Initiative Would Restore Tax Hike on Wealthiest 1%

In their role as arbiters of clashing economic interests, voters will be asked Nov. 5 to restore a $700-million income tax increase to the wealthiest Californians.

If enacted, roughly half the new tax money from Proposition 217 would be funneled to schools. The other half would go to cash-strapped local governments.

Depending on who is doing the persuading, the ballot initiative is either a reasonable continuation of higher taxes paid by the wealthy since 1991 or a misguided scheme to “soak the rich” at the expense of small businesses.

The measure also would prohibit governors and legislatures in the future from taking local property tax revenues to balance state budgets, a controversial practice launched in 1992.

Proposition 217 would permanently restore the state’s top two personal-income brackets of 10% and 11% and make them retroactive for 1996 income. The rates would apply to the wealthiest 1% of personal-income taxpayers.

For individuals, the 10% rate would apply to taxable income (after deductions) of between $115,000 and $230,00 a year. The 11% rate would apply to taxable income in excess of $230,000.

Married couples would pay the 10% rate on taxable income of between $230,000 and $460,000 a year. They would pay 11% on taxable incomes exceeding $460,000.

The 10% and 11% brackets were enacted by Gov. Pete Wilson and the Legislature in 1991 as a temporary device to help balance the state budget. The brackets expired last year and the highest rate returned to 9.3%.

But Proposition 217’s supporters assert that unless their measure is approved and the two top brackets are restored, the wealthiest of Californians will receive an annual tax break totaling $700 million.

A higher priority for the tax money, they contend, is rebuilding local services such as libraries and parks that were severely reduced when Wilson and the Legislature began seizing billions of dollars in local property tax revenues to assist in balancing state budgets.

“We think the priorities are wrong and Proposition 217 corrects them,” Lenny Goldberg, executive director of the California Tax Reform Assn., recently told a legislative hearing.

Proposition 217 is supported by teachers unions, public employees unions, the county supervisors association and various city councils. It is opposed by organizations representing major businesses, agriculture and chambers of commerce.

Opponents contend that the initiative is unfair because wealthy taxpayers have paid at the higher rates for four years and should not suffer a permanent increase just as those rates expire.

But they target their heaviest criticism at what they say is Proposition 217’s biggest threat: higher taxes on small business operators who are rebounding from California’s long economic recession and creating jobs.

“Things are looking a bit brighter for small businesses, and Proposition 217 is something that clearly pushes us in the wrong direction,” said Albert Lundeen, a spokesman for the opposition campaign.

Under California law, most small businesses pay the personal income tax instead of the bank and corporations tax, which applies chiefly to entities that are incorporated.

Although definitions vary, a small business can range from mom-and-pop floral shops to law firms and anybody else who reports income from business sources.

But Goldberg, who helped write Proposition 217, said that relatively few small businesses report enough taxable income to qualify for higher taxes at the 10% and 11% levels--$230,000 and $460,000, respectively.

“The top 1% are not small businesses. They are movie stars, corporate executives, real estate developers, celebrity athletes and highly successful investors,” Goldberg said.

He suggested that major business organizations that oppose Proposition 217, such as the California Chamber of Commerce, do so not on behalf of small businesses but because they are “concerned about the million-dollar salaries of their corporate members.”

Lundeen, the anti-Proposition 217 spokesman, insisted that the interests of small businesses are represented by the state chamber and other big business associations.

“All these groups are strong believers that 217 points California in the wrong direction,” he said. “It restricts the flexibility of decision-makers to, say, give your employees raises.”

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Proposition 217 at a Glance

* What it would do: Reimpose the top two personal income tax rates of 10% and 11%. Apportions about half the revenue to schools and half to local government in proportion to the amounts they lost to balance the state budget since 1992. Prohibits shifts of additional local funds in the future.

* Supporters: Public employee and teacher unions, county boards of supervisors, including Los Angeles, various cities, League of Women Voters

* Opponents: California Chamber of Commerce, National Federation of Independent Business, California Manufacturers Assn., local chambers of commerce and taxpayer organizations.

* Web sites:

Campaign for: https://www.prop217.org

Campaign against: No web site