Proposition 55 – 12-year extension of existing tax rate for individual incomes over $263K; phase-out of sales-tax increase.
Proposition 55’s main focus is the extension of tax increases that were passed in 2012 to raise additional funding for K-12 (about 89%) and community colleges (most of the remainder). The 2012 tax increased by 1-3% the tax rate on monies earned over $263K for individuals, $526K for couples; only the amount of money over the threshold is taxed at the higher rate and increased the state-wide sales tax.
Prop 55 extends the income tax increase, but allows the sales tax increase to phase out in 2018 as was originally planned. It also changes the allocation of the proceeds from this tax to somewhat more closely track the allocation of funds from the State’s General Fund, just over 50% of which is allocated to K-12 and college education. The legislative analyze estimates that prop 55’s revenues will be allocated approximately 50% to K-12 and higher education, and smaller increases to Medical and the State’s debt reduction and rainy-day funds (Note: the usually reliable Ballotopedia site appears to have missed this change). Exact allocations are tough because the allocations are dependent on the revenues received and the availability of funds – with education funding prioritized over other funding (as is the case in general fund expenditure).
We were supporters of this tax increase in 2012, despite the fact that we did not like the regressive aspects of an increase in the sales tax (sales taxes are evenly applied across the board, that means that low income earners who are struggling to maintain basis subsistence-level existence pay the same rate of tax on their purchases as do multi-millionaires whose shelter, education and food costs are not in jeopardy). However, that proposal, supported by Governor Brown as a way to balance the budget presented a much clearer explanation for the need to increase the tax and the corresponding budget cuts that would be needed without it. The fact that the Governor’s tax increases and budget cuts did exactly what he promised made us BIG fans of his – especially since he replaced outgoing Republican Governor Schwartzenegger who made big promises of fiscal responsibility but ultimately set records for spending and only increased the state’s deficit. With all the work, our State’s debt rating has increased back to an “A” rating (which lowers our cost to borrow) but we are still far from the highest level and rank in the bottom 20% of states in per-capita debt (i.e. 9th worst). This continues to lead us to believe that if we want to increase spending we need to increase taxes. The former issue – increasing spending – remains the question for us.
While proponents have not done a good job of pointing to facts on the “need” aspect, they have indicated that cuts would be required in order to keep the budget balanced if this measure does not pass. Aside from partisan statements, we found it difficult to locate reliable data on this issue. Our best source was a fact-checking article finding that the “yes on 55” claims of dire cuts to school funding if the measure passes were mostly false. While we agree with that assessment, the analysis shows that by 2020 there will be a 4 billion dollar shortfall in school funding, although there will be a 2 billion dollar budget surplus (thanks again Gov. Brown). Because we want those surpluses (and rainy day funds) to be available for emergencies we do view that future expected shortfall as a “need.”
The more well-reasoned opponents of Proposition 55 do not tend to question the need for the funding, rather they argue that using a “patch” to secure continued funding is irresponsible, and levying the taxes on only the top 1.5% of income earners is unfair. We agree with the former criticism, but not the later. We prefer a very progressive tax system, where those with more pay a greater percentage of their income to keep this amazing state working well. Additionally, this tax increase (or continuation) is less than the effective decreases that occurred when other taxes “sunsetted” in 2010 and 2011. We don’t think the nominal increase in taxes for the top 1.5% of income earners should be a serious concern now – though of course, it can’t be the perpetual answer every time more money is needed.
Expounding on the “patchwork” argument, critics correctly note that passing another temporary program that ups taxes on the top 1.5% solves nothing on a permanent basis and puts the funding stream for education at risk as soon as there is an economic downturn. We think those are fair criticisms, but we think that is the reason that this proposition also includes monies to pay down debt and to increase the “rainy day” fund – when the economy turns down it will be “pouring.”
The Fresno Bee probably explains our feelings best here: we don’t like this newest “patch” to our tax system, we don’t think the lurching, voter-approved, constituency-based, patchwork of tax code is a very good idea. But ultimately, we accept the political reality that given our present political climate legislators cannot make broad, smart, tax code changes because their constituencies don’t want them to do so – they want to make those decisions themselves (we think falsely) believing that they (the constituents) are best suited to decide those issues. Therefore we reluctantly accept this latest patch as a fairly good measure that does more good than harm.
Recommendation: Weak Yes.
 “For example, if this measure passes, a single person with taxable income of $300,000 would pay an extra 1 percent on their income between $263,000 and $300,000. This works out to a tax increase of $370 for this person.” http://voterguide.sos.ca.gov/en/propositions/55/analysis.htm
 http://voterguide.sos.ca.gov/en/propositions/55/analysis.htm (see breakdown)
 http://www.sfchronicle.com/opinion/editorials/article/Chronicle-recommends-No-on-state-Prop-55-9211163.php?t=104b81d5e4; http://www.latimes.com/opinion/editorials/la-ed-end-proposition-55-20160930-snap-story.html