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. 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 2031.

Justification for the poor tax policy label include:

  • Prop 55 offers a “temporary” tax hike for high income individuals for 13 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 California’s tax system is outdated and out-of-sync with today’s ways of living and doing business.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?

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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1 comment on “California’s Prop 55 – Poor Tax Policy”

  • It seems unconstitutional to ask the populace to vote to tax 5% of families at a higher rate. Why would they not? Our entire proposition system has turned into silly, personal campaigns, such as condoms in the porn industry. Why even have a state legislature?

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