June 4, 2006

The Preschool for All Act changes the state Constitution by creating a new $2.7 billion program. It imposes a 1.7% increase on taxpayers who earn more than $400,000 ($800,000 for couples) to fund the new preschool program. On June 17, 2005 children’s advocate Rob Reiner filed a ballot initiative titled: The Preschool for All Act to give every California child the opportunity to go to quality preschool.

 

While the Fresno Chamber supports increased access to pre-school for young children, the Preschool Education for All Act is not the appropriate way to achieve this goal.

 

History demonstrates that an income tax increase targeting high-income Californians can have a negative impact on revenue from this revenue stream.  

 

The 1991 California personal income tax rate increase was projected to produce more than $2 billion in additional revenue from this source. The revenue did not materialize. Revenue from the personal income tax was virtually flat until the temporary tax increase expired. Then revenue from the personal income tax grew 80% in six years.

 

A study by the National Bureau of Economic Research, analyzing 1993 federal tax increases on upper-income taxpayers, found a similar result. Two new brackets for those with incomes over $140,000 produced less than half the revenue anticipated in the static analysis.

 

The personal income tax is now more than 50% of state General Fund budget revenue, and only 11% of California taxpayers pay 73% of this tax. California is heavily reliant on a relatively small group of Californians to fund vital services. The state cannot afford to lose any of these high-income residents or see changes in investment behavior that have a negative impact on the economy and budget. This high-income group of Californians is mobile and has great discretion on investments. It is ill-advised to target this group in a punitive way through tax policy.

 

There is substantial tax saving in a move from California to a state without an income tax for this income group. It is noteworthy that some California-grown athletes who have had great success have moved their residences to other states.

 

The Preschool for All Act, like Proposition 63 of 2004 (the tax on millionaires to fund mental health) is an unfriendly gesture to high-income Californians. Voters are being asked to target someone else to pay for social programs. This targeting reinforces an unwelcome message and suggests the state is moving in a predatory direction.

 

Even before Proposition 63, California had the most expensive state income tax in the country for millionaires. California is substantially higher than the second-ranking state.

 

California is competing with no-income-tax states like Nevada, Washington and Texas for economic investment and jobs.

 

Small businesses are the backbone of the California economy. Yet increasing top income tax rates would raise income tax liabilities for some small, profitable unincorporated businesses paying personal income taxes. Logic suggests that California would foster and encourage small businesses to grow and create jobs here – not hammer these businesses with new taxes and push them either not to expand at all or expand in some other state.

 

Half of business income taxes are paid through the personal income tax. For 1999, that amounted to $7.7 billion to the General Fund.

 

Eighty percent of California business taxpayers pay income taxes under the personal income tax law. In 1999, that was approximately 2.2 million returns, compared to 325,000 bank and corporation returns.

The Preschool for All Act is a continuation of an ugly trend of raising taxes by isolating groups of consumers or taxpayers who are viewed as vulnerable because they are unpopular, few in number, or not willing to mount an opposition campaign. The tax increase on millionaires to pay for health care and the earlier Reiner cigarette tax increase initiative are examples of this predatory tax increase practice.

 

K-12 schools, higher education and other critical needs depend on substantial growth in the personal income tax to meet financial commitments to public priorities. A permanent increase in personal income tax rates dedicated to preschool will have a negative impact on future growth rates that can be expected from this tax. It will undercut schools and higher education funding.

 

The natural growth in California personal income tax revenue that is produced when the California economy grows is substantially greater than any politically viable tax increase that could be enacted. California personal income tax revenue can increase dramatically when public policy changes encourage increased California investment and job growth, particularly job growth in industries with high wage levels.