Prop. 55: California Voters Extend Highest Income Tax Brackets to Fund Education and Healthcare

November 10, 2016 By Chris Micheli 1 Comment

classroomCalifornia voters on November 8 passed Proposition 55, which is an initiative constitutional amendment which took effect on November 9. This ballot measure was the successful effort to extend the Prop. 30 highest marginal tax rates promoted by Gov. Brown and others in 2012 as a “temporary tax” to help stabilize the state’s General Fund. Prop. 55 was opposed by some segments of the business community, but no serious opposition effort was mounted against this ballot measure.

Pursuant to the Attorney General’s Title and Summary, Prop. 55 extends by 12 years the “temporary” personal income tax increases enacted in 2012 on earnings over $250,000 (for single filers; over $500,000 for joint filers; over $340,000 for heads of household). Prop. 55 allocates these tax revenues 89 percent to K-12 schools and 11 percent to California Community Colleges, as well as up to $2 billion per year in certain years for health care programs.

While the ballot measure also prohibits the use of education revenues for administrative costs, it provides local school governing boards with discretion to decide, in open meetings and subject to annual audit, how revenues are to be spent. These are among the required audits and disclosures under Prop. 55.

According to the revenue estimates prepared by the Legislative Analyst and the Director of Finance, the enactment of Prop. 55 “will result in increased state revenues annually from 2019 through 2030 — likely in the $5 billion to $11 billion range initially — with amounts varying based on stock market and economic trends. These increased revenues will be allocated under constitutional formulas to schools and community colleges, budget reserves and debt payments, and health programs, with remaining funds available for these or other state purposes.”

According to the official ballot arguments: “PRO: Prop. 55 helps children thrive! Prop. 55 prevents $4 billion in cuts to California’s public schools, and increases children’s access to healthcare, by maintaining current tax rates on the wealthiest Californians — with strict accountability requirements. We can’t go back to the deep cuts we faced during the last recession.”

“CON: Vote No on 55 — Temporary should mean temporary. Voters supported higher taxes in 2012 because Governor Brown said they would be temporary. State budget estimates show higher taxes are not needed to balance the budget, but the special interests want to extend them to grow government bigger.”

As explained by the independent Legislative Analyst Office, over half of California’s budget is spent on education and that portion of the budget has seen a 50 percent increase in spending since Prop. 30 was enacted just a few years ago. The personal income tax provides a large portion of the State’s General Fund, followed by the sales tax and the corporate income tax.

High-wage earners, as well as thousands of small businesses that pay under the personal income tax, will continue paying an extra 1 percent, 2 percent or 3 percent tax on their income for an additional 12 years. The ballot measure also creates a formula to provide additional funds to the Medi‐Cal program from the 2018‐19 state fiscal year through 2030‐31. Although included in Prop. 30, this ballot measure does not extend the expiring sales tax increase of a quarter percent.

While the proponents repeatedly claimed that Prop. 55 continues a tax on “millionaires,” that clearly is not the case. Many small businesses that gross or net less than 1 million dollars will be impacted, as well as individuals making $263,000 or more, hardly the definition of a millionaire. At least a quarter of personal income tax revenue in California is generated by small businesses (i.e., sole proprietorships, LLCs, Subchapter S corporations, etc.). Some have estimated that over 80 percent of small businesses pay under the PIT Law.

To make matters worse, Prop. 55 taxes capital gains as ordinary income. With the continued volatility of the global and domestic stock markets, California will likely see big increases and decreases of PIT receipts with the drops and bumps of those stock markets. Moreover, with over $3 billion in the state budget reserves, some have questioned the need to extend the tax increases under Prop. 30 until they expire in 2018.

Prop. 55 extends the following income tax brackets, the highest marginal rates in the nation:

For individual filers (double the figures for joint filers):

  • Over $263,000 – 10.3% tax rate
  • Over $316,000 – 11.3% tax rate
  • Over $526,000 – 12.3% tax rate
  • Over $1,000,000 – 13.3% tax rate (includes 1% surcharge for mental health)

As a result of the enactment of Prop. 55, thousands of individuals and small businesses will be saddled with additional taxes over the next dozen years and California will continue to have the highest base rates in the nation for those paying taxes under the state’s personal income tax law. While a highly progressive tax system is desired by some interest groups in California, the current rates are at such a level that some believe they are fundamentally unfair and result (along with the highest federal income tax bracket) in more than 50 percent of income being taxed by the state and federal governments.

Chris Micheli is an attorney and legislative advocate with the Sacramento governmental relations firm of Aprea & Micheli. 

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Proposition 55 — Impressive Distortions, Unimpressive Policy

October 27, 2016 By Gary M. Galles Leave a Comment

If there was a convincing case for a law, making it would not require distortions. Consequently, when arguments involve multiple misrepresentations, the likelihood of good policy, rather than a means to pick pockets, is minuscule.

Proposition 55 demonstrates this. It would extend explicitly temporary income tax hikes Proposition 30 imposed on California’s highest income earners in 2012 (to the highest rates in America), for a budgetary emergency, from 2018 to 2030.

prop-55The voter guide’s pro-55 argument offers little but distortions. It claims it “prevents billions in budget cuts,” using terms like “devastating,” by making “the wealthiest Californians continue to pay their fair share.” It asserts multiple times that it will not raise anyone’s taxes, assures voters that no one else will be affected by those taxes, and that “Under Proposition 55, all Californians’ sales taxes are reduced.”

However, no education cuts are currently planned. Proposition 30’s money pipeline continues until the 2019-2020 fiscal year. Education spending has jumped almost $25 billion (over 50 percent) since 2012, while the state budget went from a huge deficit to a sizeable surplus and a rainy day fund. No budget emergency justifies extending Proposition 30’s highly disproportionate impositions from 4 years to 16 years.

Claiming Proposition 55 would ensure that the wealthiest Californians would continue to pay their fair share is similarly distorted. Even granting that “fair share” rhetoric has real meaning, rather than offering a never-ending source of complaints so undefined opponents cannot refute them, it falls flat. If the heavily disproportionate income tax burdens before Proposition 30 were considered “fair,” the much higher burdens it temporarily imposed cannot be bootstrapped into a new, even more disproportionate standard of fairness.

Pro-55 rhetoric of providing for our children also differs from its actual effect. Much of the money will backfill underfunded pensions, increasing those teachers’ retirement security, but doing nothing for our children. With about four-fifths of education expenses teacher compensation, other funding increases will largely go to existing teachers, regardless of whether added benefits are provided to children. And cynicism is justified by teachers unions’ bare-knuckle opposition to every accountability reform that would benefit students.

The pro-55 argument asserts it does not raise anyone’s taxes. However, while it would not raise higher income earners’ tax rates from the temporarily boosted levels of Proposition 30, it boosts them from what they would have been in the absence of Proposition 55. Further, extending those tax rates a dozen years could add over $100 billion in burdens. Imposing such huge added burdens can only be dishonestly characterized as not raising anyone’s taxes.

Those not directly facing higher tax rates will also pay a price, contrary to pro-55 claims. Every restriction in supply (e.g., from producers leaving California, as documented after Proposition 30) it causes will harm everyone else through the “tax” of higher prices. This is especially problematic with many small businesses paying personal income tax rates on their business income, guaranteeing that many non-wealthy Californians will leave or face much higher taxes for years.

While Proposition 55 backers portray a huge income tax boost as nonexistent, they do the converse for sales taxes. They say, “Under Proposition 55 all Californians’ sales tax are reduced,’ and further claim it as economic stimulus. But in fact, under Proposition 30, the sales tax rate will fall back to its earlier level anyway. Whether Proposition 55 passes or fails changes nothing, but backers pretend it does.

Pro-55 interests misrepresent the education budget situation, supposedly “fair” tax shares and who gains. They assert a huge increase in tax burdens does not raise anyone’s taxes, while crediting a tax reduction that will happen anyway to Proposition 55. Cramming all that disinformation, and more, into the heavily-funded pro-55 campaign, while keeping straight faces, is an impressive feat. But going to such overwhelming lengths to deceive voters is not an impressive reason to vote for it.

Gary M. Galles is a professor of economics at Pepperdine University, a research fellow at the Independent Institute, adjunct scholar at the Ludwig von Mises Institute, and member of the FEE faculty network. His books include Apostle of Peace (2013), Faulty Premises, Faulty Policies (2014) and Lines of Liberty (2016).

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State Tax Increase, Due to Expire in 2018, Might Live On

August 21, 2016 By Larry Sand 5 Comments

brown prop 30 california budgetIn 2012, Californians adopted Proposition 30, a “temporary” tax that, according to the governor, state legislators and teachers’ unions, would save the state’s education system by giving it an influx of at least $6 billion. The initiative jacked up income taxes on people earning more than $250,000 through 2018, and increased sales tax on everyone, through the end of this year. Now, the Golden State’s teachers’ unions, along with the Service Employees International Union, are looking to keep the higher income tax in place through 2030. (The sales tax increase will expire as scheduled.) California voters will decide on the tax extension in November, when the California Children’s Education and Health Care Protection Act of 2016, or Prop. 55, appears on the ballot.

It’s no surprise that the teachers’ unions would want to keep the higher tax — and the additional revenues it brings — in place. Earlier this year, California Teachers Association president Eric Heins claimed that Prop. 30 generated revenues that “continue paying back schools from the years of devastating cuts — especially those serving our most at-risk students.” But there was never any devastation. During the recession, spending dipped for K-12 schools and community colleges, but the decrease was hardly devastating. And since the end of the recession, California’s education spending has increased more than 40 percent.

All the extra money has brought paltry results. The work of the late Andrew Coulson shows that between 1972 and 2012, California’s education spending (adjusting for inflation) doubled, but students’ SAT scores actually went down. Things have gotten worse since 2012. In fourth-grade math, California ranks at the bottom nationally, just one point above New Mexico, Alabama and Washington, D.C., according to November 2015 data from the National Assessment of Educational Progress, known as “the nation’s report card.” In fourth-grade reading, only New Mexico and D.C. fared worse.

A recent study on the relationship between spending and achievement, conducted in Michigan, found no statistically significant correlation between how much a state’s public schools spend and how well students perform. Mackinac Center education policy director Ben DeGrow, who coauthored the study, said, “Of the 28 measurements of academic achievement studied, we find only one category showed a statistically significant correlation between spending and achievement, and the gains were nominal at best.” He added, “Spending may matter in some cases, but given the way public schools currently spend their resources, it is highly unlikely that merely increasing funding will generate any meaningful boost to student achievement.”

And yet, the unions look to be in strong position to win their tax-hike extension. A Public Policy Institute of California poll in April found that 64 percent of Californians support it. Among likely voters, 62 percent favor it. More than six in 10 voters believe that the state should spend more on education. And after insisting that the tax would be temporary, Governor Jerry Brown is having second thoughts. In his May budget revision report, he said, “The emerging shortfall is in large part — but  not entirely — due to the expiration of the temporary taxes imposed under Proposition 30.”

Does the average voter know how much California already spends on education? Apparently not. A recent Education Next poll asked respondents to estimate per-pupil expenditures in their local school district. On average, the respondents guessed $6,307 — but their school districts spent nearly double that, or $12,440 per pupil in 2012, when expenditures for transportation, capital expenses, and debt service are included.

The CTA has already sunk $10 million into the Prop. 55 campaign, with more to come. The Million Voters Project, an effort funded by many left-wing philanthropists, is working hard to pass it. Supporters insist that the tax falls only on the wealthy, whom they claim don’t pay their “fair share.” A look at the numbers tells a different story. A report issued by the Congressional Budget Office in 2012 shows that the top 1 percent of income earners across the nation paid 39 percent of federal individual income taxes in 2009, while earning 13 percent of the income. Hence, it’s clear that the rich are already paying considerably more than their “fair share.” At what point will California’s perennially overtaxed realize that their bottom line will be much healthier in, say, Texas?

American Federation of Teachers president Randi Weingarten and other union leaders continue to believe that we can spend our way to academic success. All the data show otherwise. With a debt of more than $1 trillion and counting, along with some of the highest tax rates in the country, California can ill afford more spending. The state’s residents have to stop falling for myths about meager education dollars. Voting “No” on Prop. 55 would be a good place to start.

Larry Sand, a retired teacher, is president of the California Teachers Empowerment Network and a contributor to City Journal’s book, The Beholden State: California’s Lost Promise and How to Recapture It.

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UChicago Will Spend $25k Teaching Students To ‘Hang Out’

April 11, 2015 By Blake Neff Leave a Comment

The University of Chicago (UChicago) has contributed $25,000 to help a student hold a “National Symposium on Hanging Out,” The College Fix reports.

UChicago is frequently ranked as one of the country’s most stressful colleges, but senior Alec Goodwin thinks he might be able to change that by teaching people the fine art of chillaxing.

“Hanging out. Everyone does it, but how much do we really know about it?” Asks Goodwin in his video pitch for the symposium.  The pitch is quite laid-back, to say the least, indicating Goodwin may be the perfect person to help teach the finer points of chilling to his stressed Chicago colleagues.

The money is coming from The Uncommon Fund, a pool of cash maintained by UChicago’s student government, which makes annual grants for students to pursue creative and unconventional ideas. Goodwin’s grant of $25,000 is more than a quarter of its 2015 budget, with other awards going towards a pig roast, bubble soccer, and other activities. The fund is partially paid for through student activity fees, meaning that every student at UChicago has now put a small amount of money to promote scholarship in the field of hanging out.

A staff adviser to the Uncommon Fund said that Goodwin was able to draw such a large amount of money because he proposes to bring in several notable speakers to discuss hanging out. Among others, Goodwin wants to invite Vice President Joe Biden, actor James Franco (“for his masterful depiction of hanging out on-screen”), and local Chicago rapper Chief Keef.

In addition to having speakers, Goodwin wants to host several workshops, with tentative suggestions including “Maxing and Relaxing,” “Advanced Time-Killing,” and “Hanging Out v. ‘Hanging Out.’”

The Uncommon Fund has been criticized by some students at UChicago, who argue that awards are made in an opaque manner without clear guidelines for what deserves to be funded.

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