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Sunday, November 13, 2016

California's Prop 55 - Poor Tax Policy

California's tax hike, Prop 55 on the 11/8/16 ballot, passed (62-38). Its story dates back to 2012.

In 2012, a need for revenue led voters to enact two temporary tax increases (Proposition 30). The state sales tax was increased from 7.25% to 7.50% for four years (2013 through 2016). Also, new personal income tax brackets (10.3, 11.3, and 12.3 percent) were added to the existing top rate of 9.3 percent for seven years, starting at income levels greater than $250,000 (2012 through 2018). The income tax rate increase was retroactive back to January 1, 2012.

To continue to address the need for revenues, Proposition 55 on the November 2016 ballot called for an extension of the Prop 30 higher income tax rates through 2030.

Justification for the poor tax policy label include:
  • Prop 55 offers a “temporary” tax hike for high income individuals for 12 years! This is beyond any common perception of temporary.
  • The tax hike allows the voters and lawmakers to continue to kick the tax reform can down the road for many more years. California’s tax system is outdated and out-of-sync with today’s ways of living and doing business. And it doesn’t generate sufficient revenue even with high income and sales tax rates. Work of two reform commissions this century was mostly ignored. [Commission on Tax Policy in the New Economy (final report released Dec. 2003) and the Commission on the 21st Century Economy (report released Sept 2009).]
  • Even without continuation of the quarter cent sales tax hike, the sales tax rate (state and local) and the personal income tax rates are among the highest of all states. This tax system fact suggests a need to broaden the tax bases to lower the rates. Doing so should reduce volatility, simplify and improve efficiency. 
Passage of Prop 55 makes it too easy to continue to postpone the work of designing a better tax system. 

A bad day for hopes of a better tax system for California's citizens, businesses and economy!

What do you think?

Click here for my California tax reform website.

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