The day after California voters helped patch the state’s recession-battered budget by approving Proposition 30’s temporary tax hikes in 2012, Gov. Jerry Brown promised to treat the money as a short-term stopgap.
“It will be my goal to make sure the state is in such fiscal health that we can keep gliding into the future without having to go back to the well for more taxes,” he told reporters at the time.
Four years later, making good on both of those commitments — keeping the taxes temporary and keeping red ink out of California’s budget — has presented a predicament for Brown.
A coalition of unions and other advocacy groups is pushing a new initiative, which will be on the November ballot as Proposition 55, that would keep some of Proposition 30’s taxes instead of letting them expire as Brown pledged.
Proposition 30 raised the sales tax by a quarter-cent through 2016, and it increased levies on individuals making at least $250,000 annually until the end of 2018. The new marginal tax rates start at 1% and reach 3% on income of more than $500,000. Proposition 55 would let the sales tax hike lapse but keep the higher income tax rates until 2030.
Without the increased revenue, the state could face a $4.3-billion deficit in the coming years, according to Brown administration estimates. The gap would be even larger if California’s economy slows down or is struck by another recession.
Rather than “gliding into the future,” Brown would be forced to slash spending shortly before finishing his final term.
The scenario is “not pretty” and education funding could face billions of dollars in cuts, said Jennifer Wonnacott, a spokeswoman for this year’s tax campaign.
“Schools are just beginning to recover from the cuts that were made during the recession,” she said. “But there’s still a long way to go.”
The money from Proposition 55, which nonpartisan legislative analysts estimate would range from $4 billion to $9 billion annually, would go to local schools, community colleges and public healthcare.
Brown has not endorsed the initiative, but neither has he opposed it. Once it became clear that the tax campaign was moving forward earlier this year, Brown insisted that supporters tweak the proposal and ensure that some of the money raised would be deposited into the state’s newly strengthened rainy-day fund. The original version had exempted the revenue from that requirement, which Brown called a “fatal flaw.”
Brown has insisted that the state can manage any deficit that could occur, whether or not voters pass Proposition 55.
“I am prepared to manage without it,” he said in May. “I am prepared to manage with it.”
Critics feel Brown is trying to have it both ways — keep the budget balanced but avoid backtracking on his promise that the taxes would be temporary.
“There’s a wink involved,” said Joel Fox, a conservative political consultant who campaigned against Proposition 30 four years ago.
The tax extension is being pushed by some of the state’s most powerful organizations, including the California Teachers Assn., the California Medical Assn., the Democratic Party and the Service Employees International Union.
Also on board are top Democrats, including Lt. Gov. Gavin Newsom and Treasurer John Chiang, who are jockeying to succeed Brown in the governor’s office. Legislative leaders in the Capitol endorsed the initiative too.
“It’s something we need in order to continue to make sure that our fiscal shape continues to be healthy,” said Assembly Speaker Anthony Rendon (D-Paramount). “I think we need it in order to preserve programs I think are important at the current funding levels.”
Brown pushed for Proposition 30 in 2012 after promising voters he wouldn’t raise taxes without asking for their permission. At the time, the state was facing a multibillion-dollar budget deficit and Brown was slicing money from government programs for the poor to make ends meet. Without the taxes, he said, there could be billions of dollars more in cuts to schools.
In the years since Proposition 30 passed, the state’s economy has rebounded, contradicting opponents’ warnings that higher taxes would choke growth. Brown has also restored spending that was cut during the recession, although not as much as his fellow Democrats in the Legislature would like. They’ve urged him to loosen the purse strings even more when it comes to child care, public healthcare and other programs.
Brown has refused, warning about the possibility of another recession and insisting on bigger deposits into the state rainy-day fund.
“The surging tide of revenue is beginning to turn,” he said in May.
California is particularly vulnerable to economic downturns because it relies heavily on taxing the wealthy, whose incomes rise and fall with an unpredictable stock market. Roughly half of the state’s income tax revenue came from 1% of taxpayers in recent years, according to state statistics. State Sen. John Moorlach (R-Costa Mesa) joked during a Wednesday hearing that lawmakers should send California's wealthiest residents a fruit basket to thank them for not moving to more lightly taxed states.
It’s an issue Brown and the Democrats who control the Legislature have not addressed. Betty Yee, the state controller in charge of managing Sacramento’s cash flow, has called for changes to stabilize California’s finances, but she’s also endorsed extending the Proposition 30 income taxes.
“The revenues generated by this temporary tax on higher incomes will be needed to pay California’s bills with minimal reliance on external borrowing,” Yee said in a statement. “However, this is not a permanent fix, but rather another sign that we must immediately get to work on comprehensive tax reform in this state.”
It appears that Californians are inclined to agree. In a poll released in April by the nonpartisan Public Policy Institute of California, 62% of likely voters said they supported extending the taxes.
It's unclear how much opposition there will be.
“I don’t see much money for the campaign,” Fox said. “There will be people on radio talk shows, maybe some mail.”
The Howard Jarvis Taxpayers Assn., a reliable opponent of tax measures, said it would oppose the extension. The National Federation of Independent Business, which represents small business owners, has spoken out against it as well.
If voters agree to extend the taxes, what happens when they come close to expiring a second time? Wonnacott didn’t make any promises.
“Any decision to whether to pursue another extension or not would be made in the future,” she said.
For his part, Brown isn’t telling voters how they should treat Proposition 55.
“I’m leaving that to the people of California,” he said.