October 27, 1994

October 27, 1994 | FYI on

How California's Proposition 186 Could Triple State Income Tax Rates

(Archived document, may contain errors)

October 27, 19 94

HOW CALIFORNIA9S PROPOSITION 186 COULD TRIPLE STATE INCOME TAX RATES

By Stuart M. Butler Vice President and Director of Domestic and Economic Policy Studies California's Proposition 186, to be voted on by electors this November, would create a "single- payee' health system in the state. This would replace the current employment-based system available to most working families in the state. Californians would be guaranteed a comprehensive set of medical benefits, financed by new taxes, including a sliding-scale payroll tax (with the rate based on size of workforce) and a 2.5 percent income tax surcharge on all taxpayers (5.0 percent for those earning above $250,000 per year).

Paying for the Revenue Shortfall: 1998

Cosa as Mandawd by Ern@cyers Pay for AN Shortfall Individuals Pay for All Shordall Proposition 186 Banks Spectrum Banks Spectrum Shoftll $3Z500,000,000 $50,700.000,000 $3Z500,000,000 $50,700,000,000 Increase to Proposition 186 Payroll. T-ax 7.1% 1 lp% OLO% 0.0%

New Business Wage Twces Rate Under IQ Employees 4.4% $14! 5,577,808 $6,301,134,198 .$8,477D45,777 $Z415.577,808 $2,415,577,808 6*1.1' ::Ai - @07, .!-Q:2p Amployees 1 8it?1.9 .$jk .!@;386 .:$0,173= $2,173,481,919 $Z 173,481.91 @"9 Employees 7.0% $4,046,144,403 $8,137,13Z348 $10.428,085,597 $4,046,144,403 $4,046,144,403 . .. .......... . . ...... .. ..... . . .. .... 20?i(2XiJq50 '$36.286,36f3 "4287.67j.2.8'.---, 42112IZ613,959 $20,212,613,959 SD+ Empla yees: Totwo $28.647.81&089 $55.461,949,595 $70,365A"239 $28,847,818.089 $28,847.81&089

Direct Tax to IndMduals

Increase to Personal Income Tax Rate 2.5% 2.5% 2.5% 9.3% 13.2%

Average Tax Increase (Bath Private and Public Sector Workers) $813 $813 $813 $3.026 $4,295

Note: * Only the private sector share ofthe incremes is reflected State and local public sector entities vmuld also pay the new payroll tax

Recent studies suggest, however, that the financing in the Proposition is not sufficient to pay for the promised medical benefits. An analysis by Spectrum Economics, for instance, estimates that the revenue shortfall would be $50.7 billion in 1998.1 An analysis by Dwayne Banks of the University 9YI#45194

of California, projects the reve- . . ... .... . .......... .bi" Is.- nue shortfall at $32.5 billion in -Assunio 1k.. "I@ 2 0" alys 1998. These shortfalls arise ac- 1h, rce.fcq@ 6Mbfi . . .... Wiw e'sou oymen cording to such studies, mainly A :::::An - rm,size...._ d' because of doubtful assumptions . ..... .. .ii,)V:ilau,reau@of@L,;""abo'@'@SiAtistidi-w@s:tource,.,. brlhffiftnation@:66-- v@age: made by the architects of the :@ 1K . . ...... 3Y.Censm: reau,piopiplatid:"' '' ''Wffi .91179 -prole proposition. These include ques- -199'8: An 'c'ha'n'' - " ""'' f " ge -size:0--employem-ent: or tionable administrative savings, -------4Y" e--cUt6.ff----f6r'sik.d'--6f fir m... JA4s:-201hk6k&'6f:25: Oecau'se--6f Iirhit"on unduly optimistic projections for @i@ P it:difta- ness - att&r - W. .-S):.Calif long-term care costs and general 6r@nia . ..... :.t6::L9-9.I:::d2ftg to,estirn;iie medical costs, and doubtful trans- sUcce*IJn-:j6ttipg','E N fers of federal funds and waivers 6"Yt it I i fd m i a from federal rules. i.7.)u n Id'! -are.costs-to.- ealth: :.::,:-emp oyees . ..... . . .. Taking these two estimates of ::8).56 k, as4d.@6n@esdr ha-tin' mi ade b.)' e. Bahki 1:1'P::`r,,6,f6,5@;6:r1' Dwyan khar;&-t@H "'f' the shortfall, Heritage Founda- 31'f-1'h'e:i Unh@rtit `@&k-` y. s=6 .....and .!br.; d Win- tion Senior Fellow Davi ston has calculated the potential V, impact on business and taxpayers in the state. Winston uses standard databases, including the U.S. Census Bureau's County Business Patterns and population growth statistics and the Bureau of Labor Statistics reports on job growth. The results are presented in the table on page 1.

To summarize the table: If the shortfall in 1998 were to befunded entirely by an increase in the payroll tax levied on firms, the payroll tax would have to be raised 7.1 percent beyond the level in Proposition 186 (that is, would be about double the level in 186) using the Banks estimate of the shortfall ($32.5 billion), or 11.0 percent higher us- ing the Spectrum estimate ($50.7 The Current California State Income Tax billion). 0 to $9,332 1 percent If the shortfall were to be financed $9,332 to $22,118 2 percent entirely by an increase in the in- $22,118 to $34,906 4 percent come tax surcharge, the surcharge rate would not be the 2.5 percent en- $34,906 to $48,456 6 percent visioned in Proposition 186 but in- $48,456 to $61,240 8 percent stead it would be 9.3 percent if the $61,240 to $212,380 9.3 percent Banks estimate is accurate and 13.2 percent if Spectrum's estimate is $212,380 to $424,760 10 percent closer to the actual shortfall. Given $424,760 and over 11 percent the current structure of the state in- J come tax, this means that the state tax rate for middle-income Californians would more than double under the lower estimate of the shortfall and triple if the higher estimate is correct.

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Show references in this report

I Richard C. Carlson, "Proposition 186: Alternative Estimates of Costs and Revenues," Spectrum Economics, Palo Alto, California, August 15, 1994. Also Carlson, "Economic Impacts: 1994 California Health Initiative," Spectrum Economics, June 28, 1994.

2 Dwayne A. Banks, "Ibe California Single-Payer Initiative: Revenue and Expenditure Projections, 1996-2000," Graduate School of Public Policy, University of California, Revised version September 1994.