What to know about California’s other tax-the-rich measure: Prop. 3

If Proposition 3 looks familiar, it’s because this is the third time the income tax measure has appeared on California ballots. But this time might be the last.

Prop. 3 would permanently extend an income tax on the wealthy to fund schools, healthcare and other state services. It first appeared on the ballot as a temporary tax in 2012 to help schools through the Great Recession, and voters renewed it in 2016. Now, its supporters are asking voters to make it permanent before it expires in 2031.

“I can’t overstate how important this is,” said David Goldberg, president of the California Teachers Association, the state’s largest teachers union and a primary supporter of the measure. “It’s only a tax on the wealthiest Californians, but it’s vital for our schools.”

Prop. 3 would extend a tax on individuals who earn more than $371,000 or couples who earn more than $743,000 annually. It generated between $5 billion and $15 billion a year, fluctuating with the stock market, interest rates and other factors that affect the income of the state’s top earners.

Top earners would continue paying an income tax rate of 12.3% if the measure passes. Tack on the state’s additional 1% tax on income over $1 million for mental health services and California’s highest-earners wind up with an income tax rate of 13.3%, the highest in the nation.

The bulk of the money would be funnelled through the state’s Proposition 98 funding mechanism, which guarantees 40% of the state budget be set aside for K-12 schools and community colleges. If the money surpasses a certain level, the extra would go toward a budget rainy day fund.

Prop. 3 would also pay for healthcare and other services because it frees up money the state would ordinarily spend on schools for other services, according to the Legislative Analyst’s Office. Of the Prop. 98 money, 89% goes to K-12 schools and 11% goes to community colleges.

In flush years, the income tax makes up about 15% of the state’s overall K-12 education budget. If it doesn’t pass, school districts will be forced to lay off up to 50,000 teachers and make other cuts, Goldberg said.

Union’s big push

The teachers union is aggressively supporting the measure. It collected thousands of signatures to win a spot on the ballot and sent members to knock on more than 200,000 doors throughout the state. Goldberg described the campaign as “one of our biggest, most ambitious efforts yet.”

The powerful union as well as other groups have raised more than $40 million to pass Prop. 3. Opponents, which include taxpayer associations, have raised $5,500.

The measure appears to have an edge with voters. According to a Public Policy Institute of California poll conducted in September, 58% of likely voters said they planned to vote yes on the measure. Among Democrats, 82% said they favored it, while 18% of Republicans said they did.

Prop. 3 is not the only tax-the-rich measure on the Nov. 3 ballot. Proposition 40 would levy a 5% tax on Californians with assets of more than $1 billion, with 90% of the money going toward healthcare and the rest divided between schools, food assistance programs and other services. The teachers union opposes Prop. 40 because it argues schools wouldn’t receive enough of the money, Goldberg said.

“We’re not campaigning against Prop. 40. We’re just prioritizing Prop. 3,” Goldberg said.

The union decided to put the measure on the ballot now, more than four years before the current tax expires, because schools typically plan their budgets many years in advance and need plenty of advance warning of significant changes in revenues, Goldberg said.

‘Not sustainable’

Susan Shelley, vice president of the Howard Jarvis Taxpayer Association, questioned whether schools need more money, considering the state’s recent investments and declining enrollment.

“We have fewer and fewer students. Does this mean we need fewer teachers? Maybe it does,” Shelley said. “It’s time to revisit some of these costs. Some districts have unaffordable labor contracts, fewer students … It’s not sustainable.”

In addition, she said, California already has the highest personal income tax rate – 13.3% – in the country. Adding more will only drive the wealthiest residents – and their money – from the state, which will have a disproportionate impact on state revenues, she said. According to the Legislative Analyst’s Office, the state’s top 2% of earners pay about half the state’s income taxes.

California’s K-12 enrollment has declined steadily for at least a decade, with schools losing more than 500,000 students since the mid-2010s. Families are having fewer children, immigration is down and many families have left California because of the high cost of living.

Still, California has among the country’s highest student-to-teacher ratios. In 2022-23, California had one teacher for every 22 students, according to the National Center for Education Statistics. The national average was 1:15. In New York, it was just over 1:11.

That’s why California schools need more money, said Rob Manwaring, senior policy and fiscal adviser at the advocacy group Children Now.

“Those ratios mean that students who need extra help aren’t getting it, which is why we have such a large achievement gap in California,” Manwaring said. “It’s dire.”

He also noted that federal budget cuts will continue affecting California, including its schools, and the state will need revenue to backfill those costs. The chance of an economic downturn in the next few years will also imperil school funding.

“No one wants to project out too far, but schools might see some very tight budgets,” Manwaring said.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.