.
In summary, allowing Prop. 30’s income tax rate increases on very-high-income Californians to expire would eliminate billions of dollars from California’s revenue system. This would leave the state with less funding to invest in schools, community colleges, and other vital public services and systems as well as reduce the state’s ability to pay down debts and save for a rainy day.
Policy Issues Raised by Proposition 55
Prop. 55 raises key policy issues, including whether to add a new funding formula for Medi-Cal to the state Constitution and whether to use temporary revenues to support ongoing services.
Adding a New Funding Formula for Medi-Cal to the State Constitution Reflects “Ballot-Box Budgeting”
By creating a new constitutional spending requirement for Medi-Cal, Prop. 55 is an example of what is commonly called “ballot-box budgeting.” On the one hand, critics of ballot-box budgeting argue that the initiative process limits voters to an up-or-down choice in isolation from other potential uses of funds. They argue that earmarking the proceeds from a certain revenue source constrains the ability of the Governor and lawmakers to use the same source for other spending priorities, to make programmatic changes, or to modify spending in response to economic, budget, and demographic shifts.
On the other hand, proponents of initiative-based spending argue that the two-thirds vote requirement for legislative approval of tax increases makes it difficult, if not impossible, to raise revenues through the legislative process to support public services and systems. As a result, they maintain that it is appropriate to offer voters the ability to raise taxes to fund specific state budget priorities.
Proposition 55 Provides Temporary Funds for Ongoing Spending
Prop. 55 extends Prop. 30’s personal income tax rate increases through 2030, but does not make those higher rates permanent. In other words, the revenues raised by Prop. 55 would eventually disappear. Given the temporary nature of these revenues, relying on them to fund permanent, ongoing services – such as K-14 education and Medi-Cal – would mean that state policymakers (and possibly the voters) would again face the question of whether to extend these tax rates, make them permanent, or find a different source of funding. If such efforts failed, state budget shortfalls would likely emerge, meaning that state policymakers would face the prospect of reducing spending on vital public services and systems.
What Do Proponents Argue?
Proponents of Prop. 55, including the California State PTA, the California Teachers Association, and State Superintendent of Public Instruction Tom Torlakson, argue that the measure will prevent “billions in budget cuts without raising taxes by ensuring the wealthiest Californians continue to pay their share.” They state that money from the measure “goes to local schools” with strict accountability requirements that “ensure funds designated for education go to classrooms,” and further that the measure “expands health care access for children.”
What Do Opponents Argue?
Opponents of Prop. 55, including the Howard Jarvis Taxpayers Association, the National Federation of Independent Business/California, and retired Superior Court Judge Quentin L. Kopp, argue that voters supported Prop. 30’s tax rate increases only “because we were promised they’d be temporary.” They assert that funding for schools and other requirements is adequate, and state that “we can’t trust the politicians and special interests.”
Conclusion
Prop. 55 would extend – from 2019 to 2030 – the personal income tax rate increases on very-high-income Californians that voters approved by passing Prop. 30 in 2012. Prop. 55 would not extend Prop. 30’s quarter-cent increase in the state sales tax rate, which would be allowed to expire at the end of 2016 as scheduled. Prop. 55 is projected to generate between $4 billion and $9 billion per year, a range that brackets the roughly $7 billion to $8 billion per year that Prop. 30 has raised to date. Prop. 55’s revenues would be used to meet various constitutional spending obligations, such as for K-14 education and for Medi-Cal, as well as to help maintain services that were in place as of January 1, 2016. After meeting these spending requirements, any Prop. 55 revenues that remained could be used for any budget priorities, including boosting working families’ access to subsidized child care, making higher education more affordable, and improving safety-net services for low-income families with children.
With Prop. 55, voters have a choice to maintain a level of funding that has allowed California to begin reinvesting in its schools and other public services after years of disinvestment during and following the Great Recession. Rejecting Prop. 55, and thus allowing Prop. 30’s income tax rate increases to expire at the end of 2018, would result in reduced state revenues, less funding for schools and community colleges, smaller deposits to the state’s rainy day fund, less repayment of budgetary debt, and – quite possibly – cuts to vital public services and systems. Moreover, California’s state and local tax system would become even more regressive because the wealthiest households – primarily the top 1 percent – would receive a substantial tax cut and thereby contribute less toward strengthening services that can promote economic security and opportunity for all Californians.
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Endnotes are available in the PDFversion of this Issue Brief.
Proposition 30, approved by voters in 2012, provided critical revenues to California at a time when the state faced daunting fiscal challenges. These revenues increased school funding and allowed for reinvestment in other public services after years of cuts. Prop. 30’s tax rate increases are scheduled to expire over the next several years. Although the state is in a much stronger fiscal situation now than it was in 2012, the phasing out of Prop. 30’s revenue boost would mean fewer resources available in the coming years to fund California’s various priorities.
This Issue Brief is the first of a two-part series in which we discuss what Prop. 30 has meant for California, and what extending a key component of it, as proposed by Prop. 55 on the November 2016 ballot, would mean for the state.
What Did Proposition 30 Do?
Prop. 30 raised the state sales tax rate by one-quarter cent through 2016 and added three new personal income tax (PIT) rates for very-high-income Californians through 2018:
A 10.3 percent tax bracket for single filers’ taxable income between $250,001 and $300,000 and joint filers’ taxable income between $500,001 and $600,000;
An 11.3 percent tax bracket for single filers’ taxable income between $300,001 and $500,000 and joint filers’ taxable income between $600,001 and $1 million; and
A 12.3 percent tax bracket for single filers’ taxable income above $500,000 and joint filers’ taxable income above $1 million.
The PIT and sales tax rate changes enacted by Prop. 30 have increased state revenues by $7 billion to $8 billion annually, with somewhat smaller gains projected for later years due to the expirations of the sales tax rate increase in 2016 and of the PIT rate increases in 2018.
Whose Taxes Does Proposition 30 Affect?
Everyone Pays the Sales Tax Rate Increase
Prop. 30’s quarter-cent sales tax rate increase affects all consumers. However, as a share of income, this increase has a larger impact on lower-income households than it does on higher-income households (Figure 1). This makes the tax “regressive,” as opposed to a “progressive” tax, which does the opposite — ask more of higher-income households than of lower-income households.
The Income Tax Rate Increases Affect the Wealthiest 1.5 Percent of Households
Prop. 30’s PIT rate increases are aimed at the highest-income households. Prop. 30’s PIT rates affect “roughly the 1.5 percent of taxpayers with the highest incomes,” according to the Legislative Analyst’s Office. Of the total annual dollar increase in income tax revenues raised by Prop. 30, the top 1 percent of households pay 98.6 percent, with the remainder paid by households in the next 4 percent, according to the Institute on Taxation and Economic Policy (ITEP) (Figure 2). Prop. 30’s PIT rate increases are very progressive.
Proposition 30 Overall Has a Progressive Effect
The revenues from Prop. 30’s higher PIT rates ($6.7 billion in 2015-16) are more than four times the revenues raised by the sales tax rate increase ($1.5 billion in 2015-16), according to the Department of Finance. This means that even though the sales tax component is regressive, Prop. 30 overall has a progressive effect on California’s tax system. Of the total revenue increase due to Prop. 30, the top 1 percent of families pay 77.2 percent, according to ITEP (Figure 3).
Asking the wealthiest Californians to contribute more follows the “equity” principle of taxation: that taxes should be levied fairly and based on ability to pay. Furthermore, the wealthiest Californians were the only ones to see growth in their average incomes over roughly the last quarter-century. The bottom 80 percent of Californians actually saw their average incomes decline between 1987 and 2014, after adjusting for inflation (Figure 4).
Proposition 30 Played a Critical Role in Stabilizing Public Investment Through California’s State Budget
Prop. 30 has had several notable budgetary impacts. It staved off substantial budget cuts in the 2012-13 fiscal year, as an additional $6 billion would have been cut from state support for programs in that year alone, had voters rejected the measure. Moreover, Prop. 30 has:
Helped the state to reinvest in preschool, K-12 schools, and community colleges. A growing economy and Prop. 30 worked together to boost Prop. 98 K-14 spending from $47.2 billion in 2011-12 to $71.9 billion in 2016-17. Since voters passed Prop. 30, Prop. 98 K-12 spending per student has increased by more than 14 percent — from $9,168 per student in 2012-13 to $10,493 in 2016-17, after adjusting for inflation (Figure 5). This increased support for California’s students followed a significant reduction in funding during and after the Great Recession. Furthermore, the average number of annual instructional days in California schools has increased and the number of K-12 students per teacher in California has decreased since voters approved Prop. 30 (Figure 6).
Allowed for some reinvestment in other public services after years of cuts. Prop. 30 provided space in the state budget to begin restoring funding to services outside of K-14 education. It did this by generating additional tax revenues that helped to fund the state’s share of the Prop. 98 guarantee, which in turn freed up General Fund dollars to support other services outside of K-14 education.
Boosted rainy day fund deposits and debt repayment. Prop. 2, approved by voters in 2014, requires the state to set aside at least 1.5 percent of General Fund revenues each year to both build up the state budget reserve and pay down budgetary debt. By increasing state revenues, Prop. 30 helped to boost deposits into the state’s rainy day fund and payments that reduce state debts. In 2016-17, for example, the state set aside $2.6 billion for Prop. 2 requirements and made an additional $2 billion deposit into the rainy day fund. These contributions would likely have been smaller in the absence of Prop. 30.
Proposition 30 Revenues Are Significant
Prop. 30 raises a significant amount of revenue. In 2016-17, Prop. 30 is projected to raise $7.7 billion — nearly equal to General Fund spending in the 2016-17 budget for the California State University (CSU), University of California (UC), and college financial aid combined ($7.9 billion) (Figure 7).
Alternatively, for more context on how much $7.7 billion represents, funding for key services and supports for seniors and people with disabilities is about $9.6 billion in the 2016-17 budget. This figure reflects combined General Fund support for the Supplemental Security Income/State Supplementary Payment (SSI/SSP) Program, which helps low-income seniors and people with disabilities to pay for rent, food, and other necessities; the In-Home Supportive Services (IHSS) Program, which helps low-income seniors and people with disabilities safely remain in their own homes rather than having to rely on more costly out-of-home care; and the Department of Developmental Services, which provides services and supports to people with developmental disabilities.
Conclusion
Prop. 30 helped California to begin reinvesting in its people and communities after the cuts made during and following the Great Recession. The looming loss of Prop. 30 revenues means California policymakers and voters must figure out how to fill the gap or face difficult choices about which public services and systems to prioritize and which to reduce or eliminate.
One initiative on the November 2016 ballot, Prop. 55, would maintain Prop. 30’s PIT rate increases beyond their scheduled expiration in 2018. In the forthcoming second part of this Budget Center series of briefs, we will discuss what Prop. 55 would do and what it would mean for the state.
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