When is a temporary tax really temporary? For Californians, almost never.
In 2012, the voters of California approved Proposition 30’s temporary increases in our state’s personal income and sales taxes. The sales tax increase will expire at the end of this year. The personal income tax increases, on individuals earning more than $250,000, are supposed to expire two years after that.
Two initiatives have been proposed for the ballot this November to extend the increase in the personal income tax: one (sponsored by the California Teachers Association) continues them until 2030, the other (sponsored by the Service Employees International Union and the California Hospital Association) makes them permanent.
Gov. Jerry Brown this month announced his budget for 2016-17. That budget includes revenue from the “temporary” higher taxes. The personal income tax now provides more than two thirds of the state’s revenue, and a substantial part of that is due to capital gains which, unlike the federal income tax law, are taxed as ordinary income in California.
The governor’s budget message includes a warning about the great volatility of the personal income tax, due to the variability in Californians’ capital gains, which stood at $130 billion in 2007, dropped to $30 billion in 2009, and returned to $130 billion last year. It was because of the volatility in state revenue caused by these capital gains swings that Californians approved a rainy day fund by initiative in 2014.
The governor’s budget wisely provides for $2 billion more for the state’s rainy day fund than the rainy day fund initiative required. Eventually, that fund is supposed to top off at 10 percent of California’s annual general fund revenue, approximately $12 billion. If Gov. Brown’s budget is enacted by the Legislature, the fund level will rise next year to over $8 billion, two-thirds of the way to its goal. If the Legislature rejects Brown’s proposal, then the fund will be at $6 billion, still up from its present $4.45 billion.
In addition to extending the higher tax brackets, the CTA initiative adds an even higher bracket for those making more than $5 million a year and exempts the additional revenue from the prudent requirement of setting some aside for the rainy day fund. The SEIU-CHA version requires some contribution from the increased revenues to the rainy day fund, but not as much as would otherwise have been required. The CTA initiative follows current law in leaving more than half the new revenue to be used for any purpose the Legislature wishes.
The SEIU-CHA version suspends the formula that determines how much of any new revenue goes to K-14 education, giving those schools a flat 45 percent of the new revenue instead, and almost all of the rest to Medi-Cal. Thus neither is guaranteed to spend a majority of the new money for K-14 schools. (This, however, will not deter those campaigning for the tax increase from claiming it is for K-14 education. That was the winning argument in 2012 for the Prop. 30 “temporary” tax increases.)
The governor’s budget devotes substantial attention to the fact that California has a huge unfunded obligation to pay health benefits to retired state workers: over $71 billion. Nor has the state yet adequately provided a reserve for retired teachers’ pensions, over $72 billion. Although the state has begun to address the cost of pensions for new employees, it still carries a liability of $43 billion for existing retirees and employees. While not fixing these deficits, Gov. Brown at least identified these already incurred obligations in his budget message. Addressing them should come before net new spending.
However, it is hard to resist taxing someone else to pay for your own new benefits. Either initiative would generate about $10 billion a year – enough to increase state spending by about 9 percent. The sponsors of the initiative will claim that only the wealthy will pay, and it’s about time they paid their “fair share,” anyway. (The top 3 percent of Californians, by income, already pay more than 50 percent of the entire state income tax, but that fact will not dampen enthusiasm for the “fair share” argument.)
In 2012, Gov. Brown promised that his tax increases would be temporary. He is now being pressured to go back on his word. If he does recant, he should demand in return that the initiatives be recast, so that the rainy day rules apply and that additional revenue goes to pay down the accumulated existing obligations of the state pointed out in his budget message, rather than feeding the Legislature’s spending machine.
Tom Campbell is dean of the Fowler School of Law at Chapman University. He was California Director of Finance, 2004-05 and author of the automatic budget balancing mechanism proposed in Gov. Arnold Schwarzenegger’s 2006 budget. These views are his own.
