Friday, November 02, 2012


  1. Will higher taxes push businesses to leave California?

  2. Will we ever know where the money actually goes?

  3. California's budget has grown, so how are we broke?

  4. Schools are a mess, so why should we pay more?

2cents 4LAKids advocates voting YES/YES
Yes on 30/Yes on 38   |  Vote Yes 4 Kids Twice on Nov 6th

by Tami Abdollah | The KPCC Pass/Fail Blog \ 89.3 FM

Background: With less than a week to the Nov. 6 election, there's a lot of information - and misinformation - out there about Prop. 30. The measure, supported by Gov. Jerry Brown, would raise sales and income taxes in order to avert $6 billion in primarily education cuts.

Prop. 30 fact check: Will higher taxes push businesses to leave California?

By Tami Abdollah |

Consumer Confidence Index Hits Lowest Level Since Record Began In 1967

Justin Sullivan/Getty Images - A parking lot is seen empty at an out-of-business store January 27, 2009 in Vallejo, California. Fact check No. 1: Higher taxes aren't necessarily a business killer -- divorce may be a bigger factor.

November 1st, 2012, 1:04pm - With less than a week to the Nov. 6 election, there's a lot of information - and misinformation - out there about Prop. 30. The measure, supported by Gov. Jerry Brown, would raise sales and income taxes in order to avert $6 billion in primarily education cuts.

Prop. 30 is written into the enacted 2012-13 California budget, which presumes that the measure will be approved by a majority of voters Tuesday. Over the next several posts, we'll try to break down the proposition and examine the big questions that have been raised in political ads over the last weeks.

What Prop. 30 does: Increases personal income tax for seven years on people making more than $250,000. It would be implemented retroactively, starting Jan. 1, 2012. People making between $250,000 and $300,000 would pay 1% more (up to $3,000). People making between $300,000 and $500,000 would pay 2% more and people making more than $500,000 would pay 3% more in taxes.

Sales tax would be increased by 1/4 of a penny for four years starting in 2013. This works out to one cent on a $4 latte or 25 cents on $100.

If it fails: The budget provides a contingency plan called "trigger cuts"; the bulk of these would impact education. K-12 education and community colleges would be hit by $5.4 billion in cuts, the UC system by $250 million, and CSU by $250 million. Other areas impacted by cuts include city police department grants ($20 million), CalFire ($10 million), the Department of Fish and Game ($4 million) and the Department of Parks and Recreation ($2 million).

Arguments against Prop. 30: The arguments fall under four main categories: no new taxes, the measure is flawed, the money would be wasted, and schools are a mess. These positions are primarily supported by the Howard Jarvis Taxpayers Assn., the National Federation of Independent Business California and Small Business Action Committee.

We examine each claim. First up --

1) No new taxes

Claim: Higher taxes are bad for business. They force companies to leave the state. California already has the nation's highest sales-tax rate.

Facts: California actually has the nation’s 12th highest average sales tax rate at 8.13 percent, according to a report by The Tax Foundation, a nonpartisan tax research group based in Washington, D.C. This figure is calculated as a population-weighted average that takes into account local surtaxes on services, which can push the basic state-level rates to 10 percent or higher.

Although the total statewide rate of 7.25 percent is the highest state-level tax rate in the country, The Tax Foundation compares states via their average state sales tax rate because of states like Colorado, says Scott Drenkard, an economist for The Tax Foundation. Colorado's statewide rate is 2.9% but the average local rate is about 4%. "The tax rates consumers actually see checking out is closer to 7% so it's important to think about both," he says.

Sales taxes are "a less bad tax" than income taxes and are generally favored by public finance experts, Drenkard says.

"Here’s why," Drenkard says, "If you’re taxing income you’re disincentivizing the creation of new wealth, or the creation of value. If you’re taxing consumption, you're promoting savings or at least you're not disincentivizing savings, and that savings is associated with long-term growth."

Sales tax in California was also higher until quite recently. Sales tax in California dropped by 1% in July 2011 after the Legislature allowed the temporary half-cent sales tax to sunset.

In terms of personal income tax, many businesses -- especially small ones -- file through the personal income tax code, Drenkard says. According to Drenkard, anecdotal evidence shows increasing taxes does affect business negatively. In 2011, Illinois raised its corporate income tax and personal income tax rates and "there was an exodus of various businesses to other low-tax neighboring states, and some of them even left for faraway states," Drenkard says.

"The capital of businesses is very mobile," Drenkard says, "so if taxes become prohibitive, people will move."

Drenkard says there aren't conclusive studies on this point. Two recent studies come to "two totally different conclusions," Drenkard says. A recent study by Stanford University sociologists looked at California's "millionaire tax," which was introduced in 2005 and levies 1% of additional tax on people who make more than $1 million to pay for mental health services. It found that the "highest-income Californians were less likely to leave the state after the millionaire tax was passed."

"Most people who earn $1 million or more are having an unusually good year. Most 'millionaires' earned less in years past, and they are not likely to earn this much again. A representative 'millionaire' will only have a handful of years in the $1 million + tax bracket. The somewhat ephemeral nature of very high income is one reason why the top-income taxes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income."

However, what did make high-earners leave California was divorce. The study found that in the year of divorce "the migration rate more than doubles, and remains slightly elevated for two years after the event."

"This shows that there are circumstances that do generate millionaire migration. The tax policy changes examined in this report are very modest compared to the life-impact of marital dissolution."

The second recent study came out of Maryland, and concluded that millionaires will leave if you tax them at higher rates.

"Taxes do matter," Drenkard says. "They’re not the only thing that matters though. Things like climate, things like proximity to other businesses, if it’s another natural resource you’re after you want to be close to natural resources."

A problem with relying too much on personal income tax  for general fund monies though can lead to revenue volatility at the state level, Drenkard says.

"Most of the time [the revenue is from] capital gains and dividends, which can be especially affected by economic swings," Drenkard says.

"And this leads to an unstable revenue stream...When times are good, government revenues are coming in heavily and government services are being provided. But when times are bad, because there's such a reliance on high income levels, you tend to have a real big scoop in revenues that are available for running government services. And this has been a fiscal administration problem that California has had to deal with in the past decade."

Another issue is that the personal income tax increase is retroactive, which means it applies to the 2012-13 calendar year. "People have not had the opportunity to appropriately economically plan," Drenkard says. "That's one of the fundamentals of sound tax policy."

Next, we will look at the second argument -- "The measure is flawed."

Correction: This story initially said in one spot that education would be hit by $5.4 million in cuts -- it's $5.4 billion.

Prop. 30 fact check: We'll never know where the money actually goes

By Tami Abdollah |

Gov. Jerry Brown

Sharon McNary/KPCC - California Gov. Jerry Brown speaks in support of Prop. 30 at a rally of UCLA students on campus, Oct. 16, 2012. Fact check No. 2: The $8.5 billion brought in by Prop. 30 will go to a "lockbox" called the Education Protection Account and can't be spent on anything else.

November 1st, 2012, 6:07pm  ::  Prop. 30 is written into the enacted 2012-13 California budget, which presumes that the measure will be approved by a majority of voters Tuesday. Over several posts, we try to break down the proposition and examine the big questions that have been raised in political ads these past few weeks.

Read the introductory post for details on what Prop. 30 does and what happens if it fails.

Arguments against Prop. 30: The arguments fall under four main categories: no new taxes, the measure is flawed, the money would be wasted, and schools are a mess. These positions are primarily supported by the Howard Jarvis Taxpayers Assn., the National Federation of Independent Business California and Small Business Action Committee.

2) The measure is flawed

Claim: We will never know where the money actually goes. The money can be used for general expenses instead of schools. It will go to pay for pensions instead.

Facts: Prop. 30 creates the "Education Protection Account," a special fund inside the General Fund that is a "lockbox" to ensure the money is spent on education, according to the proposition language and John Mockler, a veteran of school finance and school policy expert.

This is Mockler's 48th budget. He was formerly on the state Board of Education and he has worked for the state Legislature. He is also referred to as the architect of Prop. 98. Prop. 98 -- often called the Prop. 98 guarantee -- was created to ensure that roughly 40% of the General Fund goes toward education. Over the years though, that guarantee has been suspended in bad budget times to allow the state to borrow billions to pay for other things.

H.D. Palmer, a spokesman for the state Department of Finance, explains that this measure would ensure education gets its share of funding: "All of the money goes into an account in Proposition 30 that is dedicated to schools; the indirect effect of that is that it relieves pressure on other parts of the General Fund."

Wait, what does that mean? It means schools will get what they are due; they'll be ensured the funding that comes in via that "lockbox" -- receiving nearly $3 billion more than they would have otherwise each year, Palmer says.

In all, Prop. 30 is expected to bring in about $8.5 billion in its first year because the income tax goes into place retroactively to Jan. 1, 2012. After that, it's expected to generate about $6 billion annually. Of this money, state law requires 89% be spent on K-12 education and 11% on community colleges. The exact amount generated for education through the measure may fluctuate, however, as it depends on a recovering state economy and changeable tax revenues.

According to the Legislative Analyst's Office, the money is put in the Education Protection Account and cannot be used for administrative costs. It provides local school boards the "discretion to decide, in open meetings and subject to annual audit, how funds are to be spent."

Prop. 30's language states:

"Each community college district, county office of education, school district, and charter school shall annually publish on its Internet Web site an accounting of how much money was received from the Education Protection Account and how that money was spent."

Does this mean that money can go toward pensions? Each locality will ultimately decide how the money is spent, but it's likely that teachers who were laid off will be rehired and that funds could go toward salary, which does include benefits such as a pension.

The new revenues would also be used to pay down deferrals, or IOUs, the state has racked up over the years to school districts. Right now, that's about $10.4 billion — Prop. 30 in its first year would begin to pay back about $2.2 billion.

"Those deferrals really disproportionately affect certain types of schools -- rural schools have been affected, charter schools have been affected, and those schools that may not have access to lines of credit to cover their cash flow needs have been affected," Palmer says.

"But there comes a point where you can no longer really continue a process of these deferrals without pushing a number of these districts to the point where they can no longer, even if they've got a line of credit, borrow against that. It’s somewhat like the state paying its AMEX bill using other schools’ VISA cards. At some point those cards reach their limit. So one of the things that occurs, if Prop. 30 passes, is we begin to pay back or pay down the amount of the deferrals that have accumulated in recent years."

The state would begin to pay schools back via a complicated funding mechanism in Prop. 98 that covers how the state borrows from school coffers during tougher times and how it repays that money later. In a nutshell: When General Fund revenue increases at a rate higher than personal income tax revenue, education receives roughly half of the difference in money on top of the roughly 40% guarantee, Mockler says.

Edgar Cabral, a principal fiscal and policy analyst for the Legislative Analyst's Office says that Prop. 98 is very sensitive to the health of the General Fund.

"If Prop. 30 passes, that improves the health of the General Fund, and that will increase the guarantee and provide additional revenue  for schools," Cabral says. "If that revenue is not there, it will be lower."

Mockler, who advised the governor on Prop. 30, put together an analysis on the measure. He says Prop. 30 is complicated and requires an understanding of Prop. 98, how the General Fund works, and a thorough reading of the initiative language itself. Not everyone has time for that.

"Understanding these initiatives, I mean it’s, as I say it, in both school reform, finance or instructional. Everybody wants it to be an elevator ride understanding it, it’s not," Mockler says. "You've got to take the stairs, and it’s very hard, you’ve got to go step 1, etc.

"This is not something you can turn a page and understand. It’s very complex; it involves Constitutional Law; it involves four court decisions; it involves one amendment to 98 that changed it dramatically. It involves budgeting provisions that have to do with the revenue fund, and accrual of revenues compared to cash basis for revenues..."

Read the measure for yourself: Here's the text and the LAO analysis.

Stay tuned for the next claim we'll examine -- The money would be wasted.

For your reference, here's the Mockler memo:

Mock Ler

Prop. 30 fact check: California's budget has grown, so how are we broke?

By Tami Abdollah |

Justin Sullivan/Getty Images - Fact check No. 3: State spending as a share of California's economy has dropped and is now down to its lowest levels since 1972-3. Though lottery money does go to schools, it's a drop in a very large bucket, California finance officials say.

November 2nd, 2012, 6:00am  ::  Arguments against Prop. 30: The arguments fall under four main categories: no new taxes, the measure is flawed, the money would be wasted, and schools are a mess. These positions are primarily supported by the Howard Jarvis Taxpayers Assn., the National Federation of Independent Business California and Small Business Action Committee.

3) The money would be wasted

Claim: This is just a blank check for the fat cat politicians in Sacramento. State funding has gone up and yet politicians are crying wolf and saying the state is broke. Whatever happened to the lottery?

General Fund spending has dropped by more than $11 billion in the last five years. At its peak in 2007-8, General Fund spending was close to $103 billion. That number is now down to $91.3 billion, says H.D. Palmer, a spokesman for the California Department of Finance. (Check out those budget summaries here and here.) According to the 2012 budget, General Fund spending as a share of the economy (meaning per $100 of personal income) is down to its lowest level since 1972-3. And total state spending as a share of the economy is at the same level as it was in the mid-1990s.

Though the overall budget has grown, spending on Californians has not increased since President Ronald Reagan was in office, Palmer says.

"One of the reasons the budget's larger is because of population," Palmer explains. "You have more children who are in school today than were 5-10-15 years ago. You have more individuals who are eligible for entitlement programs -- programs you have a legal entitlement to based on age or disability. Things like Medi-Cal provides insurance for 1 in 5 Californians. There are more prisoners in the state's correctional facilities. More students at UC, CSU and community colleges."

And yet, California schools have been hit with the bulk of cuts to state spending -- roughly $11 billion since 2007-08. That's mainly because education makes up about 40% of the state General Fund spending under Prop. 98. (Read more about the funding in our previous post.) But in tough budget years, the state has suspended that guarantee to pay for other programs.

The lottery was approved by voters in 1984 to provide additional money to school. And it does, but that money is a drop in a very large bucket, state finance officials say. For 2011-12, it made up 1.5% of total K-12 funding, or roughly $931 million of the $63 billion in total K-12 funding, Palmer says.

"It does provide revenue for K-12, but it's nowhere near the bulk of the revenue," Palmer says. Also, when the economy is down, fewer people may have the disposable income to gamble, Palmer says.

Why is California in such a tough economic spot? One big reason is the recession.

According to Palmer, two main things hit California especially hard: the bursting of the housing bubble and the collapse of the stock market. Since California had many more subprime mortgages compared to other states, particularly in the Central Valley and Inland Empire, it got "hit harder and earlier" than the rest of the nation.

That impact translated into the loss of housing-market related jobs in areas such as construction, durable goods sales, among others.

The collapse of the stock market at the beginning of the recession hurt capital gains earnings of primarily higher income residents. Of last year's tax returns filed in California, about 1 percent, or 140,000, represented 40 percent of all personal income tax paid in the state that year, Palmer says.

General Fund revenue is expected to continue to rise even if Prop. 30 does not pass. But it will rise at a level far lower than it would have otherwise. Education funding has dropped by about $11 billion in the last four years. Prop. 30 "builds the base off of which future growth for K-12 spending is based," Palmer says. "...Under a scenario where Prop. 30 does not pass, you start from a lower base [and] that's a long-term issue."

Stay tuned for a follow-up post: We'll examine claim No. 4 -- Schools are a mess, so why pay more?

For your reference, the California Department of Finance produced the following chart on K-12 funding projections with and without revenues from Prop. 30:

K-12 funding projections with and without revenues from Prop 30

Prop. 30 fact check: Schools are a mess, so why should we pay more?

By Tami Abdollah |

scantron standardized test

timlewisnm/Flickr Creative Commons

Fact check No. 4: Schools are a mess because of $20 billion in cuts to education funding over the past four years. But test scores are rising despite that.

November 2nd, 2012, 8:14am  :: Claim: K-12 education and community colleges are already the biggest piece of the state budget at roughly 40 percent. And yet, schools are a mess. So why should we pay more? We can't just throw money at problems -- the system needs to be fixed.

Facts: Despite California cutting about $20 billion in education funding over the past four years, test scores have continued to rise. While 57 percent proficient or better in English-Language Arts and 51 percent proficient or better in math doesn't sound great, California also has higher standards than most other states, according to Bruce Fuller, a UC Berkeley professor of education and public policy.

“Fifty-six percent of all kids proficient. The glass is half-empty and half-full," said Fuller back in August, when state standardized test scores were released. "We’ve got a lot of progress to make. On the other hand...if you lived in Mississippi or if you lived in Texas, it’d be easy to jump over this hurdle. In California, the bar is set pretty high.”

According to a 2011 report by the California Budget Project, California ranks 46th in the nation in terms of the amount it spends per K-12 student, 47th when you account for the spending as a percentage of personal income. California ranks in last place in terms of the number of K-12 students per teacher, 49th in students per guidance counselor, 50th in students per librarian, and 47th in students per administrator.

"Voters do need to have a realistic perspective as to what the state of education funding is like today," says Edgar Zazueta, director of governmental relations at L.A. Unified. "We should see this as a downpayment to getting things better...We’ve gone through almost a decade now of very little funding from Sacramento and Washington, D.C. So this is going to start to get things in the right direction, but it’s going to be an incremental effect.

"...It's just the beginning to get us to the level where we can actually compete with other states and other countries in terms of our academic needs. We’re not talking about huge windfalls here. It’s about trying to slowly get us back to the place where California education should be.

Because of its dire budget situation, L.A. Unified cut a week of instruction for this school year. If Prop. 30 does not pass, officials have warned that K-12 schools across the state could see up to three additional weeks of instruction cut.

Zazueta says such a cut would put California students in a "scary" position relative to their peers come college admissions seasons. California students could be competing with students with a month of additional instruction each year.

"Colleges and universities are going to look at those students and say, who is more prepare for a college education?" Zazueta says.

Cuts over the last few years have also heavily hit the community colleges and UC and CSU system.

According to the 2012 budget:

"From 2008-09 through 2011-12, the state reduced funding by $2.65 billion for UC, CSU, CCC and Hastings College of the Law.  The most notable consequences have been significant student tuition and fee increases and declining course offerings, which have made it difficult for students to complete their certifications and degrees in a timely manner."

The "trigger cuts" contingency plan in the 2012 state budget mean that if Prop. 30 fails both UC and CSU will each be hit by a $250 million cut while the state's community colleges would see a loss of $338 million in funding. At campuses across the state, CSU students would see tuition rise by about 5 percent,  and the UC tuition freeze would instead turn into a 20 percent increase.

At the community college level, where tuition cannot be increased because it is set by the state Legislature, more cuts to courses and services would occur, officials said. Last year, California's community colleges had to turn away 200,000 students — they couldn't get into a single course, system officials said.

John Mockler, a veteran of school finance and school policy experts, says he may be a "K-12 person," but such cuts to higher education have rippling impacts.

"It does me no good to wind up our kids and drive them into a wall where they can't go to postsecondary, and that's what we've done," Mockler says. "Achievement in K-12, the number of kids qualified to go to CSU and UC has gone up 15 percent in the last eight years, and the number getting in has gone down 15 percent."

Paul Hefner, a spokesman for the California Department of Education, says that although people may not personally have children in school, “children who are in school today are going to be the folks who fix your car tomorrow, who maybe diagnose your illness, who build your house, who decides whether you owe more in taxes or less in taxes.”

Tami Abdollah can be reached via email and on Twitter (@latams).

No comments: