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LWV California Education Fund Nonpartisan Analysis of

Proposition 217

Top Income Tax Brackets Reinstatement. Revenue to Local Agencies

Initiative Statute

The Question

Shall the state income tax rates for higher-income taxpayers be reinstated for upper-level incomes?

The Situation

In the early 1990s, California was in a recession and could not cover its expenditures. To avoid bankrupty, a temporary income tax rate of 10 percent and 11 percent for higher-income taxpayers was imposed for 1991 through 1995. Also, the state ordered local governments to send a portion of their property tax revenues to schools. This shift helped the state balance its budget during the recession while meeting its Proposition 98 requirement for funding public education. Local governments were left with a reduced portion of property taxes to pay for services such as public safety, libraries, and social services.

If the higher tax rates of 10 percent and 11 percent are not extended for 1996 and beyond, the tax rate for the highest income levels will revert to 9.3 percent.

The Proposal

Proposition 217 will:

reinstate for 1996 and subsequent tax years the 10 percent and 11 percent income tax rates on individuals' taxable income over $115,000 and $230,000, respectively, and joint taxpayers' income over $230,000 and $460,000, respectively.
require the state to apportion about half the revenue from these increases to local governments and about half to schools and community colleges.
prohibit the state from further reducing the local agencies' proportionate share of local property taxes.
prevent the state from lowering the tax rates on higher income brackets without a vote of the people.

Fiscal effect: The Legislative Analyst says about $700 million of tax revenue would be realized each year by reinstating the higher income tax rates, and about half of this amount would go to the schools and half to other local government agencies.

Supporters Say

state income taxes are deductible against federal income taxes, so higher-income taxpayers will actually pay only 65% of the increase.
Proposition 217 will prevent further loss of revenues for our schools by restoring local funding for schools and services.
claims of job losses are exaggerated; only a small proportion of small business owners would be affected by these rates.

Opponents Say

California income taxes are too high already; and we will have the highest taxes in the country with the proposed tax rates.
Proposition 217 contains no accountability or guarantees that the funds will be used to reduce classroom sizes or restore local funding for services.
jobs would be lost because small business owners would be hurt, and they create the most jobs.

(Analysis prepared by the League of Women Voters of California Education Fund.)

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Last updated: October 20, 1996
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