When we wake up on Nov. 7 — or soon thereafter — Proposition 30 will either be the law of the land in California or it will join the growing heap of potential tax increases that went before voters and failed.
Lately, pollsters say the measure is holding onto a tenuous majority. I’ve had a rare window into the debate in recent weeks, as the Ventura County Economic Development Association voted to oppose Proposition 30 and then held an unprecedented and emotionally charged session to reconsider. It remains opposed.
In off-the-record discussions with any number of business types, educators and parents over the past few weeks, I’m convinced of one thing: whether it passes or fails, the Proposition 30 debate has drawn some battle lines that won’t easily be erased.
In case you have missed it, Proposition 30 would raise income taxes by 1 to 3 percentage points for individuals earning more than $250,000 per year — no exceptions for capital gains or passive income — for seven years. The “all-inclusive” tax rate for Californians earning more than $1 million would be 13.3 percent. Sales taxes would rise by one-fourth of a cent for all four years.
Most of the money would go to fund K-12 education, but higher education would also benefit; specifically, the CSU and UC systems would avoid $250 million each in mandatory cuts.
Proposition 30 will close a big chunk of the budget gap in the short run. But whether it actually fixes the budget or fosters an exodus that threatens California’s fiscal future a few years down the road remains a huge question. Here are six points to consider:
• Retroactive income taxes mean that Proposition 30 will raise a ton of money fast. Surprise! The new taxes will be effective as of Jan. 1, 2012. This will create an automatic windfall for the state from anybody who files an individual California tax return next year. I know what you are thinking, and yes, this is legal. It may seem like highway robbery but retroactivity has been a staple of income tax legislation; it was a cornerstone of federal tax policy in the Reagan Administration.
• Future revenues are not guaranteed. It is easy to see scenarios where large technology, biotech or software companies move their headquarters — and highest paid executives — out of California and manage remotely. If Proposition 30 falls short on revenue in years three or four, then there really is no place to go to get more money, and in a recession, the pinch could be severe. Last year, DaVita, a giant in the dialysis business, left El Segundo for Colorado — the top individual tax rate there is 4.6 percent.
• The Tri-Counties may be an unusually large beneficiary if Proposition 30 passes. Ventura County’s traditionally excellent public schools are a significant part of its attraction for business and as the newest campus in the system, CSU Channel Islands needs more money for future growth. UC Santa Barbara and Cal Poly are huge employers in relatively small communities; they already have faced sharp reductions.
• Smaller, private businesses will likely feel the biggest pinch. These are companies where the owners are just recovering from a recession where many gave up pay, and some of these are among the most charitable around when it comes to funding schools. In the Proposition 30 debate, there is a vast divide between place-based companies and more portable corporations, who will find it profitable to move their flags.
• Private philanthropy will be heavily incentivized. Business owners facing a mountainous state tax bill on top of increased federal tax rates will opt to place windfall revenues into foundations and other vehicles to avert a big tax bill. That is another reason why future revenue will not be an absolute certainty.
• Dependence on 144,000 wealthy taxpayers and windfalls from Silicon Valley-style IPOs will become heavier and heavier. Proposition 30 will extend and enhance the state’s addiction to Google-style windfalls that fill the budget coffers by taxing billion-dollar stock option gains for a lucky few. But net new jobs, especially higher paying ones, typically come from small, service-oriented firms with 25 or fewer people. The owners of those firms are going to be heavily taxed and cautious about hiring.
Proposition 30 is going to be a down-to-the-wire battle, and one that matters for the future of our state.
• Contact Editor Henry Dubroff at [email protected]