This is the second in a series of essays analyzing the Propositions appearing on California’s November ballot. This essay describes Proposition 38, which amends state statutes (not the Constitution) to increase state income tax for any Californian earning more than $7316 a year, and allocates the increased revenues to K-12 education, state debt and early childhood education. I’ll also address what happens if both the tax measures, Propositions 30 and 38, should pass.
Prop 38: The Personal Income Tax (PIT)
The revenue for this measure comes purely from raising the marginal income tax rates on all but the lowest level of earners in the state. As you know, in a progressive system of taxation, such as ours, different levels of income pay increased taxes as the income increases. These are called marginal rates. Right now, we all now pay 1% (state income tax) on our first $7300 of income, 2% on the next $7300-17,000, 4% on 17-27,000, 6% on 27-38,000, 8% on 38-48,000 and 9.3% on amounts over that. Currently, the top marginal personal income tax rate in California is 9.3% and is paid by all earners with incomes of anything over $48,000 or by joint filers earning $96,000 or more. The personal income tax in California brings about 49.4 billion dollars into the state general fund. Because of an earlier initiative, an additional 1% tax applies to incomes over one million a year, with the associated revenue dedicated to mental health services.
Under the provisions of Prop 38, marginal tax brackets would increase for all individuals earning more than $7,316 a year (just double all the numbers for joint filers), although the continuation of personal, dependent, senior and other tax credits would continue to eliminate tax liabilities for some folks in the lower brackets, even after the marginal rate is increased.
This proposition would increase the marginal tax on earnings between 7316 and 17000 by .4% (total tax rate of 2.4%), on earnings between 17 and 27,000 by .7% (4.7%), 27-38,000 by 1.1% (7.1%), 38-48,000 by 1.4% (9.4%), 48-100,000 by 1.6% (10.9%), 100-250,000 by 1.8% (11.1%), 250-500,000 by 1.9% (11.2%), 500,000 to one million by 2% (11.3%), one million to 2,500,000 by 2.1% (11.4%, but with the 1% in effect for mental health, it’s really 12.4%), and everyone over 2,500,000 by 2.2% (11.5%, plus 1% for mental health=12.5%). The increases would remain in effect until 2024.
The measure is expected to raise an additional ten billion dollars annually, 4.2 billion of which would be allocated to school districts on a per pupil basis, 1.1 billion would go to schools to beef up programs for low income students and 700 million would be allocated for training and technology. In addition, approximately one billion dollars annually would go to Early Care and Education and about 3 billion would go to pay state bond debt service.
How the increased revenues would be allocated
All the new revenues would be placed into a separate fund called the California Education Trust Fund, and spent only on the three specific purposes. From 2013 to 2015, 60% of the new revenue would go to schools, with no limit on growth of the allocations to the schools. From 2015-2017, 60% would go to schools, but growth would be limited. From 2017 to 2024, 85% of the revenue would go to schools. From 2013 to 2017, 30% of the revenue would go for state debt payments, with no revenue for this purpose after 2017. From 2013-2017, 10% of the new revenue would go to Early Care and Education, and, after 2017, the share would grow to 15%.
Details of the funding proposal for public schools
Six million students in 1,000 school districts receive a public education funded primarily through a minimum guaranteed percentage of the General Fund adopted in Prop 98. Local property taxes also support the local schools. Local school boards decide how to allocate the funds and about 70% are used for educational purposes, with the remaining 30% targeted specifically for things like school meals and transportation. Seventy percent of the new monies raised by this initiative would be distributed on a per-student basis and would be in addition to Prop 98. High schools would receive more per student and the money could be spent on a broad range of educational activities like instruction, support staff and parent engagement.
Eighteen percent would be distributed at one uniform statewide rate to school districts based on the number of low-income students enrolled in each school. Twelve percent of the funds, based on the numbers of students at each school, would go exclusively for training school staff and purchasing technology and teaching materials. School districts are required by the measure to seek public input and report on their budgeting each year, including an online report for the budget for each school.
Details of the funding proposal for Early Care and Education
Early Care and Education includes both infant and toddler care and pre-school programs. Currently, subsidies are available for low-income parents and those participating in welfare-to-work. Roughly half of all the children in California actually qualify for some sort of subsidized program, but there are insufficient funds, so waiting lists are common for subsidized programs.
Under Prop 38, 10% of the monies raised through 2017 and 15% thereafter would go to overall restoration and improvement in existing subsidized programs. Nineteen percent of that money would be used to serve more children, raise the amount each family can earn and still receive subsidized services and increase per-child payment rates, and 3.5% for the establishment of a rating system, databases and licensing inspections. About half of the rest of the new monies devoted to early care and education would go to expand slots for children 3-5, 16.6% for children birth to three (through a new California Early Head Start program and 8.9% for supplemental payments to providers that receive higher scores through the new rating system.
Details of the funding proposal to pay down state debt
In order to build infrastructure, including school infrastructure, the state has issued general obligation bonds that, in 2010-11, cost 4.7 billion dollars in debt service. Of that amount, 3.2 billion was paid for debt service on school and university facilities.
This measure allocates 30% of the new income tax revenue (through 2017 only) for debt service relief. Education debt service must be paid first and then any other state general obligation bond debt service costs. The fiscal effect projected for this provision of the measure would be a savings to the general fund of about 3 billion dollars. Theoretically, this would free up three billion dollars in general fund monies for other programs and to balance the budget.
What happens if both Prop 30 and Prop 38 pass?
The state Constitution provides that, when measures conflict, the one receiving the most votes prevails. Language in each of the initiatives repeats this and says the other would not go into effect at all. The difference, however, is that should Prop 38 get more votes than Prop 30, the trigger cuts already in the budget would go into effect, reducing school funding by more than 5 billion dollars, and UC and CSU each by 250 million dollars.
A small correction to yesterday’s Prop 30 essay
The opposition to Prop 30 is not, as I reported, the California State Board of Education or the L.A. County Board of Education, but only one individual from each of those signing on to the ballot argument as an individual.
Sheila Kuehl is a former California Assemblywoman and Senator who served as chair of the Senate Health Committee. Her website is www.sheilakuehl.org.