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Failure of California’s Prop 30 Would Mean More State-Level Austerity on a Grand Scale

Hopes that we are at the end of the cycle of state budget cutbacks dragging on overall growth may be dashed if Proposition 30, a measure that would increase taxes mostly on the wealthiest Californians making over $250,000, fails at the ballot box in two weeks. And two polls out today find support tanking for the measure, amid a listless campaign from Governor Jerry Brown and his allies. The near-term result is catastrophic: cuts to K-12 schools that will eliminate as much as 20 days from the school year in some districts, and $5.5 billion in automatic cuts to education. These would come in two separate waves, a midyear adjustment that would feature immediate austerity budget cuts, and a second wave in the 2013-14 fiscal year in June.

The Public Policy Institute of California finds Prop 30 clinging to a 48-44% lead, and the USC-Dornsife poll has it at 46-42. Both of these are sharply down from previous polls, and importantly, Prop 30 is now below the magic 50% threshold. The rule of thumb in California politics is that ballot measures which do not go into an election with over 50% support will lose. So this is difficult territory for Prop 30, which would fill a budget gap through a 1/4 cent hike in the sales tax for four years, and increases in income tax rates over $250,000 for seven years (currently, Californians making $47,500 a year pay the same rate in state taxes as those making $999,999).

There’s a bit of time to reverse this trend, particularly to pick up support from registered Democrats, who aren’t supporting the measure at the overwhelming levels needed to pass. But Jerry Brown has literally just started to hit the campaign trail in favor of the measure, despite the fact that his legacy in this third term of his governorship likely depends on it. Brown claims that he has been raising money previously to keep Prop 30 on footing with the forces arrayed against it.

Prop 30 faces a number of hurdles. First, a competing tax measure from Molly Munger, the multi-millionaire daughter of Warren Buffett’s business partner, has led to predictable voter confusion. Munger’s Prop 38 has even taken direct aim at Prop 30, because even if both measures gain majority support, only one will become law (Prop 38, a more broad-based income tax increase, trails badly in all polls).

In addition, Governor Brown has had to contend with a mysterious influx of money from out of state, including a recent $11 million donation to the main anti-30 group from an unknown and anonymous Arizona organization called “Americans for Responsible Leadership,” a 501(c)(4) “social welfare organization” allowed by law to keep its donors secret. That only adds to a sea of special interest money pouring into California to oppose Prop 30 and support Prop 32, a measure that would effectively end union participation in elections in the state. Unions have successfully fended off Prop 32 to this point, with the polls showing a broad rejection. But they’ve been so preoccupied with it that they have not participated to the same degree in the Prop 30 fight, leaving it to a reticent Governor and a state Democratic Party that historically does not sway voters the way unions have been able to do in the state. Unions are now rallying to highlight the out-of-state cash from Americans for Responsible Leadership, but I would imagine only because it impacts Prop 32 as well.

The consequences of this are truly catastrophic for California and the broader economy. The state would have to shift from tax increases to cover the budget to spending cuts, which have a much higher economic multiplier in terms of dragging on the economy, especially since the bulk of the tax increases would hit rich people who could afford them. Tax-side austerity is still austerity, but it’s far more responsible than the kind of spending cuts that would result from the failure of Prop 30.

With California being the biggest state in the union, and the magnitude of the cuts – all told as much as $10 billion – this could have a macroeconomic impact as well. Thousands of teachers would see pink slips or pay cuts. Public safety jobs would be affected. And the knock-on effects for consumer spending and the economy will hurt California businesses.

It’s gut check time for Jerry Brown and the Democrats, who have been unable to articulate the importance of Prop 30 for the economy in California.

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David Dayen

David Dayen