New figures obtained by the Kersten Institute from the California Franchise Tax Board show that there has been a steep 15% decline in the income and tax liability of California's top earners for the 2016 tax year, compared to 2015. (see figure below)
Specifically, the total income of taxpayers earning over $1 million has declined by 14% based on a comparison of early returns filed in 2015 and 2016. Overall, the adjusted gross income of all taxpayers increased by 2.2% over the same period.
This has translated into a $1 billion or 14.6% decline in tax revenues the state collected from these same taxpayers. These figures only represent a comparison of early returns so these figures are projected to be more pronounced when all the returns are counted.
In 2012, the Democratic Leadership and Governor Jerry Brown (D) cut a deal to raise $7 billion in new taxes by adding in new ultra high tax brackets for the state's top earners and small business owners.
The tax hike was intended to forestall cuts in education programs, but research recently produced by the Kersten Institute shows that the tax hike may have actually been counterproductive due to a significant and immediate "chilling" effect the tax hike had on top earners and small business in 2012 and 2013.
And as it turns out, the recovering economy has generated record tax revenues since 2012 which have increased Prop. 98 education spending by more than 50%. So instead of being a necessity, the Prop. 30 tax increase effectively became a "tax windfall" to union interests and public employees who are its primary proponents, allowing for larger raises and bonuses for public employees.
Fortunately, the Prop. 30 ultra high income tax brackets are set to expire at the end of 2017, but these same public employee union interests are now pushing Prop. 55 on the November ballot which would extend the tax increases by another 12 years.
These special interests want to continue to receive the tax windfall provided by Prop. 30, which is a boon to salaries and benefits, despite increasing evidence that the windfall revenue is not needed and has in effect harmed the California economy, with a particular negative impact on the economic activity of the state's top earners and small businesses.
To date, union interests have already invested more than $20 million in the campaign to pass Prop. 55.
With the recent decline in income and tax liability for the taxpayers targeted by Prop. 30, and a likely economic downturn on the horizon, it would make the most sense to let the tax increases expire to serve as an economic stimulus.
Based on an analysis of this recent 2016 tax data, continuing the Prop. 30 tax increases will be counterproductive in that it will only serve to exacerbate already steep declines in the income and tax liabilities for the impacted classes of taxpayers.
In addition, new evidence that is currently being developed by the Kersten Institute suggests that the Prop. 30 tax increases will also help serve to help provide stop gap funding for the state's unsustainable pension and public employee benefit costs which are increasingly crowding out public agency budgets.
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.