Above: Screencast discussing the data on the impact of Prop. 30. See end of article to download and review the data.
New evidence suggests that Proposition 30 (2012) had a “significant and immediate chilling effect” on the California business activity as well as tax revenues in 2012 and 2013 and beyond, according to a new analysis of official tax data by the Kersten Institute for Governance and Public Policy.
Proposition 30 was developed in 2012 by the Democratic Legislature and Governor in 2012 to raise $6 to $8 billion annually for state programs and services by raising raise income and sales taxes beginning January 1, 2012 through 2018.
The measure was sold as being necessary to prevent “budget cuts” to education and public safety, but new evidence indicates that the tax had an immediate chilling impact on the California economy, business activity, and tax revenues for the impacted taxpayers.
The debate regarding Prop. 30 and its impact on California taxpayers is particularly relevant given that there is a measure on the November 2016 ballot which seeks to extend the Prop. 30 tax increases for another 12 years.
Prop. 30 was approved by California voters in November 2012 but increased California income taxes retroactively to January 1, 2012 on individuals and small business with annual earning over $250,000. Prop. 30 also increased the state’s sales and use tax by ¼ cent for four years, which impacts all California taxpayers with a disproportionate hit on low-income taxpayers.
As projected, Proposition 30 raised $6.5 billion in the 2012-13 fiscal year, but tax data suggests that the tax hit negatively impacted overall tax revenues for the impacted taxpayers as well as the overall economy. Small businesses were hit particularly hard, along with the poor under the state’s sales tax.
Overall economic data for the state of California shows that there was a slight decline in the growth rate of the state’s gross domestic product (GDP) in 2013, with total state GDP increasing to $2.21 trillion in 2013 from $2.12 trillion in 2012, a 4.1% increase. But the growth rate in 2012 was slightly higher at 4.5%, a relatively small, yet significant impact.
A closer look at tax records for the impacted taxpayers shows a more pronounced negative impact of the tax increases and potential counterproductive impact on the impacted classes.
As previously stated, in 2012-13 Prop. 30 raised $6.5 billion in revenue for the newly created “Education Protection Account.” But appears to have negatively impacted total personal income tax and sales tax revenues.
California’s personal income tax revenues increased from $51.7 billion in 2011 to $54.4 in 2012—a $2.7 billion or 5% increase, according to the state’s audited financial reports.
If Prop. 30 held economic growth harmless under the personal income tax, even assuming completely flat economic growth from 2011 to 2012, one would have expected at least a $5-6 billion increase or roughly double the increase in revenue actually realized.
Similarly, the sales and use tax increase did not take effect until January 1, 2013, but may be responsible, at least in part, for a decline in economic activity under the sales and use tax in fiscal year 2012. Sales and use tax revenues were flat from 2010 to 2011, at about $33.5 billion each year, but declined to $31.2 billion in fiscal 2012—a $2.3 billion decline or 7%, according to the state’s audited reports. (Note: Fiscal year 2012 runs from July 1, 2011 to June 30, 2012)
In 2013, which includes the first half year of the sales tax increase, sales tax revenues increased to $33.9 billion, up from $31.2 in 2012—a $2.7 billion or 8% increase. This increase includes the estimated $800,000 to $1 billion, so this growth is more in line with the overall economic growth.
Some more startling figures on the impact are seen by drilling down further and examining the tax data for classes of taxpayer actually impacted by the income tax increases.
As for small businesses, despite the aforementioned overall growth in the economy from 2012 to 2013, the adjusted gross income of sole proprietorships actually declined over the period decreasing from $228.22 billion in 2012 to $218.75 billion in 2013—a $9.74 billion or 4% decrease, according to official data obtained from the California Franchise Tax Board.
Similarly, total taxes collected from sole proprietorships decreased from $13.8 billion in 2012 to $12.44 billion in 2013—a $1.36 billion or 10% decline in tax revenues despite a significant increase in income taxes on small businesses.
So despite significantly increasing tax rates on sole proprietorships who pay taxes under the personal income tax, tax revenues actually declined by 10%--demonstrating the repressive impact of the tax increase on small business activity as well as revenue from that business activity in California.
A lot more data is being reviewed and can be presented illustrating these same trends, but let’s take a quick look at a couple more examples that demonstrate the counterproductive nature of the Prop. 30 tax increases.
--From 2012 to 2013, total taxable income and tax liabilities under the state’s personal income tax declined with the most dramatic declines seen for the high earners at the top of the income scale most impacted by the Prop. 30 tax increases. Taxpayers with incomes over $5 million recorded the most dramatic decline with total tax liabilities declining from $15 billion in 2012 to $10.7 billion in 2013—a $4.3 billion or 40% decline in total tax revenues collected by the state of California on these top taxpayers.
--The total state tax collected from California small businesses who file as S Corporations declined from $1.05 billion in 2012 to $969.3 million in 2013—a $82 million or 7.8% decline in total tax revenues on small businesses. The businesses also pay taxes under the personal income tax, but the income tax increases appeared to have negatively impacted them, causing a decline in overall revenues.
As one can see, a brief review of the evidence suggests that the Prop. 30 tax increases were counterproductive in that they actually led to relatively steep declines in economic activity and overall tax revenues, at least in the early years of implementation. Of course, more study needs to be done, but it is important that policymakers and taxpayers take note of the potential counterproductive nature of the Prop. 30 tax increases.
Official tax data is only available through 2013 for the income tax for many of the classes examined here, which limits the examination period currently available for study.
Total tax revenues began increasing as the economy continued to recover in 2014 to 2016, but the data examined by the Kersten Institute suggests that the Prop. 30 tax increases had an initial, significant negative impact on tax revenues and economic activity by the impacted taxpayers in the initial months and years after implementation.
David Kersten is executive director of the Kersten Institute for Governance and Public Policy (www.kersteninsitute.org). He is an expert on fiscal issues and teaches a masters’ course on public budgeting for the University of San Francisco.