California’s economic and fiscal recovery

This post is authored by Chris Hoene, Executive Director of the California Budget  & Policy Center. 

In November 2012, California voters approved Proposition 30, a constitutional amendment that increases personal income tax rates on very-high-income Californians through 2018 and raises the state’s sales tax rate by one-quarter cent through 2016. Governor Jerry Brown championed and campaigned for Proposition 30 after state policymakers’ made widespread and deep cuts to various state programs and services during and after the Great Recession. Confronted with ongoing state budget shortfalls, and the threat of additional cuts to education and other vital services, the Governor, other state leaders, and a broad coalition — encompassing educators, labor, health care providers, faith organizations, community groups, businesses, and others — backed Proposition 30’s temporary tax increases as a means to stabilizing the budget and ensuring adequate revenues to support public investments that would position the state for economic growth.

What has Proposition 30 meant for California? Since its passage, the state’s General Fund revenues have grown from $93 billion in 2012-13 to a projected $115 billion for 2015-16. This has been driven by a combination of economic growth and Proposition 30’s tax increases, but Proposition 30 alone raises approximately $8 billion for 2014-15 (the current fiscal year) and that figure is expected to be even higher in 2015-16. These new revenues have allowed the state to significantly reinvest in K-12 schools and community colleges. In 2011-12, the low point for state budget after the recession, the state’s commitment to schools and community colleges totaled $47.2 billion. For 2015-16, this commitment is projected to be $68.4 billion. Looking just at K-12 schools, the growth in state spending since 2011-12 amounts to an increase of more than $2,000 per student. California also has slowly begun to reinvest in its state university systems (the California State University and University of California), has created and invested in a new and stronger rainy day fund, and is paying down budgetary debts. Currently, the state is poised to enact its first-ever Earned Income Tax Credit (EITC) in 2015-16, a refundable tax credit targeted to the state’s lowest-income households.

In opting for tax increases, and the reinvestment it helps makes possible, California has chosen a path in stark contrast to states that in recent years have prioritized lower taxes. Consider the case of Kansas, where massive tax cuts enacted in 2012 have left the state facing a huge budget shortfall, unable to adequately support education and other critical areas of public investment.

Critics of revenue measures like Proposition 30 often claim that tax increases will negatively impact economic growth and will chase employers and wealthy individuals to other, lower-tax locales. Yet, the evidence for these claims has always been lacking (see the latest research here).

And the evidence from California?

Let’s start with California’s job recovery. As of April 2015, California has nearly 530,000 more jobs than it did when the Great Recession started. What’s more, the pace of job growth is near the heights reached during the economic recovery of the late 1990s, the most recent period of sustained and robust job growth in California. Our state saw a 3.2 percent year-to-year increase in total number of jobs between March 2013, shortly after Proposition 30 was passed, and March 2014, and this rate of growth has continued into 2015. California is now adding jobs at a rate similar to that seen in the late 1990s and faster than the U.S. as a whole (2.3%).

At the same time, the state’s economy is booming for California’s wealthiest households. Households at the top of the economic ladder have experienced large income gains. For example, the top 20% of households in California experienced an increase in their Adjusted Gross Income (AGI) of 13.6% from 2009-2013. For the top 1%, the gain was even larger, at 28.5%. Higher-income Californians, to whom Proposition 30’s tax increases are predominantly targeted, would appear to have little reason to bolt the state, and the definitive study on this issue in California refutes the oft-repeated myth that higher state taxes cause the wealthy to flee.

At a minimum, the economic news from California provides further evidence that there is little if any negative relationship between taxes and economic growth. To the extent that there is a relationship, it appears likely to point toward positive longer-term economic impacts resulting from state investments in its education systems and other vital systems and supports that help ensure that the state is positioned for economic growth and that prosperity is broadly shared.

What’s next in California? Proposition 30’s tax increases will expire by the end of 2018 and deliberations have already begun in earnest about potential tax policies — including perhaps an extension of Proposition 30 in some form — that would continue to provide additional revenues, maintain fiscal responsibility, and allow for the state to continue to invest in its future economic growth.


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