Prop. 55: Initiative to extend income tax increases to benefit schools

October 11, 2016
Prop 55 school funding initiative extends income tax on wealthiest californians

With Gov. Jerry Brown vowing to cut $6 billion in funding to K–12 schools and community colleges if they didn’t approve a temporary tax increase, voters in 2012 passed Proposition 30, raising the state sales tax and personal income tax on the wealthiest Californians.

Now, Californians are being asked to extend for a dozen years a slightly modified version of the tax, generating roughly the same amount of revenue, depending on economic conditions, under a new name, Proposition 55. Only this time, supporters must make the case without the governor’s help. Brown is staying neutral, saying in a state budget press conference in May, “I said it was temporary when I started, when I got Prop. 30 passed — and I think I’ll leave it there.”

Education funding isn’t as dire as it was four years ago, pre-Prop. 30. But advocates say continuing the revenue is essential for education because many school districts are barely above the funding levels they were at before the Great Recession.

“California is 49th in the nation in teacher-student ratios, and the money from Prop. 55 will be critical to recruit and retain highly qualified teachers,” said Chris Ungar, president of the California School Boards Association.

Benefiting from a resurgent stock market, Prop. 30 raised between $8 billion and $10 billion annually for the General Fund, money that will disappear when Prop. 30 expires on Dec. 31, 2018. In the initial years, nearly all of that money went to K–12 schools and community colleges to repay them for funding that was cut during the recession. Without the money, Brown could not have jump-started his signature reform, the Local Control Funding Formula, which gives extra money to districts with large numbers of English learners and low-income students.

Proposition 55 will not revive the sales tax increase, which generated $1.5 billion annually. Continuing the income tax increase will yield $4 billion to $11 billion per year, depending on stock market gains, according to the Legislative Analyst’s Office.

Schools and community colleges can expect to get about half of that money, as determined by the formula that determines education funding, Proposition 98.

Without Prop. 55, under “optimistic” forecasts, school and community college funding would rise about 2 percent — $1.7 billion — in 2019–20, the first full year after Prop. 30 ends, according to the Legislative Analyst. But most of that would be eaten up by increases in employee retirement costs that the Legislature has mandated. Prop. 55 is projected to provide at least $2 billion more for schools and community colleges in 2019–20, and, if the economy backslides, as Brown and the Department of Finance say is likely, potentially shelter schools from larger cuts.

With per-pupil spending in California still lagging behind the national average, California schools can’t afford the loss of billions of dollars in revenue, said Wesley Smith, executive director of the Association of California School Administrators.  “The new accountability system in California has us poised to see great progress. We must continue our investment in this work and our students.”

But Jon Coupal, president of the anti-tax Howard Jarvis Taxpayers Association, said that temporary should mean temporary. “The budget crisis is over; schools need significant structural reform, like tenure reform and more school choice, not more revenue,” he said.

Medi-Cal would get first dibs, after schools, for Prop. 55 revenue, up to $2 billion in high-revenue years. Up to $1.5 billion would go to the state’s rainy day fund and the remainder would support other uses, including more funding for preschool or higher education.

Prop. 55 would raise income taxes on the top 1.5 percent of California’s earners, about 24,000 taxpayers, starting with individuals earning $263,000 and couples earning $526,000. They’d continue to pay the 1 percent more imposed by Prop. 30. Rates would rise to 3 percent more for couples earning between $1 million and $2 million.

In its analysis, the California Budget and Policy Center noted that since the 1980s, the incomes of the top 1 percent of earners in California have more than doubled in inflation-adjusted dollars, while incomes of the bottom 80 percent of households have declined.

Nonetheless, Prop. 55 would extend the state’s reliance on a volatile source of revenue: capital gains and stock market swings that have amplified the impact of recessions and recoveries. The top 1.5 percent of wage earners paid 52 percent of the state income tax in 2014.

That’s why Prop. 55 has created a dilemma for Lenny Mendonca, who favors both tax reform and more money for schools. Mendonca, a retired executive, co-chairs California Forward, an economic policy organization that has taken no position on Prop. 55, and chairs Children Now, a nonprofit that supports it.

“I’m deeply conflicted about Prop. 55,” he said. “It’s not great policy, but in the end, I will vote for it.” Schools, as well as early ed and higher ed, do need more money, he said, “but the governor has an obligation to lead a conversation about fundamental tax reform” that will produce  more stable and reliable sources of taxes.

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