Governor's Tax Increase Initiative
Impact on School Funding
The Governor's 2012-13 proposed budget relies on increased taxes from a ballot measure he is circulating that could be voted on in November. The measure, titled, "The Schools and Local Public Safety Protection Act of 2012," would raise the state sales tax by one half cent, bringing the total sales tax rate to a statewide average of 8.6%. It would be in effect for 4 years. The proposal also increases personal income tax rates on incomes over $250,000 for five years. The personal income tax increase would also be retroactive to January 2012.
Recent independent analyses raise questions on the overall impact on school funding.
Summary of Findings:
1. The Governor estimates that his proposal will cost taxpayers $6.9 billion in 2011-12 and 2012-13. These funds will flow directly to schools, which allows the state to lower current General Fund support for schools. The measure allows the state to spend revenue that would have gone to schools on fast growing health and welfare programs.
2. The Governor's initiative will not increase programmatic funding for schools in 2012-13, despite his estimated $6.9 billion tax increase. It also asks voters to retroactively authorize the $2.1 billion cut to schools in 2011-12 and to permanently exclude the $2.1 billion at a minimum from the school funding guarantee.
3. The Trigger Cut proposed in the initiative targets schools for 97% of the proposed cuts even though education funding has not increased and represents approximately 50% of overall budget expenditures. If the voters reject the tax increase, but the state still sees increased revenues because the economy improves, education would not get any of the new revenue and would still face the trigger cut. Everything is tied to voter approval, not whether there is money available to fund schools.
Constitutionally Guarantees New Tax Revenue for Schools But Uses Money to Replace Existing Proposition 98 Funding Obligation.
The Governor's tax initiative specifies that all of the revenue raised by the proposed tax increase shall be directed to schools. However, the initiative goes on to specify that even though the estimated annual $6.9 billion in increased taxes are sent directly to schools, the taxes shall be counted as "General Fund proceeds of taxes" for purposes of the Proposition 98 calculation. This allows the state to reduce the state's ongoing contribution to schools. 1 The state can then use the freed up General Fund money to fund fast growing non-education programs.2
Does Not Increase School Programmatic Funding Despite $6.9 Billion In New Taxes.
According to the non-partisan Legislative Analyst's office, the Governor's proposed tax increase in 2012-13 does not increase programmatic spending for California schools.3 In fact, school programmatic funding would stay flat despite the $6.9 billion tax increase. This is because the tax increase is backfilling a number of one-time gimmicks used in the 2011-12 budget.4 The Governor also proposes to use $2.2 billion of the new tax revenues to pay down his 2011-12 education deferral. 5 Paying down the deferral will decrease budgetary borrowing, but will not give schools new programmatic funding.
Asks Voters to Retroactively Authorize the State to Cut Schools By $2.1 billion in 2011-12.
The majority vote budget adopted in June 2011, diverted 1.065%of the state sales tax to fund the Governor's realignment scheme (AB 114, Chapter 43, 2011). The 1.065% represented about $5.1 billion. Assembly Bill 114 then declared that the $5.1 billion would not be used in the Proposition 98 calculation even though these revenues have traditionally been part of the school funding minimum guarantee calculation. 6 According to the non-partisan Legislative Analyst's office, this mechanism reduced school funding by about $2.1 billion in 2011-12.7 The state is being sued by education groups who questioned the use of the Governor's Proposition 98 manipulations. 8
Recognizing the long-term impact of the 2011-12 cut, Assembly Bill 114 included a provision which required the state to:
Repay the lost $2.1 billion if no tax increase measure was approved by the voters in November of 2012; and
Include the $2.1 billion into the 2011-12 base and subsequent years, as if it were a settle-up obligation, or money owed to schools.
The Governor's initiative asks voters to retroactively authorize the $2.1 billion cut to education. Section 36 (b) (2) specifically states:
"On and after July 1, 2011, the revenues deposited pursuant to paragraph (1) shall not be considered General Fund revenues or proceeds of taxes for purposes of Section 8 of Article XVI of the California Constitution.9"
Note: Although not included in the Governor's initiative, it is important to note that the Governor's trigger cut proposal proposes to repeal the language in AB 114 which required the state to backfill the 2011-12 cut if a tax increase is not passed by the voters.
Trigger Cuts Target Education For 97% Of Cuts - Even if Revenue Grows.
The Governor's trigger proposal targets education for 97%10 of the proposed cuts even though education funding is programmatically flat year over year and "Big 3" tax revenues (sales, income and corporate taxes) are projected to grow by $4.5 billion. The Legislative Analyst has raised concerns about the fact that the trigger proposes a 97% of cuts for education despite the fact that education only represents about 50% of total budget expenditures.
This will result in a real $2.4 billion cut to baseline K-14 program spending. In contrast, health and welfare spending will still be $2.4 billion above the 2010-11 funding level when all health and welfare program funding is counted.11
Additionally, the Governor's trigger cut proposal is solely tied to whether the voters support his proposed tax increase. Schools would still be cut if the state receives additional tax revenues due to a surge in the economy or, for instance, the proposed Facebook IPO.
Click here to read past issues of "Budget Fact Check"
1 Section 36 of Article XVI (e) (8) reads:"Revenues, less refunds, derived pursuant to subdivision (f) for deposit in the Education Protection Account pursuant to this section shall be deemed "General Fund revenues," "General Fund proceeds of taxes" and "moneys to be applied by the State for the support of school districts and community college districts" for purposes of Section 8 of Article XVI."
2 Overview of The Governor's 2012-13 Budget, Legislative Analyst's Office, Page 3.
3 Overview of The Governor's 2012-13 Budget, Legislative Analyst's Office, Page 19. "Moreover, it contains essentially no programmatic augmentations while containing a few notable programmatic reductions."
4 Overview of The Governor's 2012-13 Budget, Legislative Analyst's Office, Page 18
5 Overview of The Governor's 2012-13 Budget, Legislative Analyst's Office, Page 7. " The year-to-year funding increase under the Governor's budget proposal is dedicated largely to reducing the size of existing K-14 payment deferrals"
6 Legislative Analyst's Office
7 The Budget Package 2011-12 California Spending Plan, Legislative Analyst's Office, Page 20.
8 California Report
9 Section 8 of Article XVI of the California Constitution is the Proposition 98 Guarantee provision.
10 97% represents both K-12 and higher education cuts. The Governor's proposed trigger cut to K-12 schools is approximately 80%. K-12 schools get approximately 40% of state General Fund resources.
11 In October, 2011, the state transferred $2.9 billion worth of health and welfare programs to local agencies. Those programs are not subject to cuts and will see a slight increase year over according to the Governor's 2012-13 budget proposal. When combined with the less than 1% reduction proposed in General Fund health and welfare programs, this means that health and welfare spending that had traditionally been funded by the General Fund is $2.4 billion more than in 2010-11.