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Californians Vote on Several Tax-Related Initiatives

4 min read

In today’s Orange County Register, Jon Coupal of the Howard Jarvis Taxpayers Association cites our newly released State-Local Tax Burdens report in an op-ed about taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase propositions on the November ballot:

We in California have just moved up from fifth to fourth in a ranking of the states by the Washington, D.C.–based Tax Foundation. For average folks, however, this is not good news. California leads 46 other states in per-capita tax burden, a dubious honor that helps to explain the state’s ongoing economic struggles.

Californians pay the highest state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. in the nation, we are tied for first in gasoline tax, our income tax rate is second, and, even with Proposition 13, we rank closer to the top than the bottom in property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es.[…]

While the high-speed rail project may be on track, the state is running off the rails. California has the worst credit rating of the 50 states. Taxpayers are on the hook for an estimated $497.9 billion in unfunded pension liability for government workers, while pay for these workers is growing three times faster than the median personal income of Californians. This year’s state budget is 6 percent larger than last year’s, but the Sacramento politicians are threatening to take it out on schools if they don’t get more money.

We will see Nov. 6 if enough voters have been intimidated into approving these tax increases and making California No. 1 in tax burden.

Proposition 30, sponsored by Gov. Jerry Brown, would raise about $6 billion per year:

  • Increases the state sales tax by a quarter point, from 7.25 percent to 7.5 percent, from January 1, 2013 to December 31, 2016. This is in addition to local sales taxes; for example, San Francisco sales tax would go from 8.5 percent to 9 percent, Los Angeles and Oakland sales taxes would go from 8.75 percent to 9.25 percent, San Jose sales tax would go from 8.25 percent to 8.75 percent, and San Diego sales tax would go from 7.75 percent to 8.25 percent. (That Los Angeles tax may go up by another half cent, announced the City Council chair yesterday.)
  • Increases the income tax on those who earn more than $250,000 per year ($500,000 per year for joint filers and $340,000 per year for heads of household), retroactive to January 1, 2012 through tax year 2018. The additional tax would apply to approximately 1 percent of California taxpayers. The top tax rate, currently 10.3 percent, will rise to 13.3 percent on income over $1 million. Four new tax brackets are added to the existing seven. See the rates of the proposal here, along with a criticism that it will worsen California’s already-severe tax volatility.

Proposition 38, sponsored by activist Molly Munger, would raise about $10 billion per year:

  • Increases income taxes nearly across-the-board, effective January 1, 2013. The full system would have 11 tax brackets with a top rate of 13.5% on income over $2.5 million ($5 million for joint filers).
  • In early years, about 60 percent of the revenues are dedicated for schools, 10 percent for early care and education, and about 30 percent to state debt payments. In later years, 85 percent of the revenue goes to schools and 15 percent for early care and education.

For both propositions, only part of the revenue would use to close the budget gap, due to Proposition 98’s requirement that 40 percent of all revenue (including this new revenue) go for K-12 education. If Proposition 30 is not approved, automatic budget cuts will take effect to reduce state spending by about $6 billion. If Proposition 30 and Proposition 38 are both approved, only the one with more votes will take effect. Note also that many references to these taxes exclude an existing 1 percent tax on income over $1 million (the revenue is dedicated to mental health programs), but we include it in our tables.

Also on the ballot is Proposition 39, which would raise about $1 billion per year by requiring multistate businesses to apportion their income to California based solely on sales. Currently, businesses can apportion based either on sales or based on a formula including sales, property, and payroll. Half of the money would be used for funding energy efficiency projects, and the rest for schools. California’s 144-page voter guide explains more but the topic of tax apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. is a tough one even for tax experts. Put briefly, multistate companies pay corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. in many states, and must use some formula by which to divvy up what each state gets to tax. Back in the day, the formula was based on your property and payroll. (For example, if you had 50% of your property in California and 100% of your payroll in California, you paid tax of 75%–the average of 50% and 100%–of your profits to California.) In the 1950s and 1960s, states adopted formulas equally weighing property, payroll, and sales. In the 1970s, states began double-weighting sales in the formula, and today many states only use sales. Aside from the additional revenue, the proposal would more heavily tax multistate firms that do business in California.

In addition to the statewide measures, California voters face 291 local ballot measures on taxes or borrowing. We analyzed two of them–measures in the cities of Richmond and El Monte to impose hefty soda taxes–but for the rest, check out the National Taxpayers Union Ballot Guide or Ballotpedia.