California Voters’ Guide 2012: Proposition 38
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Policy Brief

California Voters’ Guide 2012: Proposition 38

Among a daunting package of ballot questions, here is the free minds and free markets perspective on proposition 38.

Adrian Moore
Vice President of Policy

Proposition 38: Tax Increase for School Funding

Proposition 38 would increase income taxes on most Californians for 12 years to raise about $10 billion a year earmarked for schools and early childhood development programs.

Fiscal Impact

The Legislative Analyst’s Office says that Prop. 38 would increase state personal income tax revenues from 2013 through 2024, with increases of roughly $10 billion in 2013-14, tending to increase over time. The 2012-13 increase would be about half this amount. In each of the initial years, about $6 billion would be used for schools, $1 billion for child care and preschool, and $3 billion for state savings on debt payments. From 2017-18 through 2024-25, the shares spent on schools, child care, and preschool would be higher and the share spent on debt payments lower.

Arguments for Proposition 38

Supporters of Prop. 38 argue that political leaders from both parties have cut school budgets by $20 billion since 2008, leading to layoffs of over 40,000 educators and California having the largest class sizes in the nation.

They say that Prop. 38 will bring $10 billion a year in new state revenues for schools, money that can be used to rehire teachers and provide a well-rounded education that includes math, sciences, art, gym, college preparation, vocational and technical education to improve academic performance and graduation rates. Moreover, they say the money will be protected in a trust fund that Sacramento politicians can’t touch and that it distributes the money evenly on a per-child basis to every public school. It would also allow local control and require input from parents and teachers to decide how the money is spent, while also mandating that school districts publicly disclose how the new funds were spent at each school and whether student results were improved.

Everyone benefits from better schools, supporters argue, so it makes senses that everyone helps to pay. Moreover, Prop. 38 is based on ability to pay so that people with incomes over a million dollars would pay an average of $77,000, while people with incomes of between $25,000 and $50,000 would pay an average of just $54 a year.

Supporters of Proposition 38

Website: http://www.prop38forlocalschools.org/

  • Molly Munger
  • California State PTA

Largest Donors to Yes Campaign as of October 1, 2012

  • Molly Munger: $27,978,399
  • George Joseph: $195,000
  • Atlas Family Trust: $25,000
  • Del Sol Group, Inc.: $15,000
  • Mary Adams O’Connell: $10,000
  • Louise Patterson: $10,000

Arguments Against Proposition 38

Opponents argue that Prop. 38 is a massive tax hike on all Californians, and that if you earn $17,346 or more per year in taxable income, it raises your California personal income tax by as much as 21%, on top of what you pay the Federal government. And worse, they say, the taxes stay in place for 12 years even if there are no reforms to the education system to improve how the money is used or allow the firing of bad teachers. Why, they argue, put more money into a failing system that refuses to reform? They say too much money will continue to be spent on administration, consultants, pensions, benefits and overhead and too little will be spent in the classroom.

Approximately 3.8 million Californian small businesses pay individual taxes on their earnings, rather than corporate taxes, opponents argue, and they will have to pay higher taxes under Prop. 38, which will prevent them from hiring and creating jobs. Instead, they say, Prop. 38 will force family businesses to cut jobs, move out of state, maybe even close, or else pass the higher costs on to consumers.

Opponents of Proposition 38

Website: http://www.stopthemiddleclasstaxhike.com/

  • California Chamber of Commerce
  • California Business Roundtable
  • California Republican Party
  • California Democratic Party

Largest Donors to No Campaign as of October 1, 2012

  • California Chamber of Commerce: $23,500

Discussion of Proposition 38

Prop. 38 is very similar to Prop. 30-both are big tax increases that promise more money for schools. If both pass, the one that gets the most votes goes into effect. The analysis of Prop. 38 is therefore very similar to that of Prop. 30.

Using threats to cut school funding is an old political trick in California. Californians have shown over the years that they think education spending is a top priority for the state, and sometimes state leaders take advantage of that. Proponents of Prop. 38 are trying to take advantage of the fact that most people are not government budget experts with a nifty shell game to fool them into thinking the tax increases will increase school funding.

If Prop. 38 provides $10 billion in new funds for education, history tells us that the legislature and governor will almost certainly shift other funds out of education and spend them elsewhere, mostly to meet state worker pension obligations. They can do the same in every budget year. The fact is that raising taxes by $10 billion with Prop. 38 may guarantee those dollars go to education, but not that there will be more total funds for education.

Again, it is true that Prop. 98, approved by voters years ago to ensure that a percentage of all new state revenue goes to education, should mean that a big chunk of Prop. 38 taxes would go to schools. But for 10 years the state has “deferred” nearly $10 billion of state revenue that is supposed to go to schools under Prop. 98. So even when we think we are voting to tie the government’s hands on how they spend our tax money, they seem to find ways around it. The problem is that Sacramento is not making education a budget priority.

Voters need to consider that California’s leaders have a spending addiction. The state set a record high for total state budget spending in 2012: $142.4 billion, surpassing the $138 billion from 2007-2008. And even though Californians have repeatedly made it clear that education should be a top priority in the state budget, in a record breaking large budget Sacramento is threatening cuts to education spending. Lawmakers consistently show they want to spend more on things other than education. As well as deferring nearly $10 billion in Prop. 98 funds that were supposed to go to education, they have let general fund spending fall by 11 percent since 2007-2008 to $91 billion, while increasing special fund spending by more than 47 percent over the same period, from $26.7 billion to $39.4 billion. Since Prop. 98 requirements for education spending don’t apply to special funds, this maneuver served to cut education spending. If the general fund shrinks then Proposition 98 revenue for K-12 and community colleges shrinks as well.

Furthermore, in a time of very slow economic recovery, taking billions from consumers and businesses to fuel record-breaking state spending is an incredibly bad idea. Tax increases are no way to grow jobs and the economy. State tax revenue is already about $3 billion short of what the Brown administration projected in June. For several years in a row the state budget has overestimated how much tax revenue will come in, and how much more will be brought in by higher taxes. That is because high taxes compared to other states are making California less competitive and are depressing the state economy.

Spectrum Locations Consultants (SLC) recorded that 254 California companies moved some or all of their work and jobs out of state in 2011, 26% more than in 2010. SLC President Joe Vranich considers California the worst state in the nation to locate a business and Los Angeles the worst city to start a business. His work with clients has found that leaving Los Angeles for another surrounding county can save businesses 20% of costs. Leaving the state for Texas can save up to 40% of costs.

Finally, since education spending is the lynchpin of Prop. 38, voters need to consider whether they want more of their money to go into a system that refuses to reform, where increases in spending are overwhelmingly being consumed by administration, and not going to teachers and classrooms and instruction.

The latest analysis of state K-12 education spending by Pepperdine University’s Davenport Institute is pretty damning. The percentage of funding going to direct classroom expenditures has been falling. Less than 50 percent goes to teacher salaries and benefits. Per student spending on administrators grew twice as fast as spending on teachers. Indeed, spending on staff travel and conferences grew faster than spending on teacher salaries.

The story is equally bad in higher education. Salaries in student services and institutional support have grown twice as fast as instructors’ salaries. Worse, from 1994-2009 University of California faculty increased 33 percent, while the number of senior managers increased 194 percent. There are now more managers at the University of California than faculty.

In summary, tax increases right now will hurt taxpayers, stunt job growth, and feed Sacramento’s spending addiction. Additional school funding will only feed bad decisions to invest more in administration and managers than in classrooms and instruction.

Propositions

This Study’s Materials