Voters deserve a do-over on Proposition 63’s ‘millionaires tax’

In November 2004, Californians approved Proposition 63, imposing a new tax to expand mental-health services. Two years later, it is now clear that voters were either mislead or misinformed about how the tax would work. Fairness calls for court review and a referendum.

The official text of Proposition 63 stated: “Very high income individuals should pay an additional 1 percent of that portion of their annual income that exceeds one million dollars.” The official California Voter Information Guide said: “Proposition 63 only taxes individuals on their taxable, personal income over $1 million.” This statement was signed by Carla Nino, president of the California PTA; Areta Crowell, president of the California Mental Health Association; and Dr. Dana Ware, president of the California Academy of Family Physicians.

Elsewhere the Guide said: “People earning less than $1 million per year won’t pay anything extra.” This statement was signed by Deborah Burger, president of the California Nurses Association; Chief Cam Sanchez, president of the California Police Chiefs Association; and Barbara Kerr, president of the CTA.

But these statements, made by trusted members of the community, are untrue.

The proposition’s fine print pointed to a part of the tax code (without actually including that part of the tax code in the proposition’s text) that ensured the regular income-splitting tax provisions do not apply to Proposition 63. As a result, people whose individual incomes fall far below $1 million are beingassessed the “Millionaires’ Tax.”

Consider a married couple filing jointly with a taxable income of $1.2 million. Assume each spouse earns $600,000. Under normal rules, the tax imposed would be twice the tax that would be imposed if the combined taxable income were cut in half. The upper tax rate would be 9.3 percent. But the Proposition 63 fine print applies the 1-percent surtax on the $200,000 in excess of $1 million. A married couple filing jointly gets a single million-dollar “exemption” before the surtax kicks in. People whose individual incomes are far below $1 million ($600,000 in this example) are being assessed Proposition 63’s millionaires’ tax.

This was never made clear to voters–quite the contrary–and press stories implied the tax would affect only individual millionaires. Consider how the Sacramento Bee explained Proposition 63.

“It works like this: Someone earning a taxable income of $1.5 million would pay 1 percent of $500,000, or $5,000 extra, in income tax.” Notice the Bee said “someone.”

The San Jose Mercury News said Proposition 63 “would impose an additional tax of 1 percent on individuals’ taxable income over $1 million.” Similarly, the San Francisco Chronicle said: “The November ballot initiative would place a 1 percent tax on individuals with taxable income over $1 million.”

Clearly, the popular interpretation, based on official literature, was that this tax would apply only to individual millionaires. Had the full truth been explained, voters might not have approved the proposition. Preliminary data suggests that even California’s nonpartisan Legislative Analyst’s Office was fooled.

The LAO publicly estimated the surtax would generate $513 million in its first year, 2005, with 25,000 to 30,000 taxpayers assessed the tax. But the California Franchise Tax Board has identified 47,408 returns yielding $1.26 billion from the surtax in 2005. The tax hit many more people than the LAO estimated, possibly because it did not factor in the obscure ban on income splitting that resulted in a surtax assessment on thousands of couples with incomes between $1 million and $2 million who filed jointly.

If language is the currency of politics, California voters were given counterfeit bills in 2004 when they voted 54 percent to 46 percent for the millionaires’ tax. State voters look to the official text and Guide for truth, expecting both to provide a full and accurate picture of how an initiative will really work. The official literature on Proposition 63, however, was grossly misleading, if not freighted with outright lies.

Voters deserve a do-over in the interest of honesty in government. The courts should review the fairness of the Proposition 63 vote, and there should be a referendum on the tax in 2008 to determine the true will of a fully informed public.

Lawrence J. McQuillan, Ph.D., is director of Business and Economic Studies at the California-based Pacific Research Institute for Public Policy.