The answer is not a piece of cake, but if you are willing to dig in and digest it, you’ll be full of knowledge about taxes that many people don’t have.
Note: This is the second of a 2-part series on Prop 30 and Prop 38. The first one can be found here.
The 30-second Answer
Prop 30/Brown proposes a 0.25% increase in the sales tax which will be paid by everyone, plus a 1-3% increase in the Personal Income Tax for the highest income earners who comprise about 1% of personal income taxpayers. The majority of the revenue raised is expected to come from the Personal Income Tax.
Prop 38/Munger proposes a 0.4-2.2% increase in the Personal Income Tax for all but the lowest personal income taxpayers. While 60% of personal income taxpayers will be affected, the highest increases will be borne by the top 1% of personal income taxpayers.
Voters can approve both propositions, but legal, education and policy experts are predicting that only the proposition with the most votes will be enacted. Much of that decision will be in the hands of the courts, if it occurs. More information on what happens if both propositions are approved can be found here.
That’s the quick and factual answer to that question, but do you know what it really means? To really understand it, you need to spend a little more time with the details…
The 10-minute Answer
Do you really know how progressive income taxes work?
Most people don’t. And because we don’t, we can get really worked up and worried reading news about tax increases. Here’s a little video I did about how progressive income taxes work so that you will understand the implications of those facts.
Now that you’ve watched the video, let’s see if you can read these charts more easily. These are the proposed changes to California’s Personal Income Tax by Prop 30/Brown, followed by Prop 38/Munger, and provided by the California Legislative Analyst’s Office analyses of Prop 30 and Prop 38:
Q: What’s the difference between regressive and progressive taxes?
A: Usually, we think of taxes in terms of the “chunk” they take out of a household’s income — the percentage of a family’s income that goes towards the tax. Regressive taxes would take a proportionately bigger chunk of a lower income family than a higher income one, thus making regressive taxes more burdensome on lower income families because they have less disposable income.
Progressive taxes take a bigger chunk out of a higher income family than a lower income family, which is less burdensome because a higher income family is better able to absorb the loss than a lower income family.
A simple rule of thumb to determine if a tax is regressive or progressive is to ask: “After the tax, are the families now closer together or farther apart economically?” Regressive taxes push families further apart because they create more economic inequality. Progressive taxes move them closer together by making the families more equal. See this post and this one for a more detailed discussion.
Q: I don’t want to support Prop 30/Brown because I think raising sales taxes is unfair. It’s too burdensome for people to pay a regressive tax right now.
A: Prop 30/Brown’s version of fair taxes in this case is to raise Personal Income Taxes on 1% of California tax filers and share the remainder of the burden with everyone through the sales tax.
Yes, sales taxes are a type of regressive tax. Prop 30/Brown proposes to temporarily raise the state sales tax by 0.25%. One positive aspect of sales taxes is that they are more stable than income taxes. In fact, the California Legislative Analyst’s Office says that the amount of money raised by Prop 30 or Prop 38 is hard to predict because it relies so much on the income tax, which is volatile and subject to the same swings as the stock market. Schools need stable funding sources to be successful, and a sales tax increase is one way to add stability to this funding stream for education.
Here is a breakdown of how much of Prop 30′s funds will come from the Personal Income Tax and the sales tax provided by the California Legislative Analyst’s Office:
Q: Am I going to have to pay higher income taxes because of these propositions?
A: That depends on your family’s income. The California Budget Project did an analysis of who would pay for the increases proposed in Prop 30 and found that the top 1% of earners ($533,00o or more) would pay 78.8% of the increase. That analysis also points out that 82% of the income gains over the last twenty years also went to the top 1% of earners in Califonia.
California Budget Project’s analysis of Prop 38 revealed that the top 20% of income earners in California would see most of the increases in their tax bills, with much of it for the top 1% of earners. Prop 38′s website has a special calculator that you can use to determine what the effect will be on your taxes if it is passed.
Q: Aren’t Californians are overtaxed? It feels like we pay some of the highest taxes in the country.
A: According to the California Budget Project, California is considered a moderate tax state. For some taxes, California is higher than other states, and in other cases lower. Here is a chart from that fact sheet for comparison:
Q: These propositions focus too much of their taxes on the high earners. Why should the most wealthy have to pay so much? That doesn’t seem fair.
A: Here is a chart from the California Budget Project which shows that low income families pay a greater share of their incomes in state and local property taxes than do the wealthiest. The absolute tax bill may sound like a large amount to pay in taxes, but the day-to-day impact of paying 7.4% in taxes on $2.3 million in income is different than paying 10.2% in taxes when you only earn $12,600 a year.
Fairness depends on how you look at it. The California Budget Project did an analysis that points out that 82% of the income gains over the last twenty years also went to the top 1% of earners in Califonia.
Q: What happened to all the other times voters approved ballot propositions to fix school funding like the lottery and Prop 98? Why are these propositions even necessary? And why are there two of them?
A: The lottery was not a quick fix for the schools as it only generates enough revenue for 2% of the education budget. Prop 98 was sold to voters as a minimum funding guarantee for the schools. Unfortunately, in practice it has become a maximum funding guarantee since the legislature has not funded it more than it is required to by law. More information on Prop 98 can be found in the links on this page.
These two propositions reflect schools’ fiscal situation in the current economy and budget crisis. Both have been brought to the voters as alternative plans for funding schools, because compromises could not be reached to combine them into one plan. They are not, however, competing with each other in that both can pass. If they should both pass, it is likely that only the one with the most votes would actually go into effect. For more detail on this scenario, please see my original Voter Guide post here.
Q: I’ve heard that Prop 38/Munger is a middle class tax hike. Is that true?
A: If you haven’t watched the video above, please do because this answer will make more sense to you afterwards. Prop 38 increases the marginal rates for all tax brackets except the lowest tax bracket. However, because of various deductions, credits and the progressive nature of the tax, middle income families are likely to see only a minor increase in their taxes. Most of the tax burden will be on the highest earners (the top 1%). Here’s a chart from the California Budget Project that shows the projected increase in the tax bill for various income levels:
This post is a follow-up to my original Voter Guide for Parents post which can be found here. Useful and informative links for Propositions 30 and 38 can be found here. Feel free to post questions in the comments section below.