New CBP Video: Proposition 30 Would Move California Toward More Broadly Shared Prosperity

November 1, 2012

In this brief video, CBP Deputy Director Alissa Anderson discusses the importance of Proposition 30 in the context of widening income inequality in California. Proposition 30, which will appear on the November 6 statewide ballot, would raise significant new revenues through temporary tax increases that would largely affect the wealthiest Californians.

This is the latest in an ongoing series of videos from the CBP highlighting key issues and trends in budget policy and what they mean for individuals, families, and communities statewide.

Proposition 39: Should Corporations Choose How They Are Taxed?

November 1, 2012

During the recent recession, when state revenues were at their lowest level as a share of the economy in more than three decades, lawmakers quietly passed a set of significant tax cuts that benefit a small number of large corporations at a cost of more than $1.5 billion a year to our state budget. Proposition 39, one of the measures on the November 6 ballot, singles out the largest and most costly of these tax cuts for public scrutiny. The CBP recently released an analysis of the measure, which would end the state’s current policy of allowing multistate corporations to choose the more favorable of two methods for determining their California income tax.

Under a system known as “optional single sales factor apportionment,” in effect since 2011, multistate corporations operating in California are allowed to choose the more favorable of two methods for determining what share of their income will be subject to state tax. Proposition 39 would change the law so that nearly all multistate firms would be required to calculate the share of their income subject to the state’s corporate income tax the same way: based on the percentage of their total sales that occur in the state. The proposed new system, called “mandatory single sales factor,” has been adopted by almost half of all US states.

Starting in 2013, Proposition 39 would result in an estimated $1 billion annually in additional state revenues, an amount expected to grow over time. From 2013-14 through 2017-18, half of these dollars would be used to fund energy efficiency and clean energy initiatives. After 2017-18, all the dollars would be deposited in the state’s General Fund. Proposition 39 is also expected to increase school funding because significant growth in General Fund revenues tends to boost the state’s minimum funding guarantee for K-12 education and community colleges.

The current system for taxing multistate corporations neither encourages firms to locate in California nor offers an incentive to hire Californians. Instead, it provides an arbitrary tax break for multistate firms by letting these corporations choose the most advantageous formula for calculating their annual tax bill. Currently, California is one of only two states that allow corporations to choose each year between single sales factor and another tax apportionment formula based on the firm’s property, payroll, and sales in the state. All other states that have adopted single sales factor have made it mandatory – either for all corporations or for certain categories of firms. States that have adopted the mandatory approach provide both a “carrot” and a “stick”: the carrot of lower taxes for firms that locate in-state and export out-of-state and the stick of higher taxes for firms that sell to the state’s market without locating a proportionate share of property and payroll there.

In the CBP’s analysis of Proposition 39, we find that the largest firms would provide the majority of Proposition 39’s new revenues. Firms with gross annual receipts over $1 billion would provide approximately 70 percent of the revenues. In a given year, only about 2 percent of all corporations doing business in California would likely be affected by the tax change.

Proposition 39 has its drawbacks: It includes an exception that specifically favors cable companies, and it dedicates a share of its revenues to specific, inflexible uses (namely, renewable and clean energy projects). Voters will need to weigh these concerns against the fact that Proposition 39 would revoke a sizeable and unnecessary corporate tax break and bring in $1 billion a year in new revenues, helping to stave off deeper cuts to California’s vital public systems and programs.

— Hope Richardson

New CBP Analysis Provides Side-by-Side Comparison of Propositions 30 and 38

October 5, 2012

The political season is heating up, and once again the statewide ballot includes several measures that ask voters to weigh in on important state policy issues. Two of these measures, Proposition 30 and Proposition 38, would raise additional revenues through temporary tax increases, but differ significantly in their approaches as well as their implications for the state budget.

To help voters better understand Propositions 30 and 38, a new CBP analysis provides a side-by-side comparison of these measures. This easy-to-read table draws from the recent CBP reports, What Would Proposition 30 Mean for California? and What Would Proposition 38 Mean for California?, and aims to succinctly explain what each measure would do. As noted in our full reports, the CBP has endorsed Proposition 30 and neither supports nor opposes Proposition 38.

This side-by-side look at these measures sheds light on some notable strengths of Proposition 30. For example, the measure would raise almost four-fifths of the new revenues (78.8 percent) from the top 1 percent, a group whose average inflation-adjusted income has skyrocketed during the past generation, even while average incomes for low- and middle-income Californians have decreased. Furthermore ­– and most importantly – while Propositions 30 and 38 would both increase funding for K-12 schools, Proposition 30 also would provide the revenues needed to help close the state’s budget gap and stabilize the state’s finances. Proposition 30 thus would allow California to reinvest in education, while at the same time bringing the state budget into balance and avoiding deeper cuts to public programs and systems that are essential to all Californians.

– Jonathan Kaplan

The CBP Looks at Proposition 31

September 28, 2012

A new CBP analysis shines a light on Proposition 31, one of the most complex initiatives set to appear on the November 6 statewide ballot. Californians who’ve heard about the measure probably know that it would establish a two-year state budget cycle. But that’s just one of numerous provisions – which run the gamut from the modest to the sweeping – that would affect government at the state and local levels, as our new report shows. For example, Proposition 31 generally would require bills being considered in the Legislature to be in print and publicly available for three days prior to passage, a modest improvement that would help boost the transparency of the lawmaking process. However, the measure also includes several far-reaching provisions whose benefits aren’t so clear. These include allowing local governments to preempt state laws and regulations with locally developed alternatives, giving the Governor unilateral authority to cut state spending during a fiscal emergency, and establishing new pay-as-you-go, or “paygo,” rules that generally would require the Legislature to pay for some spending increases or tax cuts – those that exceed $25 million per year – with offsetting spending cuts and/or revenue increases.

Our analysis identifies a number of policy issues raised by Proposition 31. For example, allowing local governments to substitute locally designed rules for state laws and regulations could result in widely varying local approaches across a range of policy areas in which uniform statewide standards may be more appropriate. Moreover, Proposition 31 could also result in significant local policy changes that might not otherwise receive approval through the state’s ordinary – and longstanding – legislative and regulatory review processes. The measure’s paygo provisions also raise concerns. While properly designed paygo rules can be a valuable component of public budgeting practices, spending cuts and tax increases do not operate on a level playing field in California. Tax increases require a two-thirds vote of the Legislature, whereas spending cuts can be adopted by majority vote. Consequently, Proposition 31’s paygo rules likely would result in the costs of new or expanded programs being paid for with cuts to existing services, rather than with tax increases. Our analysis also shows that the measure’s most far-reaching changes would be placed in the state Constitution, making them difficult to alter in the future if they prove to be ill-advised or unworkable.

– Scott Graves

Clearing Up Some Confusion About the Governor’s Proposed Tax Initiative

June 20, 2012

By now, many Californians are well aware that Governor Jerry Brown is seeking to qualify an initiative for the November ballot that would ask voters to temporarily boost sales and income taxes, with the increase primarily affecting the wealthiest Californians. What is less well known is that the Governor’s measure is also the keystone of the state’s effort to permanently transfer – or “realign” – several public safety, health, and human services programs, along with a dedicated source of funding, to the counties, a process that began last year. In particular, the Legislature redirected to counties two existing revenue streams – portions of the state sales tax and the Vehicle License Fee (VLF) – that are intended to flow to counties indefinitely in order cover the cost of the realigned programs. Counties, however, hoped for greater certainty than a change to state law can provide. The Governor’s initiative would address that concern by placing the revenue shift in the state Constitution, thereby guaranteeing that the sales tax and VLF dollars set aside for realignment will continue to flow for that purpose. The measure would also provide key legal protections for both the state and the counties as realignment rolls out, as we explain in our recent report.

Unfortunately, there appears to be some confusion about the relationship between the realignment provisions and the temporary taxes in the Governor’s measure. A recent post on Prop Zero, for example, claims that “much of the tax revenues [the Governor] would raise in his measure go to providing funding to locals for his realignment plans.” The post further argues that the Governor’s measure makes “the mistake of establishing a permanent change in governance … with temporary taxes.” This analysis is off the mark. As explained above, the Governor’s measure would place in the state Constitution the current, ongoing revenues that were already shifted to counties as part of last year’s realignment. In other words, the measure would combine a permanent change in governance with a permanent source of funding for counties’ new responsibilities. In contrast, the Governor’s proposed temporary tax increase has nothing to do with realignment. Instead, it would raise revenues in order to help balance the budget and stabilize the state’s fiscal situation.

In short, the Governor’s initiative encompasses two separate sets of revenues with different purposes and time frames – and never the twain shall meet.

– Scott Graves