On Revenues and Referenda: Will California Extend Higher Tax Rates on the Wealthy?

This fall, in addition to casting their votes for elected officials, voters will also determine significant tax policies through ballot initiatives in states and localities across the country. ITEP will be highlighting a number of tax-related measures on the Tax Justice blog in the coming weeks.

Among the measures to be decided by Californians this November is Proposition 55—an extension of increases to the personal income tax rates paid by the wealthy that voters adopted in 2012.

Prior to 2012, high-income taxpayers in California all paid the same marginal rate of 9.3 percent on taxable income over $103,000 (filing jointly)—whether they had $103,000 or $103 million. In the wake of the great recession, voters approved Proposition 30, which made the personal income tax more progressive by temporarily increasing marginal tax rates on the wealthy and also increasing the sales tax by ¼ cent. Absent a change in the law, the sales tax increase will end this year and the higher marginal rates on those earning more than $526,000 (filing jointly) will expire in 2018.

Proposition 55, “Tax Extension to Fund Education and Healthcare,” asks voters whether the income tax rate increases on the wealthy should be extended through 2030. If it passes, the policy is expected to generate between $4 and $9 billion a year, revenue that would go toward meeting constitutional requirements (including public education and the state’s Medicaid program), maintaining existing services, and investing in other budgetary priorities as the funds allow. (See the CA Legislative Analyst’s full analysis of the proposition here.)

ITEP analysis shows that the income tax changes from Proposition 30 and 55 are positive steps toward a more progressive state and local tax system. Without Proposition 55, the top 1 percent of taxpayers would pay an estimated 7.8 percent of their incomes in state and local taxes—a smaller share of their incomes than taxpayers in the bottom 60 percent. With Proposition 55, the wealthy would be required to pay a more proportionate share at 8.7 percent.

Proponents of Proposition 55 emphasize the critical role revenues from the higher rates have played in stabilizing and improving the public school system and saving other services from more devastating cuts in the years following the recession. To them, maintaining these public investments through Proposition 55 by having the wealthy continue to pay their fair share is smart tax and public policy.

Opponents emphasize concerns over relying on unstable sources of income given the volatility in incomes at the top, warn of tax migration, and bemoan the temporary nature of temporary tax increases. (Though surprisingly, there hasn’t been a strong oppositional response to the measure.)

While the incomes of the wealthy do fluctuate more with broader economic conditions, additional revenues available to the state through Proposition 55 would also help shore up contributions to the state’s rainy day fund, a critical tool for smoothing spending over variable economic conditions that can reduce harmful cuts and reliance on temporary tax measures to stabilize budgets and government services.

Counter to claims that taxing the wealthy leads to a depressed economy, California has fared well in the years since the higher tax rates of Proposition 30 were adopted, with an economy that grew faster than the U.S. overall. (Compare to Kansas which infamously cut taxes during the same time period.) And, as has been repeatedly shown but confirmed once again recently by researchers at Stanford University and the Treasury Department, millionaire tax flight is of marginal statistical and socioeconomic significance, making it essentially a negligible issue when determining statewide tax policy.

Six weeks out from the election, field polls suggest strong support for Proposition 55. If such support pans out at the ballot, it will be a positive step for tax fairness and public investments in California.