California Budget Bites

It’s that time of year. No, not the holidays. It’s filing season – the time of year when ballot measure proponents start down the long road toward the November election. To date, at least three “major” revenue measures have been filed with the Attorney General’s office, along with a number of measures that raise lesser amounts of money and/or are targeted to specific purposes outside of the state’s General Fund. This blog post briefly examines the three main proposals: what they tax and the extent to which they help narrow the state’s budget gap.

First, some background. Both the Legislative Analyst’s November forecast and the Department of Finance’s more recent estimate project a shortfall in the range of $12 billion to $13 billion for the remainder of the current and upcoming fiscal years. The Legislative Analyst’s estimate, which looks five years in the future, shows the gap slowly narrowing, but not closing over time. Significantly, this projection assumes that none of the spending cuts made in recent years are restored and that the trigger reductions included in the 2011-12 Budget become part of the “base” used to determine future years’ spending. Thus, a key consideration in evaluating potential ballot measures must be the extent to which they do, or do not, help bring the budget into balance and limit additional spending cuts.

The three major proposals filed to date include:

• The Governor’s Proposal. The Governor’s proposal would impose three new tax rates on very-high-income Californians – married taxpayers earning $500,000 or above – and increase the state’s sales tax rate by 0.5 percentage points on a temporary basis. The higher income tax rates would apply to 2012 through 2016; the sales tax would be increased from January 1, 2013 through December 31, 2016. This proposal would raise an estimated $7 billion per year, approximately $4.4 billion from the tax rates on high-income individuals and $2.6 billion from the higher sales tax rate. The additional revenues would be earmarked for education, but would also count toward the Proposition 98 guarantee, thus “freeing up” General Fund resources to help close the budget gap. The Governor’s measure also places the framework for the recent “realignment” of criminal justice and social services programs in the state’s Constitution and clarifies that the revenues supporting realignment do not count toward the Proposition 98 guarantee.

The bottom line? More than half of the revenues raised by the Governor’s proposal would come from the top 1 percent of state income taxpayers, while all Californians, including businesses, would pay the higher sales tax rate. Reports suggest that the minimum school funding guarantee would increase by approximately $2 billion and approximately $5 billion of the new revenues would be available to help close the budget gap.

The big question: How should the budget gap be closed once the temporary tax rates expire?

• The Millionaires Tax. The so-called “millionaires tax,” sponsored by the California Federation of Teachers (CFT), would permanently add two new rates to the state’s personal income tax: an additional 3 percent on income in excess of $1 million but not over $2 million and an additional 5 percent on incomes of more than $2 million (the 1 percent mental health tax rate would still apply in addition to the two new rates). Revenues raised by the new tax rates would be allocated to K-12 education (36 percent), community colleges (8 percent), the University of California (8 percent), and the California State University (8 percent), with the remainder allocated to counties for children’s and senior services (25 percent), public safety (10 percent), and roads and bridges (4.9 percent). The new tax rates would raise an estimated $5 billion to $6 billion.

Funds allocated to K-12 education and community colleges would be in addition to the amount guaranteed under Proposition 98, and the measure does not address the shift of revenues from the state to counties under the “realignment” included as part of this year’s budget. Thus, it appears that the state would still be obligated to increase school funding as required by language included in the budget agreement. The CFT measure would not directly help close the budget gap, leaving the state facing a $12 billion to $13 billion shortfall over the next 18 months. However, the Legislature could potentially reduce funding to the UC and CSU or suspend the Proposition 98 guarantee to achieve savings. Due to “mandate” provisions in the state’s Constitution, it is unclear whether the state could reduce funding or shift additional responsibilities to counties for public safety or children’s and senior services in an amount commensurate with their new revenues. Significantly, none of the moneys for children’s and senior services would go to support services wholly or primarily funded by the state or where state laws establish the framework for programs and services, such as SSI/SSP; CalWORKs grant levels and time limits; Medi-Cal benefits and co-payments; and Healthy Families.

The big question: Since little or none of the new revenues would go to reducing the budget deficit, how should that gap be closed?

• The “Munger Proposal.” Advancement Project co-director Molly Munger has filed a measure that would add a new personal tax rate on the incomes of nearly all California taxpayers. The new rates would be progressive, that is, a higher rate would apply to the incomes of higher-income individuals. The new tax rates would range from a low of a 0.4 percent rate on taxable incomes of married Californians between $14,642 and $34,692 to a high of $68,169 plus 2.2 percent of taxable income above $3,402,944. The new tax rates would raise approximately $10 billion. Eighty-five percent of the new revenues would be allocated to K-12 education, and 15 percent would be earmarked for early care and education. The new revenues would be in addition to amounts guaranteed under Proposition 98. The measure also includes detailed language governing how the new moneys would be allocated among programs and school districts. Since the new revenues would go to schools in addition to, and not as part of, the Proposition 98 guarantee, the measure would not help close the state’s budget gap. The new tax rates would be adjusted each year for inflation and remain in effect from 2013 through 2024. Similar to the CFT measure, the Munger proposal does not address the shift of revenues from the state to counties under the “realignment” included as part of this year’s budget. Thus, it appears that the state would still be obligated to increase school funding from General Fund revenues as required by language included in the budget agreement.

The big question: Since none of the new revenues would go to reducing the budget deficit, how should that gap be closed?

Future blog posts and CBP analyses will examine other pending measures and take a closer look at the three measures described above once additional information is available. Importantly, the revenue estimates noted above are preliminary and often based on press reports. State law requires the Attorney General’s office to prepare a “title and summary” and the Department of Finance and Legislative Analyst’s Office to prepare an estimate of a measure’s cost or revenue impact during the same period. Once these are completed within the specified time period, proponents can begin to gather the signatures needed to place a measure on the ballot.

The CBP is more convinced than ever that a balanced approach is the only responsible approach to addressing the state’s substantial fiscal challenges. It now appears that the voters will have the opportunity to express their will at the ballot box next November. The only question is which, and how many, measures will they have to choose from.

– Jean Ross