Bloomberg News

Californians Approve Brown Tax Plan, Averting School Cuts

November 07, 2012

Governor Jerry Brown

California Governor Jerry Brown speaks during a rally in support of Proposition 30 in Panorama City, California. Photographer: Kevork Djansezian/Getty Images

California voters approved Governor Jerry Brown’s sales- and income-tax increases, handing the Democrat his biggest victory since he was elected two years ago and averting $5.5 billion of cuts to public schools.

Proposition 30 won by 54 percent to 46 percent, with 100 percent of precincts reporting, the Associated Press said.

Brown’s successful referendum contrasts with the 1978 passage of tax limits known as Proposition 13, which he opposed in his previous term as governor. The measure capped local property taxes, led to cuts that reduced per-student school spending to 29th nationally from seventh, and pushed the state into budget gridlock. Without the ability to boost local levies, three municipalities -- Stockton, San Bernardino and Mammoth Lakes -- have filed for bankruptcy protection since June.

Voters backed the governor’s tax increase because they believe in “our schools and our universities, and in the capacity of our state government to make some wise investments, that will benefit all of us,” Brown said.

California, the most-populous U.S. state, has an economy bigger than India’s, ranking ninth in the world as measured by gross domestic product. Proposition 13 caps real-estate taxes at 1 percent of a property’s most-recent sale price. Before it passed, local governments could raise revenue as they saw fit.

‘Unfair’ System

“Proposition 13 set up an unfair and dysfunctional two- tiered system of property taxes,” Kevin Starr, a University of Southern California history professor, said in an interview last year. “It choked off a source of revenue, and the lack of that revenue has brought California to the edge.”

Brown, 74, and fellow Democrats in the legislature, counted on the revenue from the tax increases when they passed a budget in June that closed a $16 billion deficit. The spending cuts, equivalent to taking three weeks off the academic year, were built in midway through fiscal 2013 to assure investors that the state would have adequate cash to repay them if the tax plan lost.

The governor campaigned in 2010 on a promise not to raise taxes without voter approval. His measure increases the statewide sales tax to 7.5 percent from 7.25 percent, and boosts rates on income starting at $250,000. Those making $1 million or more will pay 13.3 percent, the most of any state. The increases, which will raise an estimated $6 billion annually, are to expire by 2018.

‘Positive Outlook’

Standard & Poor’s, which rates the state’s credit A-, six levels below AAA and worse than any other U.S. state, lauded passage of the tax increase. The company said the measure would lead the state toward paying down $34 billion of budget liabilities from previous deficits by 2016.

“It’s consistent with our positive outlook,” Gabriel Petek, a San Francisco-based S&P analyst, said in a telephone interview. “The measure actually does more than just boost the state’s revenues temporarily. It adds credibility to the governor’s plan to repay a lot of its budgetary debt and liabilities over the next several years.

A rival proposal, financed by Molly Munger, the daughter of Berkshire Hathaway Inc. (A:US)’s vice chairman, was rejected, 73 percent to 27 percent.

12-Year Boost

Munger’s plan would have increased taxes for 12 years on income of more than $7,316 from 0.4 percent for the lowest earners to 2.2 percent for those making more than $2.5 million a year. The proceeds were to be earmarked for education.

The governor sought the ballot initiative with the help of labor unions after Republican lawmakers in 2011 blocked a vote to extend expiring taxes to help combat what was then a $10 billion deficit.

Brown and the unions raised more than $69 million to support their initiative, according to MapLight, a nonpartisan research organization based in Berkeley, California. Millions to fight Brown’s plan came from Munger’s brother, Charles Munger Jr., and an Arizona non-profit that fought to keep its donors secret. Molly Munger donated $44.1 million of her personal fortune to back her proposition.

The trigger mechanism was inserted into the budget to pacify Wall Street investors who wouldn’t lend the state $10 billion of cash without assurance they would be repaid by year- end.

California voters yesterday also rejected initiatives to abolish the death penalty, to prohibit unions from spending member dues for political campaigns and to require the labeling of genetically modified food.

Voters approved a measure that strips out-of-state corporations of an option for lowering their state income taxes.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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