Governor's New Tax Plan

Raises more tax revenue, but still shortchanges schools

On March 14, 2012, the Governor filed a new tax increase proposal with the Attorney General's office.  It has been suggested in news accounts that this will be the basis of the Governor's 2012-13 budget proposal.   The data from the Department of Finance indicates that the proposal would raise $9 billion in 2012-13, up $2.1 billion from the Governor's original proposal.  Note that the projected state deficit in 2012-13 is $9.2 billion. 

The essential elements of the Governor's new tax increase proposal are:

Summary of Findings:

  • The projected budget deficit in 2012-13 is $9.2 billion.  The tax increase will raise $9 billion, according to the Governor.
  • These funds will flow directly to schools, but the measure explicitly allows the state to lower current General Fund support for schools.  Exact figures aren't available, but it is estimated that about 65% of the $9 billion immediately generated would be applied to budget-balancing, with the remaining 35% going to schools. Of the four different proposals, this new "compromise" proposal helps schools the least. 
  • The Governor's initiative raises California's highest Personal Income Tax rate by up to 30%.  California's personal tax rate will be the highest in the nation, 21% higher than the next nearest state, raising concerns about California's ability to compete for high-paying jobs.

Governor's Revised Tax Initiative Shortchanges Classrooms to Fund Other Programs 

The Governor's tax initiative specifies that all of the revenue raised by the proposed tax increase shall be directed to schools.  However, the initiative goes on to specify that even though the estimated annual $9 billion in increased taxes are sent directly to schools, the taxes shall be counted as "General Fund proceeds of taxes"  for purposes of calculating the Proposition 98 minimum guarantee to schools.iii  This is a loophole that will allow the state to reduce the state's ongoing contribution to schools, while allowing the majority party to fund fast growing non-education programs, such as welfare.iv  While exact figures are unavailable, news accounts suggest that only 35% of the funding will aid schools while 65% of the funding will fund other programs.v

Governor's Plan Retroactively Cuts Schools

The majority-vote budget adopted in June 2011 diverted $5.1 billion of the state sales tax to fund the Governor's realignment scheme (AB 114, Chapter 43, 2011).  According to the non-partisan Legislative Analyst's office, this legally-questionable move reduced school funding by about $2.1 billion in the 2011-12 budget.  The Governor's initiative asks voters to retroactively authorize the $2.1 billion cut to education.vi  Section 36 (b) (2) specifically states:

"On and after July 1, 2011, the revenues deposited pursuant to paragraph (1) shall not be considered General Fund revenues or proceeds of taxes for purposes of Section 8 of Article XVI of the California Constitution.vii"

Governor's Proposal Boosts California's Personal Income Tax Rates to the Highest in the Nation

The Governor's tax increase proposal includes a ¼ cent sales tax increase for 4 years, bringing the total sales tax rate to a statewide average of 8.4%.  The proposal also increases the state's Personal Income Tax rate for 7 years.  Under the Governor's Personal Income Tax proposal, rates would rise 10-30%, topping out at 13.3%.  The tax increase would affect single income tax filers making $250,000 a year or more.  This will make California's highest marginal personal income tax rate 21% more than the next closest states.viii ix  The personal income tax increase would be retroactive to January 2012.   Many of these employers could easily leave California and flee to other states with lower tax burdens, taking jobs and opportunity with them.

Governor's New Tax Plan Could Lure Jobs to Other States

Recently, the state has shown signs of an emerging economic recovery. California's unemployment rate has most recently dropped to 10.9% from a high of 12.4%.x  This decline in the unemployment rate has contributed to a surge in state revenues without tax increases.  The proposed tax increase raises some important questions about the potential impact on the overall state economy. 

Impact on Small Business Owners: According to the most recent data available, two-thirds of businesses, more than 2.7 million small business owners, filed their income taxes under the personal income tax system.xi  The businesses that file as individuals under the personal income tax system are usually small "mom and pop" businesses.  Under the Governor's proposal, they could be subject to the tax increase if their business generated more than $250,000 a year.  For a small business making $250,000 a year in profits, an increase in the marginal tax rate will affect their ability to hire and retain employees.xii  

High Tech Industry: More than 900,000 Californians are employed in the high tech industry.  Due to the relatively high wages paid to high tech workers, other states have begun to compete for high tech jobs.  Other states with numerous high tech workers include Texas (456,500), New York (294,700), Virginia (277,600) and Florida (267,500).  All of these states have significantly lower personal income tax rates than California.  The closest is New York with a 9.3% rate followed by Virginia at 5.75%.  Florida and Texas do not have a personal income tax.xiii 

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