|Budget Issue:||The LAO's outlook for revenues resulting from the temporary tax measure passed in 2012|
|Finding or Recommendation:||This note describes the numbers concerning Proposition 30 that are reflected in our Nov. 19, 2014 publication, California's Fiscal Outlook.|
We have received a number of questions about the Proposition 30 revenue numbers in our annual Fiscal Outlook publication, which was released on Wednesday, November 19. This note will answer some of them.
LAO Fiscal Outlook Based on Existing Laws. Our annual Fiscal Outlook publication generally reflects tax policies in current state law. As such, the estimates in our Fiscal Outlook assume that the temporary taxes passed by voters in Proposition 30 expire consistent with today's laws. Specifically, the taxes of Proposition 30 expire under current law as follows:
How Much Revenue Has Proposition 30 Generated? State and local budgets are planned on a fiscal year basis (generally, with the fiscal year running from July 1 to June 30). Currently, we estimate that Proposition 30 generated the following amounts by fiscal year:
Because data is still emerging for prior fiscal years, these amounts remain subject to change.
How Much Revenue Will Proposition 30 Generate? Trends in taxable income for the top 1 percent of California PIT filers are linked to trends in asset prices (particularly stock prices) that drive capital gains and trends in business income. As we note in our Fiscal Outlook (see "Keys to Understanding This Report" in Chapter 1), it is impossible to predict future stock market trends. As a result, future Proposition 30 amounts may vary widely in percentage terms from those reflected in our Fiscal Outlook main scenario, which assumes (1) continuing moderate economic growth and (2) stagnant or slowly growing stock prices. Currently, under this main scenario, we estimate that Proposition 30 would generate:
Why Is There No "Cliff Effect" As Proposition 30 Expires? The numbers above illustrate why there is no sudden drop off of overall revenues in our main scenario even as Proposition 30 expires. The lack of a cliff effect is less because of our economic assumptions and more because of the design of Proposition 30 itself: specifically, that its revenues will gradually drop off over several fiscal years for the state budget process.
To understand the gradual drop off of Proposition 30 revenues, consider each fiscal year in turn:
This gradual tapering off limits the possibility that any one fiscal year sees a sudden drop off in total General Fund tax revenues. During the period, if the economy is growing, growth in non-Proposition 30 state tax revenues likely will be more than enough to make up for the gradual tapering off of Proposition 30 revenues. The tapering, however, does not eliminate entirely the possibility of a year-over-year decline in tax revenues as Proposition 30 ends. For example, such a decline could result from a large stock market drop or economic downturn at the time the measure's PIT increases expire. In that case, the primary cause of a decline likely would be the downturn's effect on the over 90 percent of General Fund taxes not attributable to Proposition 30, and the expiry of the Proposition 30 rate increases might exacerbate that decline.
Does Proposition 30's Expiration Contribute to Anticipated Slow Revenue Growth? Yes. The gradual tapering off of Proposition 30 revenues contributes to fairly slow anticipated growth in state General Fund revenues over several fiscal years beginning in 2016-17. Figure 4 in Chapter 2 of our Fiscal Outlook shows that overall growth in the state's "Big Three" tax revenues slows considerably beginning in 2016-17. Under our main scenario, "Big Three" tax revenue growth is anticipated to be slowest in 2018-19 and 2019-20 (2.6 percent or less) as the Proposition 30 PIT rates expire.
Proposition 98, the minimum funding guarantee for K-12 schools and community colleges, is driven in part by growth of state General Fund revenues. As we discuss in Chapter 3 of our Fiscal Outlook, the assumed expiration of Proposition 30’s taxes, coupled with an assumption of capital gains revenue declines after 2014, contributes to slow growth for the Proposition 98 minimum guarantee in the later years of our fiscal outlook period.
What Would Happen if Proposition 30 Were Extended? In his press conference concerning our fiscal outlook, the Legislative Analyst addressed this question (see “Fiscal Outlook Press Conference Q&A” at 15:37). In 2019-20, a hypothetical extension of Proposition 30 could result in over $8 billion of state revenues above those reflected in our main scenario revenue outlook. A significant portion of these revenues would be required to be spent on schools and community colleges pursuant to Proposition 98. The exact portion of the $8 billion that would go to Proposition 98 would depend on various calculations made at the time. The Legislative Analyst noted that about half of the added revenues would go to schools and community colleges in a typical fiscal year.
LAO Contact: Jason Sisney (916-319-8361, firstname.lastname@example.org).
Online notes (like this one) that concern California's economy and tax revenues will soon appear on an LAO web page dedicated to those issues. For updates on this new web page, email our office.