There’s a Hole in the Bucket

Props 30 and 38 would raise billions, but neither would solve California's structural budget crisis.

Propositions 30 and 38 are two of the most progressive tax measures proposed in California in recent memory. Each would raise billions of dollars by raising taxes on the rich at higher rates than on middle- and low-income residents. Both of these so-called “millionaire’s taxes” also propose to dedicate much of the money they raise on education, which has suffered severe cuts in recent years. But, according to experts, neither measure will adequately address California’s structural budget crisis — although Prop 30 may do more to help solve that problem than Prop 38.

The two measures, in fact, diverge in very important ways. To understand why requires a bit of history. The state’s fiscal health has been in decline since voters approved Prop 13 in 1978 — the famous measure that dramatically cut property taxes and limited the legislature’s ability to enact new taxes, thereby setting in motion a huge and sustained drop in revenue for state and local governments. California’s budget process was made worse in the decades afterward by needlessly complex ballot measures. “Over the years, the system has grown more tortuous, warped by frequent voter-approved initiatives that increased or earmarked spending,” explained veteran political journalist Jerry Roberts in a recent essay, describing the state’s fiscal crisis that Governor Jerry Brown’s favored tax measure — Prop 30 — is designed to alleviate.

According to the nonpartisan California Legislative Analyst’s Office, voters have approved eighteen statewide ballot propositions concerning taxes since 1978, each of them a form of “ballot-box budgeting” as critics of the process call it. Together, these propositions, whether they raised or lowered taxes, have cumulatively worsened the structural budget crisis by limiting how the state can raise money, and what it can be spent on. None of these measures was able to repair the proverbial hole in the bucket — the huge loss in revenues that has grown over time and exploded during recessions, mostly due to the permanent slashing of property taxes.

Which brings us back to props 30 and 38. Are they solutions? The short answer is no. And one of the propositions — 38 — arguably represents another example of ballot-box budgeting.

Prop 30 would implement three new tax brackets that apply only to the wealthiest of California residents, beginning with a 10.3 percent rate for individuals and couples making $250,000 and $500,000 respectively, and topping out with a rate of 12.3 percent for individuals making $500,000 and couples raking in more than $1 million. Prop 30 also includes a sales tax increase of a quarter cent that will disproportionately impact low and middle-income earners. Nonetheless, it’s still a progressive tax proposal. The income tax hikes for the wealthy will last for seven years while the sales tax expires in four years.

If Prop 30 doesn’t pass, $6.0 billion in mandatory “trigger cuts” will take effect on January 1, further harming K-12 and higher education, and slashing funds for local police, the California Department of Forestry and Fire Protection, the state Department of Fish and Game, state parks, and other programs.

Backed by wealthy Southern California lawyer Molly Munger, Prop 38 would also implement a significant tax hike on high-income earners through increases in state income tax rates as high as 2.2 percent above the current 9.3 percent that targets single filers who make $2.5 million and up. While Prop 38 doesn’t propose a sales tax increase, it does gently squeeze the middle and working classes with increases in their income tax rates, but this rise is slightly less than the 1.9 to 2.2 percent that earners in the quarter-million dollar and above club will face. Thus, on balance, it’s also a progressive tax proposal.

Both are also equitable measures if you consider the massive gains in income by the wealthiest Californians over the past two decades. Data from the Franchise Tax Board shows that the state’s top 1 percent saw their incomes rise by 50 percent while the bottom 20 percent suffered a decline of 20 percent in income.

But the biggest difference between the two measures is what they would do with the tax money they raise. Prop 30 would drop an estimated $6 billion annually into the state’s general fund, where it could also be used to help shore up California’s social safety net and safeguard state parks. However, because of a previous ballot-box-budgeting measure approved by voters — Prop 98 — roughly half of the money raised by Prop 30 must be dedicated to K-12 education.

By contrast, money raised through Prop 38 would not go to the general fund, and so the state would not be able to use it to fund social service programs and parks. Instead, all of the revenues would be deposited into a newly created California Education Trust Fund. Most of the money in this fund would go to K-12 education, with about 30 percent set aside to repay state debt, much of which has been incurred by selling bonds to build school infrastructure. Because Prop 38 includes a clause that denies legislators the ability to count its funding of K-12 education as part of Prop 98’s mandate, this essentially means that if Prop 38 passes, we will have significantly increased the overall share of state dollars going to K-12 education. But Prop 38 would do little to help deal with the overall budget crunch — except to alleviate some payments on state debt — because no money would go into the general fund. Prop 38 also would not help the state avoid the trigger cuts set to take effect on January 1, except to safeguard K-12 education funding.

A Yes on 38 ad justifies this by arguing that “Sacramento politicians have chopped away funds for our schools,” and suggests that the way to fix this is to put a firewall between legislators and new tax dollars for education. But these sorts of limitations on how various special pots of tax dollars can be spent, like Prop 98, have become as much a part of California’s government crisis as the overall lack of revenue.

There are other reasons to fret over these progressive tax measures designed to support education. Darien Shanske, a professor at the UC Hastings College of Law, said a major shortcoming of both is that the projected budget deficit next year is growing. “For this budget cycle [Prop 30] is supposed to raise about $8.5 billion. That’s pretty good because the deficit at the time Prop 30 was proposed was projected to be about $9 billion,” Shanske explained. “So we had a deficit of $9 billion projected for next year, and hoped to raise $8.5 billion, that looks pretty good. But the first problem is that the deficit is now already predicted to be $16 billion, and so in no way will it be able to close the deficit even if Prop 30 raised as much as initially projected.

“It’s also worth noting that the cuts to education and social services over the last four years is estimated to be about $56 billion,” Shanske continued, “and none of that money is proposed to come back.” In this sense, both propositions could at best only stabilize education budgets, greatly reduced as they are.

The California Budget Project, a nonpartisan organization well-known for its rigorous analysis of state policy issues, holds a more optimistic view, and has even taken the rare step of endorsing Prop 30. “Prop 30 would raise much needed revenues as part of a balanced approach to closing state budget gap over the long haul,” said the CBP’s senior policy analyst Jonathan Kaplan. While the organization supports Prop 30, Kaplan clarified that it’s taking a neutral position on Prop 38.

Only one of the measures can pass, however. If both receive more than 50 percent of the vote, the one with more total votes cancels out the other.

Corrections: The original version of this story erroneously stated the amount of the so-called “trigger cuts” that would take place should Prop 30 fail. It’s $6 billion, not $4.8 billion. Also, the current state tax rate for high-income earners is 9.3 percent, not 11.5 percent.


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