Proposition 38

Proposition 38 — Tax for K-12 Education and Early Childhood Programs.

Proposition 38 is the competing proposition to the Governor’s Proposition 30.  Prop 38 was created by and nearly completely funded by wealthy private tax attorney and Democrat Molly Munger, who is daughter of Berkshire Hathaway billionaire vice-chairman Charles Munger.  She has funneled approximately 13 million dollars into the campaign as of this writing.  We analyze Proposition 38 in comparison to Proposition 30 for two reasons:  First, State Constitutional law and both propositions themselves view these as competing measures, which means they cannot both be enacted, only the one receiving more votes will become law.  Second, we believe both Propositions endeavor to achieve similar ends, but do so using differing means.

Proposed Income Tax Increase

This proposition increases personal income tax rates for any annual earnings over $7,316 using sliding scale from .4% for lowest individual earners to 2.2% for individuals earning over $2.5 million for a period of twelve years. (see Tax Table reference in Proposition 30 post) Thus, the tax increases last five years longer than those in Proposition 30 and rely exclusively on increases in the state income tax, rather than a combination of increasing the income tax of the top 3% coupled with a minor increase in the flat state sales tax.

According to the Legislative Analyst, this tax increase will raise about $5 billion this year and an estimated $10-11 billion (compared with 7-9 billion in Proposition 30) starting next year.  The 10-11 billion figure will then gradually rise over the remaining eight of the twelve year tax hike.

Proposed Expenditures

This proposition expends funds very differently than Proposition 30.  During first four years, 60% of revenues go to K-12 schools, 30% to repaying state debt, and 10% to early childhood programs. For the remaining eight years, the revenues are distributed as follows: 85% of revenues to K-12 schools, 15% to early childhood programs.  However, if revenues exceed a particular growth formula, excess funds are used to pay off state debt – We have identified no way to estimate if such funds might exist (much less quantifying how much they might be).  Based on the first four years where known revenues go to pay down debt, the State’s General Fund will see savings on debt-service costs of about $1.5 billion in 2012-13 and $3 billion in 2013-14, with savings tending to grow thereafter until the end of 2016-17 (when payments probably stop, unless the growth formula is exceeded).

Funds to K-12 schools are funneled through a newly created “California Education Trust Fund.”  That fund then distributes money to schools using a complex formula of grants.  Most of the money (70%) is expended on a per-pupil basis, some money gets allocated specifically based on the determination of the number of lower-income students in the district, and some (12%) must be allocated (spent) on technology and technology training.  (See the Office of the Legislative Analyst for a more comprehensive explanation).  The proposition creates a complex mechanism for public input and public disclosures for all funds generated through this process.  The law also imposes upon the superintendent of schools a series of reporting requirements, including the creation of an appropriate mechanism for providing such reporting.  Not surprisingly, the provision allows for up to 1% of a school’s allocation to be used to fund the bureaucracy needed to create this added disclosure process.

Of the funds dedicated to Early Childhood Programs, the proposition expends about 70% of its funds to expand Early Childhood Programs to serve more children, 20% of funds to restore services that have been cut since 2008, 9% of funds to provide “bonus” or incentive payments to providers who achieve good “evaluation scores” and about 3 % of funds to increase reporting (including a new rating system which generates the “evaluation scores”), database information collection, and inspections.  (For exact figures see p. 63 of this report)

The proposition does not provide funding for higher education.  Thus, the “trigger cuts” that would go into effect if proposition 30 does not pass, but proposition 38 passes would likely be somewhat off-set for K-12 schools by funds provided from this proposition.  However, the full effect of the “trigger cuts” would affect higher institutions because they receive no funding under proposition 38.

Why We Support Proposition 30 and Oppose 38

There are certainly appealing aspects to Proposition 38.  Like proposition 30, it properly (to our thinking) gives voters a choice of paying for services or declining to receive them – although it is aimed less directly at the “trigger cuts” in the budget.  Also, all of the revenue increases in this proposition come from a graduated income tax scheme – a mechanism we generally prefer over flat taxes.  However, while we prefer the graduated tax conceptually in Proposition 38 to the hybrid tax in 30, we are troubled that California’s tax structure starts off with very few grades (currently citizens making $48,029 pay the exact same tax rate as those earning up to $1 million) and that this tax reaches all the way down to those earning about $7,000.  We would prefer that the tax be more weighted toward the middle and upper economic echelons.  We suspect that in this instance, the impact of the ¼ percent flat tax (that would affect lower-income earners under Proposition 30) would have less impact than the modest .4% – 1.4% increases proposed on those earning between $7-48K under this proposal (though admittedly we are extrapolating here based only upon a few model calculations we did).

This Proposition also has the lofty goal of helping children and enhancing K-12 education in the state – something we probably need given our recent ranking – 30th (out of 50) in overall education scoring and 43rd in per-pupil spending.    In case you don’t think that these rankings translate into a knowledge gap, consider the fact that the science test scores of our State’s eight graders are currently ranked 47th in the nation.

Of course conceding that our state’s school funding is probably too low (compared to other states) and that we are building an ever-increasing knowledge gap between Californians and other states (much less other countries), does not tell us that either of these propositions is better since both provide money to schools.  That said, we are unconvinced that providing more money to K-12 and less to higher education (because of the “trigger cuts”) is a wise move.   Similarly, we are unconvinced that for the next 12 years we should force schools to expend exactly 12% on technology and training as is required under this proposition – such an expenditure might be smart or it might not.  With well over 9,000 schools, serving over 6,000,000 students in over 1000 different school districts throughout the state to consider we don’t like the idea of vegematic policy that mandates local schools act in a certain way.   We ask ourselves:

What if your school just got a huge donation of technology equipment from Apple or Dell?  Well, under this proposition your school must find some new wizzy gadgets to buy even if what you really need is something boring like textbooks, paper, or pens.  That isn’t good policy.

We are also concerned about the various reporting requirements – while the aim seems laudable, it is difficult to foresee how onerous it will be to comply.  While measurement and evaluations are important, one thing our education system is not lacking is more bureaucracy.  Once again we are bothered that we don’t have enough information to make that decision for the entire, massive, state educational system. (gee if only we had professional legislature with committees that specialized in this sort of thing instead of asking lay people to evaluate complex policy decisions. Oh that’s right we do – but we digress.)

Finally, we have been unable to discern any basis for the amount of funds that Proposition 38 sought to generate (i.e. what problem was it trying to solve).  Proposition 30 definitely grew out of lengthy budget discussions that identified a specific need – one we can agree with or not.  This proposition seems somewhat haphazard in that respect – for example, consider that in the first year K-12 schools will likely get less money (based on trigger cuts and the fact that only about $5 billion will be generated), then they will get a dramatic increase in year two, then things will level off in years 3 and 4, and then they will get another large increase in years 5-12.  Similarly, consider that billions are used to pay down debt during the first four years (something we find appealing), but then in year 5 those payments suddenly stop and are inexplicably shifted completely over to K-12 schools and Early Childhood programs.  Proposition 38 gives us no rationale for any of this “yo-yo funding.”

If you sense a trend here, you are right.  Proposition 38 isn’t a bad concept – it has some very good ideas.  The problem is that it was basically constructed by a single person who wanted to make some structural changes.  By contrast, proposition 30 was developed over several years by an entire political mechanism with many diverging interests.  The result is that Proposition 30 strikes a balance between many competing interests while Proposition 38 tries to impose a particular viewpoint about K-12 funding onto a massive existing bureaucracy.  Additionally, Proposition 38 prohibits any changes by the legislature, so if something doesn’t work, schools need to generate another ballot initiative to fix it.  Nevertheless, if proposition 30 were not on the ballot, at least some of us here at Politomuse might be more tempted to consider 38.  With Proposition 30 available, with the impending “trigger cuts” that will hit K-12 and higher education this year, and with the fact that only one of the two propositions is permitted to pass, we think Proposition 30 is a far better option.

Vote: No

  1. Oh Molly… Why Californians Need To Reject 38 And Approve 30 « PolitoMuse
  2. GO VOTE — PolitoMuse Offers Complete Analysis on All 11 California Propositions And Selected Local Measures « PolitoMuse

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