Long-Awaited Income Tax Proposal Finally Surfaces

Loren Kaye
President of the California Foundation for Commerce and Education

The Legislature adjourned Friday after passing hundreds of bills, but not a single tax increase. The very next business day, lawyers for the state’s most powerful government workers union unveiled a proposed ballot initiative to raise taxes by at least $60 billion.

Dubbed the “School Funding and Budget Stability Act of 2016,” the proposed measure would extend for 12 years the income tax increases originally approved by voters. Sponsored by Governor Brown in 2012, Proposition 30 added three new tax brackets on the highest earners, plus a small increase in the sales tax.

This new measure would continue those top income tax rates but not the sales tax increase. Proposition 30 adds about $6 billion a year in new taxes, on average. With these higher rates, California has the steepest income tax in the land. In fact, taxpayers and families with more than $200,000 in income pay more than 70 percent of all income taxes in California.

The top-heavy state income tax is the well-documented cause of much of California’s roller coaster revenue volatility. In boom years the revenues pile up; when the business cycle turns south, the state’s deficits climb. With that in mind, Governor Brown and a legislative supermajority placed a requirement for a rainy day budget reserve on the 2014 ballot, which voters handily approved.

Good thing, right? After all, extending these high income tax rates for a dozen years means at least one and likely two economic downturns will visit the state during that period, and our budget reserves should be a healthy bulwark as recession tides advance.

Except there’s nothing a government union, like the California Teachers Association, hates more than leaving money on the table – or in a reserve. So the proposed measure specifically prohibits depositing any revenues from these billions in higher taxes into the rainy day reserve. In other words, the Legislature can spend all the money from billions in new taxes as if those revenues are locked in stone.

Since most of the proceeds of these higher taxes will flow to schools and community colleges, and since increased revenues for schools are typically locked into place by the Proposition 98 formula, any future recession-induced revenue tumble will have to be cushioned by cuts to other programs – public safety, higher education, or the social safety net. Just like the bad old days before the voters sensibly insisted on a rainy day budget reserve.

This new measure is aimed at joining a crowded 2016 general election ballot. Since it will be a presidential year, the turnout will be higher with a slightly more liberal profile. There might be other tax increases on the ballot, as well as high profile measures such as legalization of recreational marijuana use and a minimum wage increase.

Even though this proposal may directly affect only a few hundred thousand taxpayers, the consequence of undermining the new state budget cushion will affect millions of Californians who depend on state and local programs in good times and bad.

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