Prop 55 would extend Prop 30 temporary tax hikes for the wealthy

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In 2012, voters approved Proposition 30 that temporarily raised two types of California taxes – a quarter percent (from 7.25 to 7.5 percent) increase in state sales tax for four years, and graduated income tax hikes of one to three percent for seven years on high earners, with money raised direction to education funding.

Proposition 55 (Tax Extension to Fund Education and Healthcare) proposes to extend those temporary hikes for an additional 12 years and direct money raised to education (K-12 and community colleges) as well as health care for low income individuals (“healthcare services that qualify for matching federal funds” – Medi-Cal and other eligible programs).

Prop 55 contains language requiring strict accountability and transparency standards and gives local school districts control of how money is to be spent. The sales tax increase would sunset at the end of 2016 and not be extended.

With the 2012 passage of Prop 30, on single incomes from $263 thousand to $316 thousand and joint from $526 thousand to $632 thousand, the tax increase was one percent (from 9.3% to 10.3%); on single incomes from $316 thousand to $526 thousand and joint from $632 thousand to $1.053 million, it was two percent (from 9.3 percent to 11.3 percent.); and on single incomes over $526 thousand and joint over $1.053 million the increase was three percent (from 9.3 to 12.3 percent). The measure passed by 55 to 45 percent.

According to the Prop 55 text, “All revenues from this measure are subject to local audit every year, and audit by the independent controller to ensure they will be used only for the purposes set forth in this measure.”

The non-partisan California Legislative Analyst’s Office notes the extension affects roughly 1.5 percent of state taxpayers, those with the highest incomes. LAO notes passage of Prop 55 would increase income tax revenues from $4 to $9 billion annually. Income taxes provide about two thirds of all general fund revenues, according to the LAO, and education funding consumes over half of the $122 billion state budget.

Roughly half of the revenue raised by Prop 55 would go to Increased funding for K-12 and community colleges. And if general fund revenues annually exceed constitutionally required education spending and costs of government programs that were in place as of Jan. 1, 2016, then 50 percent of the excess (up to $2 billion annually) would be allocated to Medi-Cal. Generated new Medi-Cal revenues would be additional and not replace existing general fund support for the program.

LAO also notes passage of the measure could produce increased budget reserves of between $60 billion to $1.5 billion each year depending primarily upon stock market activity.

Proponents argue that Prop 55 is not a tax hike, merely an extension of existing temporary taxes on the state’s highest earners (1.5 percent of those paying income taxes) and does not affect the vast majority of state taxpayers. They note this is also a tax reduction (through expiration of the temporary sales tax extension). They also argue that rapid reverses in economic conditions can occur unexpectedly, based on national or international events, and that budget reserves should be increased from present levels to deal with such exigencies.

Opponents argue that Prop 30 was intended to be temporary and that a commitment is a commitment. Governor Jerry Brown, who touted Prop 30 as a temporary tax hike, has not specifically endorsed Prop 55 stating that it is for the people to decide. Opponents also argue that Prop 55 is a “band aid” on a tax structure that needs fundamental overhaul. They note too that the extension is not necessary and that education, healthcare and state government can be adequately funded without the addition funds this measure provides. They argue that a state budget deficit of $12 billion in 2012 has been turned into into a $2.7 billion surplus in 2016 and that amount is a sufficient reserve to cover potential future budget emergencies. They argue too that passage of Prop 55 would be a “job killer” and continue an undue burden on small business owners who often pay business taxes as part of personal income tax and could therefore be affected by this extension.

The lineup of supporting and opposing organizations falls, to some degree, along past political and interest lines. In support are the state Democratic Party, League of Women Voters, California Federation of Teachers, California Labor Federation, California State PTA, California League of Conservation Voters, California State Firefighters Association and numerous school and college boards throughout the state.

In opposition are the California Republican Party, the California Chamber of Commerce, the National Federation of Independent Businesses, the California Taxpayers Association and the Howard Jarvis Taxpayers Association.

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