What California's November Tax Measures Could Change | Susan Shelley

In California, this November, we're gonna have a number of tax measures on the ballot. Some are extending taxes on wealthy individuals in California. Other measures are actually proposing wealth tax on high net worth individuals worth more than a billion. At the same time, there are some measures that are going counteractive to these, will cancel the wealth tax. Today, we sit down with Susan Shelley, who's with Howard Jarvis Taxpayer Association. She's gonna give us the taxpayer's perspective into these measures. Well, the way it impacts taxes is they are spending more and more money. And then you get to the next year or two years later in the budget, and now you have to pay that money back. So now they have another shortfall, and they either have to cut services or they have to raise taxes. You can't just keep putting an IOU in the future and spending money that's not there. I'm Siamak. Welcome to California Insider. Susan, it's great to have you back. Welcome back. Thank you, Siamak. It is great to be with you. It's the election season again, and we're gonna have a number of ballot propositions that you guys have a position on. You're one of the largest taxpayer associations in California, and you're taking positions on these ballot propositions. Tell us about them. Well, there are a number of really important taxpayer-related measures on your November ballot, which, of course, is really your October ballot, because they mail out by October 5th, and there's a month of voting. And a lot of people will open up that booklet, and they'll say, I don't know what any of this is. So I am happy to bring some clarity to the ones that affect taxpayers the most. There's a number of them. There's the wealth tax. We won't get into all of them, but let's start with number two, Prop 2. Proposition 2 looks like it's about the government saving money for a rainy day. But what it really does is it makes it easier for them to spend money, because it's changing the rainy day fund rules to allow the reserve fund that's supposed to be for recessions to be used to pay what's called budget borrowing. Now, what's budget borrowing? Budget borrowing is when they are spending more than they are taking in, so that even revenue can be growing, but spending is growing faster. And they take, essentially, an IOU, and they plunk it into the future, and they say it's somebody else's problem. Ha, our budget is balanced. They have to have a balanced budget, but the courts have said that the legislature decides what a balanced budget is. So you can imagine the fox watching the hen house. So how would that impact taxes? Well, the way it impacts taxes is they are spending more and more money. And then you get to the next year or two years later in the budget, and now you have to pay that money back. So now they have another shortfall, and they either have to cut services or they have to raise taxes. You can't just keep putting an IOU in the future and spending money that's not there. So you think eventually, if this gets out of hand, it could increase taxes down the road? It absolutely could. I think it may already be increasing taxes. The legislature considered a lot of tax increases and passed a couple of them. One on software services, and then they did away with some business credits. So they did raise taxes. And there, of course, are some things on the ballot that would raise taxes further. So there is a lot of pressure because the spending has increased so much. And what's really concerning is we're in a so-called budget emergency. They are dipping into the reserves in this emergency, and yet, where's the emergency? There's no pandemic, there's no tsunami, there's no recession. Where is this emergency? Well, the emergency is defined as they don't have enough revenue for their highest level of spending in the last three years. You might say they could cut spending, they could stop increasing spending, they could do things like that, but no. What they wanna do is change the rules for the Rainy Day Fund so they can stuff more money into it and then pay for budget borrowing. And this gets around something called the GAN limit, which is designed to make sure that the government's spending doesn't grow. It's been pretty much shot full of holes since 1979 when it passed, and it's much more difficult. But technically, they're supposed to give the taxpayers the money back if they take in more revenue than they're allowed to spend. And this is another way of making sure that that never happens. So, you know, we're a no on Proposition 2. What about Prop 3? That's an extension of a tax increase that was supposed to be temporary. You guys are against it. It's a temporary tax, they told us, in 2012. It's just because the Great Recession was so tough and we need the money for education. It's temporary. So this is an income tax increase. It's an increase in the rates at the top part of the income spectrum. It was supposed to be temporary. And then in 2016, something was put on the ballot to extend it to 2030, and now something is on the ballot to make it just permanent. They're dropping this pretense that it was temporary at any time. It's going to be permanent. So we're a no on Proposition 3. One of the problems with our progressive income tax, which is so much higher on people with upper incomes, is if they leave, if they go to Texas, if they go to Florida, if they go to Nevada, where they have no income tax at all, it leaves a big hole in the budget. It leaves a big hole in the Treasury because 1% of the tax filers in California pay about 45% of the personal income tax, which is the largest share of the general fund. So you don't want to be squeezing people to the point where they get angry and leave. It's also very tough on small businesses, which pay taxes very often as an individual, and they get hit by those high rates. And this one is impacting the singles who have income of $371,000, something like that, above that. I think that's right. For families, I don't know what's the treasure for families. Well, it's just based on income. And the top tax rate is currently 13.3%. It's 12.3 plus a millionaire's tax of an additional 1%. And then there's a payroll tax on top of that where the cap came off of it. So someone can pay 14 point something if they're working and they have wage income at that level. Now, it's not that you have to take up a collection for people who are making that much money. But what is a fair share? And what is just abusive? I would think that 9.3% as a top rate, which is what it was before these increases, is quite enough for a state income tax. And we have the highest income tax rates in the country. So we're not competitive for small businesses. We're not competitive for people starting businesses. Why would you? Why would you start your business? Some states, some even neighboring states have zero income tax. So we're competing with them. Right. But California, everyone wants to be here. Well, yes, everyone wants to be here. And yet we do have a net outflow. We have this out-migration problem. And if it's at the top end of the income spectrum, it does hit the general fund budget. And then there's less money for everything. What about Prop 40, which is like wealth tax? And this has been tried in different countries. And most of the countries that have tried it, it may have not worked out. How about this one? Can you tell us more about it? Well, this is a terrible idea. And it's a terrible measure. One of the things it does is amend the state constitution. I didn't know this, but there is a cap in the state constitution of 0.4% on an asset tax. But we don't have an asset tax. The legislature has never enacted one. And for very good reason. Why would people come to California and start their businesses if you're going to tax their assets, not their income, but their assets, which may be an unrealized capital gain. Why would you do that? Why would you tax unrealized gains and drive people out of the state? People are not going to come and start businesses. They're not going to be entrepreneurial if you're going to start looking at what they have in unrealized gains and taxing it as if it was realized. This is a bad idea. So California has a 0.4% cap on it in the constitution. They've never enacted it. What this measure does is it repeals that cap because this is a 5% wealth tax. Now they say it's only on billionaires. It's only on about 200 people in California. But guess what? There's a provision in it that lets the legislature rewrite it after it passes. And how does that work? They just change it supposedly to further the purposes of the measure as defined. But the purpose of the measure is to take money from people. So pillage and plunder is the purpose. And a lot of tax increases could come in there. So the legislature could change the threshold. It could change really anything about it with a two-thirds vote. And guess why? Guess why they want that in there? Do you have the concern that this might hit people that are not billionaires down the line? Absolutely, it would. Even if this particular measure didn't do it, once they set up a system with the Franchise Tax Board to figure out how to collect this, how to have everyone report it, how to verify it, how to collect it, what the penalties will be if you don't do it correctly. Once they put all of that in place and they have a bureaucracy with new bureaucrats to implement this, it would be very easy for the legislature to pass another wealth tax. And we're very concerned about that. We just think they have their hands on enough of your money and we don't need a wealth tax in California. So you mentioned this is on billionaires and does it, what if you're a billionaire, you wanna come to California? Does it include you or you have to be here already? The way it's written, it applies to people who were here on January 1st, 2026. So some people left in December, 2025. Some people have left since thinking that it's never really gonna be a one-time thing. The idea that it would be restrained is pretty much not credible. Even the people who are promoting this, which is SEIU, United Healthcare Workers West, even they say, well, at the end of the roughly five years that this money will last, we'll have to think of what to do next. Well, gosh, what do you think that'll be? It'll be another hit on somebody's assets once they've set this all up. So I think it's a really bad path for California to go down. The governor's against it, Governor Newsom. Both candidates for governor are against it. Many people are against it. All the money from it goes essentially just to this one purpose, which is facilities that provide public health services and employ the members of this union, which is backing it. So it's a little bit self-interested from that perspective. It's not money that goes to the general fund to be for all the purposes that California needs. And you mentioned unrealized gains. Can you explain that? How would this work? Sure, let's say you buy a stock for a dollar and it goes up to $1,000, but you haven't sold it. So you have an asset that's worth $1,000, but you don't have one dime in your pocket from that because you haven't sold it. When you sell it, you have a capital gain of $999. That's taxable in California at 13.3% at the highest rate. It's taxable at regular income rates. So you have your capital gain when you sell it, but if you haven't sold it, you're being taxed on paper profits. So let's say January 1st, it's worth $1,000. You have a $999 gain. You're gonna be taxed on the 1,000 because it's worth 1,000. And then if in February it drops to $50, too bad. You were taxed on it as of this date certain because that's how it has to be implemented. There has to be a date at which you set the value for the tax. So it's an unrealized gain. It's a paper profit. And whether that's tons and tons of Tesla stock or whether that's what you have in your retirement account, if you're being taxed on the value of something you haven't sold, it could go down the next day. It's not a realized gain. Realized gain is when you sell it and you have the money. So it doesn't mean that people have the money, the cash is not sitting there. Exactly. The LAO, Legislative Analyst Office has mentioned that this could cause, when people leave, because some people kind of ran away after this initiative was introduced, when people are leaving the state, then they take the good tax money with them where they're funding, you mentioned 45%. It's a general fund personal income tax that leaves the state, exactly. So even just talking about this billionaire tax before it even passes has hit the general fund because people have left. And don't forget that when people who run companies move their companies, all the people who are on the payroll stop paying taxes in California also because they're going to Texas, the jobs are going to Texas. And the other part of this that's really bad for California is that when jobs leave, everything in California becomes less affordable for people who are here because you can't get a good job because the good jobs are leaving. So what's left, service jobs, other kinds of things that don't pay as well, but the jobs that really are good careers in growing companies, in growing sectors, they're leaving or they're never coming to California in the first place. And so people get out of college and they're looking around, they want to buy a house maybe, they want to find a job, and there's no way. They can't afford a house. They can't find a job that will allow them to buy a house. Everything is paying less than they were hoping it would. Why is that? Well, the tax structure is driving growing companies elsewhere. So that's the problem. Now, there is another proposition that actually is the opposite of this one, is Prop 42, right? Right. Prop 42 blocks Prop 40. If Prop 42, let's say they both pass and Prop 42 gets more votes than Prop 40, it blocks Prop 40 from taking effect because they're conflicting measures. Prop 42 bans asset taxes like this, bans taxes on people's retirement savings and all these other assets that Prop 40 is trying to go after. So the way this is going to work, even if Prop 40 passes, let's say it passes with 51%, and Prop 42 passes with two points more, then Prop 42 takes effect and Prop 40 does not. And now there's Prop 41. Can you tell us about that? Prop 41 is another one that conflicts. It conflicts because Prop 40 is trying to get around that GAN spending limit that we talked about. So that part of it in Prop 41, it's a little bit in the weeds, but there's this GAN spending limit evasion, which is reversed with Prop 41. So that part of it conflicts. But what Prop 41 does, if it were just a standalone measure, it's a pretty good idea. It requires pre-election audits of programs that are going to be funded with a special tax that's going to be on the ballot. So for instance, this billionaire tax is a special tax, meaning the money is earmarked for particular purposes. It's not in the general fund to be used for anything. It's special for one purpose or two purposes only. So the way that this would work is a special tax is subject, the program that's funded by the special tax is subject to an audit before the election. So the voters can see how their money is already being spent in this program before they vote on the tax. That's a good idea. So by itself, if 41 passes, if 42 passes, those would both be very good. You'd have pre-election audits. You can't have too much transparency in California on these government programs. And 42, banning taxes on your retirement account and the rest, both very good ideas. So how does the audit work? So essentially you have a program that's already running. What if it's not a program that's running? I think there would have to be some kind of an evaluation. I don't, it wouldn't be an audit exactly, because you're right. If it doesn't exist, it can't be audited. So I don't know exactly how that would work. Your organization have put Prop 43 on the ballot. Can you tell us about that one? Prop 43 is really important. This makes it harder to raise local taxes. After the courts made it easier to raise local taxes. The backstory on this is that in 1978, and again in 1996, the voters put something in the constitution that says special taxes at the local level need a two-thirds vote of the electorate. They all have to go on the ballot. General taxes need a simple majority vote. Special taxes where the money is earmarked need a two-thirds vote. Well, that's the way the law was from 1978 to 2017. And then in 2017, the California Supreme Court put a comment into a decision called California Cannabis Coalition versus City of Upland. And in this comment, they suggested, without really deciding, that if a tax was put on the ballot by the citizens themselves, not by the government, but by the citizens, well, then the constitution doesn't apply, which was right out of the air. It was just created right out of the air. The next year, two county supervisors in San Francisco decided to test it. So they took a special tax that they were going to pass at their desk, which would have needed a two-thirds vote if they put it on the ballot as the government, and they said, well, we're citizens. Let's go out to the sidewalk and collect signatures on this same tax, which is exactly what they did. And they put it on the June 2018 ballot, and it passed with 50.8%. Nowhere near the two-thirds vote that it would have needed. Everybody sued and lost, and appealed, and lost. And the reason was, because of these comments in this Upland decision, the courts said, well, the constitution doesn't apply if the citizens put the tax on the, but it was the government. So even if you're a representative and you put it, you're still considered as a citizen. So this happened in Fresno, this happened in San Diego, this happened in Los Angeles, and now we have billions of dollars a year in extra taxes that people are paying that according to the constitution, they shouldn't have to pay. And what are we doing about it? Proposition 43, which says that the constitution applies if it's a citizen's initiative tax increase. And if it needs a two-thirds vote from the government, it needs a two-thirds vote from the citizens. By the way, who are these citizens? It's not always the government. Sometimes they're special interests directing all the money to themselves. They write their own tax increase, they direct the money to themselves, they pay to collect the signatures, and they evade the two-thirds vote requirement. So can the taxes come to a specific organization? Let's say if I had a janitorial services company and I would say we need to have cleaner office spaces in this city, I work on putting the measure, can it go specifically to me or does it happen behind the scenes? How specific is that? It can go to you. It probably has to be written like this. A company that has X number of employees that's located in such and such an area that is specifically devoted to whatever. And you would describe exactly what you do and who you are so that it could only go to you. That's one way to do it. And sometimes they can just say who the money's gonna go to. I think that's part of the way that measure ULA works in Los Angeles. That's a mansion tax, which is really a tax on all real estate above $5 million, not mansions necessarily, apartment buildings, commercial real estate. And the money is very specifically directed to organizations that provide particular types of services for tenants, for the homeless. And so they directed the money to themselves. They paid for the campaign. That's their tax and that's their money. So the money goes to the city, but the city has to spend it according to the way the measure says. So if your measure passes 43, the threshold will go back to- Back to two thirds. Two thirds. Right, so these special interest taxes, you can still put them on the ballot, but all special taxes would need a two thirds vote to pass, which is a really important protection because otherwise we're going to see, we're already seeing in every election, another tax increase. And a lot of these are sales taxes and sales taxes are very harsh on people right now because everything's expensive. And then you add not 9%, not 10%, we're going to 11% in some of these cities and higher. This is crazy. And sales tax impacts everyone, but it's not on food, right? It's not on groceries. It's not on groceries, but it is on restaurant food. It's on McDonald's. If you go to the drive-thru, you take a look at that receipt, there's a giant tax on your food. It's very expensive. And of course, clothing and all kinds of essentials. So it's really bad to raise the sales tax over and over. Interestingly, there is a cap in state law on how high the local sales tax can be. It can only be combined jurisdictions, 2% total above the state sales tax. So the state sales tax is seven and a quarter percent. No one in California theoretically should be paying more than nine and a quarter percent, but we are. How does that happen? Well, the legislature passes special bills. They say, oh, this is urgent for this city and it's urgent for that city. And this year at the end of the session that they did two bills, I think they carved out for 15 cities an exemption from the cap so they could all raise the sales tax. This is very harsh on people to take that sales tax up above 10%, 11%. That's crazy. Now there's a Bay Area five county sales tax measure for transit funding. It's half a cent, half a percent, everywhere in four counties is half a percent. In San Francisco, it's 1%. I believe in Alameda County, that would take the sales tax to 11 and a quarter percent and people in Oakland will have to pay that. That's a lot, 11 and a quarter percent sales tax. And it isn't right. So certainly these taxes should need a two thirds vote to pass. People should be very sure that they need it, that they want it, that they're confident it will be spent well and not wasted. And a two thirds vote really helps that. Is it hard to go backwards in taxes in the cutting from 11% to going back to 9%? Has that ever happened? Well, if prop three fails, then the income tax will go down. That's those are the income tax rates. Has the sales tax gone down? Usually what happens if there's a temporary sales tax, couple of years later, there's an extension measure. So we've seen that in Los Angeles County with one of the transit taxes, it was measure R, it was temporary, but then measure M was proposed, which was another half percent sales tax for transit. And it made measure R permanent. And we saw that with the homeless tax in LA County, measure H was temporary. And when it got close to expiring, measure A was proposed as a citizen's initiative sales tax. And that made measure H permanent and doubled it. So instead of a quarter cent, it became a half cent, half percent and permanently. Usually it seems to be very hard for our city and state government to actually deal with one time money because if a program gets started, some people benefit from it or some people will get hired. And then it's hard to lay them off or hard to cut the program. Then there has to be some sort of funding so people start proposing new ideas to tax, right? Yes, but sometimes what we're seeing is they know people will vote for a tax increase for the police or the schools. So what we're seeing in two different places, we're seeing this in Palos Verdes Estates and in Santa Monica, you're seeing a current situation where the general fund is paying for something. And what they wanna do is have the general fund stop paying it and they want a special tax to pay for the police and the schools. That's happening in both those cities, police in Palos Verdes Estates and schools in Santa Monica. So those tax measures on the local ballot are a little bit deceptive. It's creating a situation where the general fund is currently paying it. And so they wanna free up that general fund spending for something else and have a tax increase for something that people will vote for. It's very political in that regard. Now, what about Prop 44? Prop 44 is from the people who brought you all those kidney dialysis propositions on past ballots that everybody probably remembers. Also from the people who did the billionaires tax. This is SEIU, United Healthcare Workers West. And what they're trying to do, it appears, is pressure these clinics to unionize. And so they harass them with these ballot measures that threaten all kinds of needless regulations and would raise costs. And in the case of these public clinics, probably raise costs to the taxpayer. But it's not necessary. It's not a good idea. That's Prop 44. How does it lead to the taxpayers? Well, I think if it's a public clinic where it's funded by Medicaid or Medi-Cal and public money from grants or whatever else, then if it has additional expenses to meet, whether it's more manpower or it's different regulations or whatever it is that they have to do, then it raises the cost of the program to the taxpayers. Now, your organization, Suzanne, actually has a big history in California. Yes, we do. Can you tell us about it? Many people may not know the story. Well, the Howard Jarvis Taxpayers Association was founded in 1978 after Proposition 13 passed. Howard Jarvis was the prime mover who got Prop 13 on the ballot. And what Prop 13 did was prevent property taxes from going up as the price of housing went up. It used to be the case that people were taxed on the market value of their house and the tax rate was not capped. So it was 2.67% statewide average. And if you can imagine paying 2.67% of the market value of your house- Especially in California. Especially in California, especially during inflation, which we had in the 70s and we have again, it's very brutal because you're not necessarily making enough money to buy your house at what it's worth today. So what Prop 13 did is it tied your tax bill to your purchase price or your fair market value at the time of purchase. And what it said is that the assessed value of your property can only go up with inflation capped at 2% a year. And the tax rate was cut to 1%. And that gave everybody certainty that helped everybody stay in their property, no matter what the real estate market did. And people could have certainty, businesses too, about what their tax bill was going to be. It does go up. It just doesn't go up a crazy amount like the price of the house is going up. And there was an incident that inspired this movement. Can you tell us more about that? Yes, Howard Jarvis was at one of the tax offices, one of the county offices, and a woman was there with her tax bill and she said, this can't be right. I can't pay this. What am I going to do? And they couldn't help her. They said, you have to pay it or you're going to lose your house. And the woman had a heart attack and died in the county office. And Howard Jarvis was there to see that. And he knew way before that happened that this was going to just brutalize people, that they were being taxed on the market value of their property and inflation was roaring in the 70s. The joke used to be, I always wanted to live in a $100,000 house. And now I do. And now you could say it about a million dollar house. I always wanted to live in a million dollar house. And it is. And it's the same house, obviously. And nobody has that kind of money all of a sudden to pay these taxes just because the value went up. So Proposition 13 creates certainty for people. And it creates certainty for the counties and the cities as well, because the property tax roll climbs very steadily and it's not volatile like the income tax and the sales tax and the business taxes. So it's very steady, consistently going up. And that's been a good thing. Now, Susan, some people argue that we need this money for our schools, for our cities and infrastructure. Is your organization always against more taxes? No, we're not always against taxes. If people in a community want to vote for a tax, as long as it's put on the ballot the legal way and there's no deception and no loopholes, we think it should be up to the voters. But I have to say that the taxes are so high in California right now that if you think you're not paying enough in taxes, I think we should refer you to a competent doctor and get your medications adjusted because how do you not think you're paying enough tax in California? You are paying so much. And yet the budgets of the cities and counties are not prioritized for the most important things. So they come to you for a tax increase for the fire department, for the paramedics, for the police, for the schools. You're paying a lot in taxes already. And they're wasting a lot of the money you already pay. And then they're coming to you for a tax increase. Now, what about California compared to other states? Because in places like Texas, they have the real estate tax, which we have the Prop 13. You guys helped pass that. The real estate tax is a lot less, but we have a huge income tax here. The income tax is a lot less there. I don't know if it's zero there or not, but- It is, it's zero. Income tax is zero in Texas. So have you guys done any comparisons? Like, do we pay more or do they pay more? How does that work? Well, interestingly, there is an organization called ITEP, and I forget what it stands for, but they do a study of taxes at the state level comparing state to state. And they found that California has a pretty good deal and is not the highest. And in some respects, Texas and Florida are higher, but guess how they did that? They counted the property taxes of people who rent. They attributed the landlord's property tax bill, which is protected under Prop 13. They attributed that portion of the taxes to the rent that the tenants are paying. And they said, you see, they're actually paying more in property taxes in Texas and Florida than they're paying in California. Well, that's because of Prop 13. That's not to the credit of the legislature. The legislature did everything it could to stop Prop 13. And so that's the story there. But what about the incomes? Has there been an analysis of how much we are paying? Income tax in California starts at a pretty low income. It starts at about $20,000 or so. You start paying income tax. And then I think the median income in California is right around 65,000. And when you get to 70,000, you're paying 9.3%. You're barely above the median income and you're paying this income tax rate of 9.3% that in other states would be reserved for millionaires if they even collected a tax rate that high, which I don't think they do. So this is really, this is troubling that people are paying so much in state taxes. Well, Susan, it was great to have you back and make sure to come back and update us in the near future. It was great to have you in California, et cetera. Thank you so much, Siamat. Great to be with you. Tell us what you think about this conversation with Susan. Do you agree with these measures? Do you think we should pay more taxes in California or do you not agree with them? Make sure to email us at siamat.californiainsider.com or comment and make sure to tell us why. I'm Siamat Kourami, this is California Insider. We'll see you next time.