Governor Brown Looks to Patch a Budget Gap with Prop 30

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By Sheila Kuehl

When Governor Brown took office, he erroneously believed he was dealing with the same California Republican party with whom he had worked out so many things in the past. Instead, he was strung along just long enough for the temporary taxes put into place by Gov. Schwarzenegger, which were simply supposed to be extended, to expire. Left with no alternative, the Governor put his version, a continuation of the Schwarzenegger tax increases, out for signature. At the same time, a proposed initiative, cheerfully dubbed the Millionaire's Tax, was circulating and the two seemed destined to do some harm to each other, especially since the provisions of the Millionaire's Tax were polling better. As Sen. Russell B. Long once put it, "Don't tax him and don't tax me, tax that guy behind the tree." That would be the rich, and the 99% seemed very willing to do it.

But the Governor's signature collection budget was high, so the proponents of the Millionaire's tax decided to flex their good polling muscles and voila! Out of mutual interest, a hybrid was born: Prop 30. The new initiative adopted the small sales tax increase in the Governor's plan, but adopted the establishment (really restoration) of three new tax brackets for upper-income earners.

The Sales Tax

California state sales tax rates differ, depending on where you live. This is because, local governments, special districts, and others have the ability to add to the basic state sales tax through a vote of the populace. The average state sales tax rate is just over 8%. A portion of that goes to the state, and the rest to local government. In 2010-11, the state share of the total sales tax collected in the state was around $27 billion dollars.

The sales tax revenues are extremely important to local governments. When Gov. Schwarzenegger gleefully Terminated the Vehicle License Fee, and with the limits placed by Prop 13 on property tax, the sales tax came to be the greatest source of revenue for local government. Having gutted local governments' ability to collect Vehicle License Fees, Arnold finally agreed to raise the state sales tax by one quarter of a cent for every dollar of goods purchased. The tax was temporary, and expired earlier this year. Should Prop 30 pass, we would, in essence, be paying the same sales tax we were paying before the end of June. Under Prop 30, the one quarter cent sales tax would last for only four years, and then expire.

The Personal Income Tax (PIT)

Currently, the top marginal personal income tax rate in California is 9.3% and is paid by all earners with incomes of anything over $48,000 or by joint filers earning $96,000 or more. Under Reagan and other Governors before him, there were higher marginal tax brackets for higher earners, all of which have since been eliminated.

As you know, in a progressive system of taxation, such as ours, different levels of income pay increased taxes as the income increases. These are called marginal rates. Right now, we all now pay 1% (state income tax) on our first $7300 of income, 2% on the next $7300-17,000, 4% on 17-27,000, 6% on 27-38,000, 8% on 38-48,000 and 9.3% on amounts over that.

This proposition would increase the marginal taxes for individuals earning more than $250,000 or couples earning more than $500,000 in the aggregate (shown ahead in parentheses): so that the new marginal rates would be 10.3% for earnings above 250,000 but below $300,000 ($500-600,000); 11.3% for 300-500,000 (600,000 to one million) and 12.3% on amounts over 500,000 (one million). These new taxes actually affect only the 1$ of Californians who gross more than $250,000 a year. Like the sales tax increase, these new brackets would be temporary, but, whereas the sales tax increase expires after four years, the new tax brackets would be in place for seven.

The 2012-13 California Budget

As passed at the end of June of this year, the California general fund budget already includes the amounts to be raised by Prop 30. In that budget, K-12 education was relatively unscathed and higher education was not cut as deeply as it had been in the past. Built into the budget, however, were a series of "trigger" cuts which automatically go into effect should Prop 30 fail to pass. The cuts would be relatively instantaneous (and have to be applied all in the last half of the 2012-13 budget) and would diminish K-12 and community colleges by a whopping 5.35 billion dollars, UC by 250 million, CSU by 250 million, and various other law enforcement, safety, and developmental disability services by a total of 99 million.

All in all, if Prop 30 passes, it is expected to provide about $6.6 billion dollars to the schools. Under Prop 98, education funding (K-12 and community colleges) increases when there are increases in state revenue, on a formulaic basis.

The realignment to the counties of responsibility for the incarceration of low-level, non-violent offenders, supervision of parolees and provision of substance abuse treatment services has begun. It is funded currently but there is no guaranteed source of funding for the counties in the future. The 2011-12 state budget provided a transfer of monies to pay for the realigned services but funding was only guaranteed through last June, with a proposed transfer of six billion dollars a year from state to counties to pay for the programs. This is to be accomplished by shifting an additional portion of sales tax which usually goes to the state to the counties. Prop 30 embeds language in the Constitution requiring the state to continuously provide the tax revenues that had been redirected in 2011 to local governments going forward.

Other Provisions in Prop 30

Language in Prop 30 provides that local governments may not be required by the state to implement state laws that increase local costs to administer the programs transferred by realignment in 2011, unless the state provides additional money.

In addition, the state must pay any increased costs that result from court actions or federal statutes related to these transferred services.

So What's The Good, the Bad and the Ugly?

The approach adopted by this measure is like holding a gun to your head and shouting "Stop me before I hurt somebody!" The budget is in place and the gun is pointed squarely at education, and the public safety services tied to realignment. Without the influx of revenue provided by the increased temporary taxes, there is insufficient money to hold education or the counties harmless.

It seems very clear that education was chosen as the main hostage most likely to succeed because people prefer putting money into schools rather than into the social safety net that provides health care and welfare to low income, seniors, children and families. Cuts to those social services programs, bloody as they were, will remain even if the Proposition passes. However, with the trigger cuts built into an already-adopted and signed budget, education across the board takes a heavy blow if it fails.

Opponents claim that there is nothing holding the state to keep its promise to put the new revenue into the schools and into the counties. As to the schools, when state general fund revenue increases, Prop 98 allocations also increase, so a portion of the money would definitely go to the schools. Similarly, realignment monies will have to go to the counties if Prop 30 becomes part of the Constitution.

You can find the list of supporters and opponents online. The League of Women Voters, the California Teachers' Association and the California State Sheriffs' Association signed the ballot argument in favor, as well as the rebuttal to opponents. The Small Business Action Committee, the National Federation of Independent Business/California and the Sacramento Taxpayers Association signed the ballot argument against. The Howard Jarvis Taxpayers' Association, the California State Board of Education and the Los Angeles County Board of Education signed the rebuttal to the proponents' arguments.

Sheila Kuehl is a former California Assemblywoman and Senator who served as chair of the Senate Health Committee. Her website is www.sheilakuehl.org.