California Voters Favor Higher Income Tax on Wealthy

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Laura Mahoney

Oct. 27 — California voters appear likely to say they want to keep taxing wealthy individuals to pay for schools and health care when they vote Nov. 8.

Proposition 55 to extend temporary income tax increases on high-income earners for 12 more years beyond a 2018 expiration date would apply to only 1.5 percent of taxpayers but generate between $4 billion and $9 billion a year.

Recent polls are showing a majority of Californians support the measure. A poll from the Public Policy Institute of California released Sept. 21 found 54 percent of likely voters said they would vote in favor, and a poll of likely voters in early October from the Institute for Social Research at Sacramento State University found 58 percent of likely voters plan to vote yes.

Although Gov. Jerry Brown (D) championed the temporary income tax increases first approved by voters in 2012 to close a chronic budget gap, he isn’t taking a position on the extension.

Teachers, Hospitals Support

Instead, a coalition lead by the California Teachers Association and California Hospital Association, with some help from entrepreneur and activist Tom Steyer, have mounted a one-sided campaign to make the increases last longer.

Supporters have raised $57 million to launch a statewide campaign, arguing it will prevent $4 billion in cuts to education funding without raising taxes.

“We can prevent cuts simply by maintaining the current tax rates on the wealthiest Californians with a yes vote on Prop 55,” Fred Van Vleck, superintendent of Eureka City Schools, said in an Oct. 20 news release from the campaign, which calls itself Californians for Budget Stability.

No Opposition Campaign

Opponents of the measure include the California Chamber of Commerce and the California Taxpayers Association, although they haven’t translated their opposition to financial support for an opposition campaign.

A total of $3,000 to oppose Proposition 55 has come from California’s Future Political Action Committee, which is backed by a private fiscal and policy think tank called the Kersten Institute for Governance & Public Policy. The opposition campaign consists of a web site and Facebook page.

The opponents argue the measure breaks a promise Brown made to California voters when he campaigned in 2012 for approval of the increases at the ballot: that the increases would be temporary. With Democrats controlling both houses of the Legislature and the governor’s office, and strong public support for Proposition 55, the opponents have chosen not to invest in a campaign.

“This is just another boot in the posterior of upper income people to get them to leave the state,” Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, told Bloomberg BNA Oct. 26. The group is one of the signatories to the arguments against Proposition 55 in the Secretary of State’s official voter guides, but isn’t actively campaigning, he said.

Manageable Deficits

Voters approved Proposition 30 in 2012 to increase income tax rates on individuals earning more than $250,000 a year and couples earning more than $500,000, with a built-in expiration of Dec. 31, 2018.

At the time, Brown said the measure was necessary to raise $6 billion a year and avert deep cuts to public education and other programs.

Brown has been quiet on Proposition 55, although when asked in recent months he said he still believes the increases should be temporary. “I’m leaving that to the people of California,” he told reporters in May when asked if he would support the measure.

He also said California’s deficits will be manageable if voters reject the measure.

“If the tax passes, it’s more or less steady as you go,” Brown said. “If it doesn’t pass, we’ll manage.”

Economic Expansion

In fact, the state is experiencing more than seven years of economic expansion that has turned chronic, multibillion dollar deficits into a surplus. Brown has continued to caution that, despite strong economic growth, state leaders must plan for the next recession by holding the line on spending and saving in a reserve fund.

Proposition 30 also increased the statewide sales tax by 0.25 percent, to expire Jan. 1, 2017. Proposition 55 doesn’t include the sales tax.

With adjustments for inflation built into Proposition 55, earners in the following brackets would pay 1 percent to 30 percent more than the base rate of 9.3 percent they paid before 2012:

  •  the personal income tax (PIT) rate on individuals earning $263,000 to $316,000, and joint filers earning $526,000 to $632,000, would stay at 10.3 percent;
  •  the PIT rate on individuals earning $316,001 to $526,000, and joint filers earning $632,001 to $1.053 million, would stay at 11.3 percent; and
  •  the PIT rate on individuals earning more than $526,000 and joint filers earning more than $1.053 million would stay at 12.3 percent.

Under Proposition 30, the revenue from the increased personal income and sales tax rates has been dedicated to schools and community college funding. Under Proposition 55, about half of the revenue of $4 billion to $9 billion a year would continue to go to education, and up to $2 billion would go to Medicaid each year. Also, between $60 million and $1.5 billion would go into the state’s budget reserve fund each year.

Variations in revenue from year to year would largely depend on performance of the stock market, because personal income tax revenue from high-income earners is heavily dependent on capital gains, according to the Legislative Analyst's Office.

Proposition 55 Income Tax Rates
Singlefiler'staxableincomeJointfiler'staxableincomeBasemarginaltax rate2012increasesextendedto 2030Total rate
263,000to316,000526,000to632,0009.30%1%10.3%
316,001to526,000632,001to1,053,0009.30%2%11.3%
Over526,000Over1,053,0009.30%3%12.3%
Source: California Legislative Analyst

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at LMahoney@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

The Official Voter Information Guide on Proposition 55 is at http://voterguide.sos.ca.gov/en/propositions/55/.

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