Prop 3: Making the Income Tax Rate on High Earners Permanent

Ericka Cruz Guevarra [00:00:00] California has what’s known as a progressive tax system. Basically, the more money you make, the more you pay in income taxes.

Olivia Allen-Price [00:00:09] For years, California voters have approved certain tax rates for high-income earners. And now, Prop 3 could make some of those rates permanent.

Ericka Cruz Guevarra [00:00:20] I’m Ericka Cruz Guevarra, host of The Bay.

Olivia Allen-Price [00:00:23] And I’m Olivia Allen-Price, host of Bay Curious. Welcome to Prop Fest. For two weeks, our teams at The Bay and Bay Curious are bringing you breakdowns of each statewide proposition on the California ballot, so you can vote smart this November.

Ericka Cruz Guevarra [00:00:37] There are 14 propositions on the ballot this year, and we’ll be taking you through all of them.

Olivia Allen-Price [00:00:43] Today, we’re talking about Proposition 3. A bill that aims to lock in tax rates for high-income earners to pay for schools and health care in California. Here’s how it’ll read on your ballot.

Voiceover [00:00:56] Prop 3 provides permanent funding for schools and health care by extending existing tax on high incomes.

Ericka Cruz Guevarra [00:01:04] Here to walk us through Proposition 3 is politics and government correspondent Guy Marzorati. What’s up, Guy?

Guy Marzorati [00:01:10] Hey, you may remember me from Prop 2.

Ericka Cruz Guevarra [00:01:14] I sure do. Thank you so much again for joining us on this one. This one seems pretty straightforward, I gotta say. But walk us through what Proposition 3 might do.

Guy Marzorati [00:01:24] Yeah, so this would permanently extend California’s current income tax rates on our top earners. So back in 2012, California voters approved a new higher tax bracket for the top 2% of income earners, California. Voters extended those taxes in 2016. Now it’s on the ballot again to make it permanent.

Ericka Cruz Guevarra [00:01:45] Who are we talking about when we say high earners in California?

Guy Marzorati [00:01:49] Yeah, that’s a great question. So the folks who pay these taxes that are being proposed to be permanent under Proposition 3 are really just the top 2% of California income tax filers. Those individuals and families pay a marginal tax rate of a little over 10% on income above $371,000 for an individual or $743,000 for a family. And there are higher rates of just over 11% and 12% as you go up the income ladder to families making more than $1.5 million.

Ericka Cruz Guevarra [00:02:23] So when you’re saying top earners also, just to be clear, we’re not talking about the billionaire’s tax.

Guy Marzorati [00:02:29] That’s right. No, we are not talking about Prop 40, the billionaire wealth tax. That is a measure about overall wealth for California billionaires. Proposition 3 is just about income taxes.

Ericka Cruz Guevarra [00:02:43] And how much money could this bring in for California every year? And what are the kinds of things that this money would pay for?

Guy Marzorati [00:02:52] Yeah, so the California Budget and Policy Center has went back and looked at what kind of impact these higher tax rates have had. And basically, since they were enacted in 2012, these higher taxes have brought in about $120 billion for the state. In recent years, that’s been about $10 billion a year, so roughly like 4% of the overall state general fund. And so the big winners of these taxes are schools and health care because the vast majority of California state spending from the general fund goes to schools and goes to health care.

Ericka Cruz Guevarra [00:03:27] And when you say health, Guy, you mean health and human services, so things like Medi-Cal.

Guy Marzorati [00:03:33] Yeah, so the biggest piece of that is Medi-Cal, which is our Medicaid system in California, basically our healthcare safety net for low-income working-class Californians.

Ericka Cruz Guevarra [00:03:45] And let’s get into the politics of this measure. Who are the main proponents of preposition three and what are their arguments?

Guy Marzorati [00:03:53] So the main proponents of Proposition 3 are Democrats and Democrat-aligned groups, specifically the California Teachers Association, which is the biggest single proponent of Proposition 3. Their argument is these taxes are working. We’ve had them in place for more than a decade. They’re bringing in billions of dollars, and they really have championed California’s progressive tax system, saying it’s fair for the folks who earn the most income in state to pay at a higher rate. They’re also the biggest beneficiaries of these taxes. Again, the biggest slice of the pie for a California tax revenue is going to schools. And so I think it’s no surprise that you see the state’s biggest teachers unions getting behind Proposition 3 and wanting to make it permanent. Here’s David Goldberg, who’s president of the California Teachers Association, making an appeal for Prop 3 on Instagram.

David Goldberg [00:04:45] Prop 3 will make permanent an already existing tax on wealthy Californians. We’re making out like gangbusters right now. We have to make the case to make sure that people know that investing and voting for Prop 3 is investing in us, in our communities, in our students, in our families, and in education.

Ericka Cruz Guevarra [00:05:05] And then the California Budget and Policy Center has said that if the income tax on top earners doesn’t extend, the state’s income tax would become more regressive. Can you explain what they mean by that?

Guy Marzorati [00:05:19] Yeah, so basically the way that the state’s income tax system is set up right now is you have top earners paying at a higher rate, not just paying more because they earn more, but actually paying at higher rate than lower income earners. And so what that does is it creates a system that supporters say is fair, that you have people who are making the most money, paying a higher share into the state government. What that also does create though is more volatility because the people who were who the largest share of state taxation, it’s a smaller group. So if the stock market goes down or the economy goes down and that group is affected, you’re gonna see these swings up and down in state tax revenue.

Ericka Cruz Guevarra [00:06:03] Or if our top earners leave California.

Guy Marzorati [00:06:07] Yes, and that’s I mean, this this kind of ties into the arguments that we’re seeing around Prop 40, the billionaire wealth tax, but this idea that if you know those high earners leave the state, then that could have an outsize impact on how much money the state is able to bring in because the state is relying so much on that kind of smaller group of wealthy individuals.

Ericka Cruz Guevarra [00:06:31] We’ll have more on Proposition 3 with KQED’s Guy Marzorati right after this break. If you appreciate the work we’re doing here on Prop Fest, consider supporting the journalism we do here at KQED by becoming a sustaining member. We can’t do this work without you. Just go to donate.kqed.org/podcasts. We’ll be right back.

Ericka Cruz Guevarra [00:07:07] Who’s coming out against Proposition 3, and what’s the argument on their end?

Guy Marzorati [00:07:12] Yeah, you really see an opposition from Republicans and kind of taxpayer advocacy groups, including the California Taxpayers Association, the Howard Jarvis Taxpayers Association, who have basically made the argument that Californians face too much of a burden in taxes, and that the state needs to start doing things to lower the tax burden on individuals. There is a group reform California led by Republican Assemblymember Carl DeMaio. He has come out against Proposition 3, but also against Proposition 40, which is the billionaire wealth tax. And here he is kind of wrapping up his opposition to multiple tax ideas that are on the ballot.

Carl DeMaio [00:07:54] I know some of you are probably saying, well, if it’s just going to apply to the rich, why not do it? They’re coming for you. But it also has a negative impact on our state budget. What happens when a high income earner leaves the state? Instead of paying a little bit more in taxes with the higher Prop 3 or Prop 40 tax rates, They take a hundred percent of their tax increment to another state and that state gets the revenue. We get zero.

Guy Marzorati [00:08:26] You also hear the argument that this tax was never meant to be permanent. When it was initially enacted back in 2012, it was championed by former Governor Jerry Brown. It came after Brown’s first two years in office where he really made some difficult cuts to state programs. And he turned to voters and said, look, I’ve been frugal. I’ve made these cuts. Now I need to ask you to pay more in order to kind of make the budget more stable. Voters approved that, but it was pitched as a temporary increase. Uh, that temporary increase was extended again in 2016 as a temporary increase. Now proposition three would make those higher income taxes permanent. So opponents of this say, you know, This is a bait and switch.

Ericka Cruz Guevarra [00:09:13] Let’s talk about the money here. Is there anyone coming out to spend any money for or against this measure?

Guy Marzorati [00:09:20] We’ve seen funding for Proposition 3 overwhelmingly on the Yes campaign. There’s been over $40 million in support so far, and the vast majority of that — $33 million of the $43 million comes from the California Teachers Association.

Ericka Cruz Guevarra [00:09:43] What about any of California’s highest earners, Guy? I mean, have they spoken out against this tax or have they been, for the most part, pretty quiet?

Guy Marzorati [00:09:52] No, we really haven’t heard any kind of organized opposition to Proposition 3, nothing like the money that we’re seeing coming in in support of prop three, especially from the teachers unions. And I think a big reason for that is the richest Californians, they might be a little bit more focused on another measure, which is Prop 40, the billionaire wealth tax, we are seeing some of the wealthiest residents of the state organized against that. And really not as much of a big campaign around proposition three.

Ericka Cruz Guevarra [00:10:22] Yeah, and I mean, as you said earlier, this proposition builds on previous ballot initiatives that Californians have approved in the past. So how likely do you think is this one to pass?

Guy Marzorati [00:10:35] You know, we had initial support for this back in 2012. I think as this has just become part of the state budget and part of the way California taxation works, you’re likely to see voters kind of just like get used to it and say, look, this has been in place, you know, only the top 2% of income earners are paying this. I do think one potential iceberg for this measure is just voter confusion because we are seeing so many different measures on the ballot related to taxes. Maybe this gets confused or conflated with Prop 40, the billionaire wealth tax, and voters who are opposed to that turn against this. That’s speculation. But certainly, taking the last two elections where this was on the ballot, 2012 and 2016, voters said yes to this idea of taxing our highest income earners in California have more.

Ericka Cruz Guevarra [00:11:28] Guy, thank you so much.

Guy Marzorati [00:11:30] Yeah, thank you.

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This story was reported by Guy Marzorati. Prop Fest is a collaboration between Bay Curious and The Bay. It’s made by Olivia Allen-Price, Katrina Schwartz, Christopher Beale, Anna Casalme, Ericka Cruz Guevarra, Alan Montecillo, Gabriela Glueck and Pauline Bartolone. Additional support from Jen Chien, Katie Sprenger, Maha Sanad, Ethan Toven-Lindsey and everyone on Team KQED.

Some members of the KQED podcast team are represented by The Screen Actors Guild, American Federation of Television and Radio Artists, San Francisco-Northern California Local.