Proposition 30: Temporary Taxes to Fund Education. Guaranteed Local Public Safety Funding.
This proposition is a marriage of the two policy initiatives Governor Brown indicated he would pursue in order to stop the State’s burgeoning budget deficits. While general fund spending over the last 10 years peaked under Governor Schwarzenegger between 2006-8 (an ironic twist given that he supplanted Governor Davis on a “fiscal responsibility” platform after Davis was recalled by voters following his effort to raise revenue in an effort to forestall California’s budget woes), spending remains too high in comparison to tax revenues. (For an overview of state budget spending click here). The only solution is to either cut more spending or raise taxes. To that end, Governor Brown has proposed the following tax increases to address the problem:
Proposed Income Tax Increase — Single / Filing Separately (Joint Filers in Parenthesis)
Annual Income Range Proposed Rate Change Increased Cost Per Taxpayer
$0-$250,000 ($500K Joint) No Change $0
$250,000-$300,000 (5-600K Joint) 1% Increase $0-$500
$300,000-$500,000 (600K – 1M Joint) 2% Increase $500-$4,500
$500,000-$1,000,000 ($1M+ – Joint) 3% Increase $4,500-$19,500
$1,000,000 and up 3% Increase $19,500-and up
These tax increases remain in effect for seven years. Because those individuals earning less than $250,000 ($500,000 for couples) per year are unaffected by these tax increases, it means that 97% of California income earners will see no increase in their income taxes. For the top 3%, the increases are substantial. However, presumably, the top income earners have a greater amount of discretionary income and can therefore absorb the increased burden with less difficulty than those earning substantially less since those individuals must dedicate a greater amount of their income to cover life’s basic necessities.
Proposed Sales Tax Increase
Increase state sales and use tax by ¼ cent for four years. Unlike the graduated income tax, sales tax is a flat tax. It affects all consumers – regardless of income level – at the same rate.
The combination of these taxes will raise between 7-9 billion dollars each year in order to pay down existing spending commitments – mostly education costs. Because these spending commitments already exist, we can readily analyze the effect of declining to shoulder these increased tax burdens.
Anticipated Spending Cuts If Taxes Are NOT Increased
Opponents to Proposition 30 complain that spelling out decreased services amounts to a blackmail campaign aimed at scaring voters into authorizing these tax increases. We don’t see it that way. For years our California government leaders have cut taxes and fees while continually increasing services. Simple math tells you that isn’t a sustainable system. Governor Brown has taken what we think is a more responsible approach. He has committed to putting the fiscal house in order by first cutting spending and then either raising tax revenues, or (if the citizenry really does not want that) cutting spending even more sharply by reducing basic services. Specifically, the current budget states that if this tax hikes does not pass the following cuts to services will automatically be implemented:
- $6 billion in additional cuts to K-12 schools. Our schools have lost $20 billion in funding over the last 4 years (translating to between 12-20% in various funding classifications) in an effort to control the budget problem, translating to 30,000 fewer teachers. Absent this initiative, expect that number to rise another 30% including a cut of $457 of funding per student this year. (See ASCA Prop 30 Q& A)
- $1 billion in additional cuts to higher education including $250 million in cuts to each of the U.C. and Cal State Universities and a $550 million cut to community college funding. All state supported higher education institutions have confirmed that student rates will rise again if the initiative fails to pass. Funding to these institutions has been cut dramatically over the past 10 years, by way of example, per student funding has dropped 50% in the U.C. system of that timeframe. (See this post, for an excellent discussion of why these cuts will cripple our competitiveness and productivity in the future). Overall state spending on higher institutions has dropped 21% in just the last four years.
- $50 million in cuts to the Department of Developmental Services – the agency that provides support services for some 260,000 developmentally disabled Californians (persons suffering from autism, epilepsy, cerebral palsy, cognitive disabilities, Down Syndrome and the like) throughout California. For an example of what this agency does click here .
- Approximately $50 million in cuts directly to police, other law enforcement, fire, flood, and water safety services. These are generally considered “essential services” provided by government. See analysis
Each of the above-referenced are “trigger-cuts” meaning state law currently requires these cuts if revenues are not raised. Similarly, revenue from the tax increases is specially allocated; the proposition’s revenues are allocated to pay for existing obligations as follows: The proposition allocates 89 percent to K-12 schools and 11 percent to community colleges. It bars use of funds for administrative costs, but provides local school governing boards discretion to decide, in open meetings and subject to annual audit, how funds are to be spent. Guarantees funding for public safety services realigned from state to local governments.
Why We Favor This Tax Hike
Nobody Likes Paying: We don’t like paying taxes any more than the next person. However, we do like getting government services. We even like knowing those services are available for others even when we don’t need them – such as the limited aid for disabled Californian’s that happily none of us PolitoMusers need, the state fire and police services that we (knock on wood) have yet to use (arguably we have been known to actively evade some of these state police resources (read CHP), but we are still happy they exist). We don’t subscribe to the relatively new (the last 20 years or so) theory that citizens should continually enjoy such services but not pay for them.
Everybody Likes Spending: In considering whether to raise revenues (here taxes) or reduce expenditures on benefits, it is necessary to consider the state of the State’s Budget. First, it bears noting that over 70% of funds collected at the state level simply get sent back to local governments (for schools, police etc) – so, the State largely acts as tax collector for your local services (yes we know, not the most efficient way to allocated funds). Second, while there is a mis-perception that the state budget is filled with special accounts funneling funds into the pockets of elected officials, the reality is that 50 cents of every state dollar spent goes to education (a percentage that has remained constant over the last 30 years), 29 cents go to social services for the disabled, poor, etc, (a percentage that has dropped about 4% over the last 30 years), and 10 cents go to fund our burgeoning prison system (a number that has risen 1,500% in terms of real costs, and a four-fold increase as a percentage share of expenditures over the last 30 years). Only 11% of spending goes anywhere else. (wonder where the tax revenue goes? Checkout this PDF). By way of example, if the legislature decided to completely shut down the next 16 largest programs:
- the entire judicial branch [so no more state courts],
- all forestry and fire services [sorry Smokey],
- the entire Franchise Tax Board [good news: no business taxes],
- the Legislature [some people might like that],
- the Department of Justice [no more state prosecutions, but that’s ok, because there are no more courts],
- the State Board of Equalization [we’ll just hope people are honest enough to pay taxes],
- the Department of Veteran Affairs [they only served our country],
- the Food and Agriculture department [what’s a little lead in your food?],
- all California Parks,
- the Secretary of State [heck, these elections are kind of annoying anyway],
- the State Controller [perhaps the ultimate acknowledgment that we are out of money],
- the Department of Fish and Game,
- the Department of toxic Substances Control [toxic is such a subjective term],
- the Governor’s office [see#4],
- the California Coastal Commission (build whatever you want, wherever you want),
- and the State Treasurer (not much to protect at that point we suppose)
…we would reach about $4.8 billion in savings – or roughly half of what is needed to close the budget gap. The remaining $3-5 billion would once again be added to our debt (more on that later). We raise this point not to suggest this course of action, but simply to show that opponents who argue that we should “cut waste” rather than raising revenues are simply not grasping the magnitude of the problem.
There can be little question that in a roughly $100 billion dollar budget there will be waste, it is highly unlikely that 7-9% of expenditures are “waste” and even less likely that you will be able to catch and correct such “waste” since some inefficiency is inherent in every system.
How about borrowing? Those of you who know us PolitoMusers know we are not fans of debt. When people talk about using debt to fund operations (like schools) we get really fired up. Debt is a great way to fund long-term capital projects that will grow an economy or solve a long-term problem. Debt is a reasonable way of dealing with a short-term emergency like a war, flood, fire etc. But debt used to pay for our benefits is simply greed (or denial employed to disguise greed). It literally says I don’t feel like paying for this so I’ll make future generations foot the bill. Kicking the can down the road is not good policy.
If you are not convinced by the policy, consider the numbers. According to one report, California ranks number one among states in debt and owes an impressive $617 billion in debt. According to one state study, every person in California currently owes about $9,400 (as of 2007) in state & local government issued debt. According to a 2011 report, debt service costs the state nearly $8 billion a year and accounts for nearly 8% of general fund expenditures.
Shouldering The Tax Burden: Long-time readers of this blog (and its predecessor paper version) know that we do not favor “imperfect” propositions. While we can think of some changes we would make to this proposition, they are few and far between. We generally do not favor use or consumption taxes (like sales taxes) because we feel they disproportionately impact citizens in lower economic brackets. We tend to favor a highly graduated tax structure that increases the tax burden on those earning more – not because we feel that those who make more are less worthy but simply because those earning more by definition possess more disposable income. Since they must dedicate a smaller percentage of their income to take care of basic needs (food, shelter, medicine, etc) we feel they are better able to shoulder a larger share of the communities’ tax burden than are those who have a lower level of income (a higher percentage of which must necessarily be dedicated to procure basic human needs). If we had our way, both our state and federal tax systems would be far more graduated (i.e. more intermediate levels) and slightly more weighted to favor the poor at the expense higher income earners.
Making The Right Choice: We applaud what we view as a fair, responsible, and decidedly non-shrill presentation of this issue to voters: Raise revenues or lower services. California voters have an intellectually honest choice instead of saying Californians can have their cake, eat it and lose weight. If you’re loath to accept any tax increases, then you will be supporting dramatic cuts to state funded services. While every institution – public or private – has some inherent waste, there is no evidence that either (1) the amount of waste in state government is anywhere near the $7-9 billion needed to right the fiscal ship or (2) that there is a way to completely eliminate waste from the state governmental system (or any other system for that matter). We think arguments to the contrary are, frankly, red-herrings. As you know if you have read our prior analyses, we are always loathe to recommend curing budget problems by incurring debt. We believe that is an irresponsible and ultimately unsustainable way of paying for services. We think the value of the services at issue here, K-12 education, higher education, and essential services (police, fire, etc) are proper expenditures for government to be supporting. We do not think that dramatic further cuts to the budgets for these services is good policy. This tax increase would still keep the state per capita state tax burden at a level lower than we have seen for most of the last 30 years. (see Page 6 of this report ). We think raising revenues by increasing the tax burden slightly on low to middle income citizens and increasing the burden at a modestly higher rate on the top 3% of income earners (those who have enjoyed a 40-82% increase in their inflation-adjusted income levels over the last 20 years, while the bottom 80% of income earners have all seen a decrease in income levels) in the state is a necessary step toward fiscal responsibility. (For additional excellent economic analysis from our friends at the California Budget Project see the report).
Epilogue: Whatever your thoughts on this proposition, our Governor, in passing this budget (including either the trigger cuts discussed or the revenue increases available through this proposition) has quietly done something quite remarkable. His budget introductory message states something that no other Governor has been able to truthfully say in over a decade:
“…Under current projections, the Budget would be balanced on an ongoing basis for the first time in over a decade… Given the deep spending cuts included in the 2011 budget and the 2012 Budget, overall General Fund spending is now $91.3 billion, $11.6 billion lower than five years earlier. General Fund spending as a share of the economy is down to its lowest level since 1972-73. By the same measure, total state spending is at the same level as the mid-1990s. …The total of $16.6 billion in changes balances the Budget and leaves the state with a reserve of nearly $1 billion.”
(emphasis added). That’s right folks, A RESERVE. Something responsible governments do to plan for the future. There’s a reason we endorsed this guy two years ago…
We find the Governor’s work on this massive budget problem impressive and think he deserves a vote of confidence (see analysis re competing Proposition 38) based on his work. We are also impressed that this proposition is supported not only by the governor and other politicians, but also overwhelmingly by school groups (even though Prop 38 would raise a greater amount of money for K-12 schools), by nursing and healthcare groups, and by a very broad range of business groups and corporations (about $1 million by Pepsi, Coke, and other beverage providers, about $1 million by television and film companies, and several hundred thousand from smaller retailers, markets, and PG&E; see Who’s Funding Prop 30) who presumably believe that this proposition is necessary to ensure that they have a reliable flow of educated workers available (something that is increasingly problematic – see this post and this post. For compelling data on the growing “skills gap” facing employers see this article), but is not so onerous as to harm the California economy. We find ourselves agreeing with them and with the Governor.