Proposition 55: Tax Extension to Fund Education and Healthcare.

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Passed
The Question: 

Should the State Constitution be amended to extend certain income tax increases on high-income taxpayers through 2030, and increase funding for Medi-Cal benefits?

The Situation: 

This year’s state General Fund budget is about $122 billion with over half going to education and about one-quarter to health and human services, which includes the Medi-Cal program. 

Income taxes, imposed on payroll, investment income, and profits from the sales of stock or other assets, provide about two-thirds of General Fund revenues. Tax rates increase as a person’s taxable income increases. In 2011, tax rates ranged from 1% to 9.3%.  Prop. 30 in 2012 increased these rates 1% to 3% through 2018 on high-income taxpayers, defined as individuals earning more than $263,000 a year and couples earning more than $563,000 a year, and a quarter-cent increase in the state sales tax.

This year Prop.30 income tax increases will raise about $7 billion, all for K-12 schools and community colleges.

The state must spend a minimum amount annually on K-12 schools and community colleges.  This year, the General Fund will provide over $50 billion towards this minimum guarantee. Local property taxes also contribute to this obligation.

The Medi-Cal program provides health care services to over 13 million low-income people—roughly one-third of the state’s population. It relies heavily on federal funding and receives some support from other state sources.

The Prop. 30 income tax increase is set to expire at the end of 2018, and the sales tax increase to expire at the end of 2016.

The Proposal: 

Prop. 55 would extend the Prop. 30 income tax increases on high income taxpayers from 2018 through 2030 (an additional 12 years). Income tax increases would vary by level of income.  On a single person’s income of $300,000, there would be an additional tax of $370, while on a married couple’s income of $2,000,000, there would be an additional tax of $37,980.

These additional revenues would continue to provide funds to K-12 and community colleges, but also be directed to the Medi-Cal program, based on a new formula for its funding.

Prop. 55 would not extend Prop 30’s sales tax increase, which will expire at the end of 2016.

Fiscal Effect: 

Prop. 55’s increased revenues would be used for education, health care services for low-income people, and other state budget purposes.

The amount of additional state revenue is uncertain. Depending upon the economic year, the increases could range from $4 billion to $9 billion.

Roughly half of any revenue increases would go to education. Additional Medi-Cal funding under Prop. 55 could vary significantly, possibly ranging up to a maximum of $2 billion per year. 

Prop. 55 could increase annual contributions to “rainy day” budget reserves and annual payments of state debts by $60 million to $1.5 billion or more.

What a YES or NO Vote Means
A YES Vote Means: 

Income tax increases on high-income taxpayers, which are scheduled to end after 2018, would instead be extended through 2030.

A NO Vote Means: 

Income tax increases on high-income taxpayers would expire as scheduled at the end of 2018.

Support & Opposition
Supporters Say: 
  • Prop. 55 maintains existing tax rates, so the wealthy pay their fair share to provide adequate funding for education and health care.    
  • Prop. 55 has strict accountability requirements, making sure that the funding reaches the schools.
Opponents Say: 
  • Voters who approved Prop. 30 were promised that the increases would be temporary, not permanent.
  • Prop. 55 tax increases are not needed to adequately fund education, health care and state government, and would be a job-killer.