Jockeying Begins Over 2012 California Tax Initiatives
Author: Fred L. Main
When does 7 + 34 = 0? If California voters approve 7 ballot initiatives proposing to raise $34 billion in taxes, California taxpayers and businesses could face this choice on the November 2012 ballot.
Several competing ballot measures have been filed proposing to increase taxes on services, personal income, commercial property, sales of personal property, corporations, pharmaceuticals, and oil companies. Proposed taxes would increase funds in excess of $34 billion if all of the measures were approved by the voters. Voters, however, will not approve $34 billion in tax increases, so the real fight is between the competing proponents of the measures in jockeying for funding, support, and endorsements to qualify their respective proposals for the November ballot.
Many sponsors of the proposed tax increases have also included spending proposals in their initiatives. Governor Brown proposes to fund education and public safety with a temporary increase in income and sales taxes. A separate measure would increase all income taxes to fund education, including funding for public higher education. Still another would increase K-12 education funding with an oil severance tax. And another would fund education, local government, and state debt by extending the sales tax to services.
Proponents of the measures represent a number of well-funded interests, including public employee unions, business interests, wealthy hedge fund managers, and Governor Brown, who vowed during his campaign not to raise taxes without voter approval.
Funding is important to run a campaign in support of an initiative, but is also used to qualify most measures for the ballot. It is common in California to use paid signature gatherers at a cost of approximately $1.5 million to $2.5 million to get a proposal before the voters. Proponents of a statutory initiative measure must collect 504,760 valid signatures, which generally requires the collection of about 700,000 total signatures to ensure the measure qualifies. An initiative that would amend the Constitution requires 807,615 valid signatures or roughly 1,000,000 total signatures to qualify.
The time line to qualify a ballot measure for the November ballot is not final, but should not present any problem for initiative proponents. The proponents have until approximately March to turn in their signatures and still allow election officials to do random samples to ensure the validity of the required number of signatures.
The most far-reaching proposal for a tax increase has been offered by The Think Long Committee For California, a project of the Nicolas Berggruen Institute, which has released its “Blueprint to Renew California.” This Blueprint proposes dramatic changes to governance, budgeting, and tax policy in California. The tax policy changes would likely raise $10 billion in new revenue by extending the sales and use taxes to almost all services in the state, with the exception of healthcare and education. While services would be subject to a new tax of between 5% and 5.5%, the political trade-off for voters would be a reduction in the state sales tax rate on goods from 5% to 4.5%, personal income tax rates would be lowered (with the top marginal rate reduced from 10.3% to 8.5%), the corporate income tax rate would be reduced from 8.84% to 7%, and the homeowners’ real property tax exemption and related income tax credit for renters would be doubled.
The other proposals in the Blueprint are as far-reaching as the proposed tax measure, including proposing to change the initiative procedure itself, creating a new Citizens Council that could place measures directly on the ballot, restructuring the budgeting process, reforming K-12 education, and improving the business climate. The Think Long Committee has not yet filed its language with the Attorney General’s office. The extension of the sales tax to services is already highly controversial. The service economy now accounts for $1 trillion in value, and small business owners, advertising firms, website developers, accountants, and lawyers, among others, are organizing to mount a vigorous campaign against the proposal.
The question for both sides is when will the proposal be voted on? Governor Brown and others are attempting to convince The Think Long Committee to hold their tax proposal for a later election. As of this writing, though, the focus appears to be on qualifying the measure for the November 2012 ballot.
Governor Brown submitted his highly anticipated tax initiative to the Attorney General on December 5. The proposal would add a surcharge on the income tax to incomes over $250,000. For incomes between $250,000 and $300,000 the top marginal tax rate would increase from 9.3% to 10.3%, incomes between $300,000 and $500,000 would be 10.8%, and for incomes over $500,000 the rate would be 11.3%. The state sales and use tax rate would increase by one-half percent. The proposal is expected to raise $7 billion per year. Both the personal income tax rates and the sales tax rate increases are to be repealed after 2017. The revenues raised by the measure are earmarked for education and public safety. Interestingly, the measure contains a provision that states that the tax rates in this measure trump any other initiative that changes income tax rates. This provision would be operative if the measure receives more votes than the other income tax rate increase measures.
The third major initiative that has been filed would increase commercial property taxes by up to $3 billion a year. The measure would require nonresidential real property to be reassessed every three years. Currently reassessment occurs when there is a change of ownership. In addition to the reassessment provisions, the homeowner's property tax exemption is increased from $7,000 to $14,000 and a new exemption for business personal property of the first $1 million is established. Although the measure would raise a significant amount of tax revenue, there is a political motivation for filing the measure. The proponents are likely seeking to force the business community to spend resources to defeat this “split tax roll” initiative, thereby diverting these resources from being used to pass measures opposed by unions that have qualified for the ballot.
Corporate taxes would be increased by approximately $1 billion under a separate ballot proposal that would require all corporations to file corporate income taxes based on single sales factor apportionment of income. Single sales factor apportionment generally benefits corporations with higher proportions of property and payroll in California versus sales in the state.
There are more proposed initiatives, so 2012 promises to be quite a political year for California and ballot box policymaking.
The prospects of success are another question. While a recent poll by the Los Angeles Times showed that 64% of voters would support new taxes for education, voter approval of tax increases is always an uphill fight. As the Attorney General’s office completes title and summaries for all of the measures, the behind-the-scenes jockeying over which measures actually move forward is being closely watched as the prospects for some measures will rise or fall depending on what other measures are on the November ballot.