Money Matters: Voters to Decide Major Tax Initiatives

Arizona, California and Illinois are just some of the states that have significant tax measures on the ballot that could impact billions in state revenue for years to come.

Financial ballot measures always carry extra weight in an election year with so many voters heading to the polls. This year looks to be no different. There are 26 tax-related ballot measures, according to Ballotpedia. They include some substantial changes to income and property taxes, along with measures that affect sales, oil and gas production, tobacco and gambling.

Here is a roundup of some of the most-watched finance ballot measures that will be presented before voters next Tuesday.

California’s Proposition 15

In 1978, California sent shockwaves through the state’s tax system when voters approved Proposition 13, which required that residential, commercial and industrial properties be taxed based on their purchase value. The amendment to the state’s Constitution placed an enormous cap on how far and fast property taxes could be raised.

Proposition 15, a ballot measure for the 2020 election, would, for the first time, amend the Prop. 13 law
and require commercial and industrial properties — except those zoned as commercial agriculture — to be taxed based on their market value, which tend to increase faster than 2 percent annually. The state’s fiscal analyst estimates that, if the ballot initiative passes, it would generate between $8 billion and $12.5 billion in revenue per year, all of which would go to cities, counties and school districts.

Proponents of the measure point out that Proposition 13 has given large businesses a huge tax break. If the initiative passes, it would affect big businesses worth at least $3 million, shielding entrepreneurs and farmers from any change. Critics of the measure take a different view, pointing out that California has one of the nation’s least-friendly business laws, but the current tax code is one of the few bright spots. Proposition 15 would be a step backwards, according to the Tax Foundation.

Many of the state’s biggest firms, from Disney to Silicon Valley tech giants, have seen their business values soar, yet the land they own is assessed at a fraction of its market value, according to experts.

“When we talk about Disneyland or Disney Studios, people say, ‘Oh, well, they built a lot of new stuff, their values have gone up.’ That’s true. But the land value at the core of Disneyland is still at a 1975 value,” Lenny Goldberg, a former state capitol lobbyist, told the Los Angeles Times

Colorado's Amendment B

In Colorado, voters will have an opportunity (for the second time) to repeal the Gallagher Amendment, a constitutional provision set in 1982 that limits the residential and non-residential property tax assessment rates so that residential property taxes equal 45 percent of the total share of state property taxes and non-residential property taxes equal 55 percent of the total share of state property taxes. 

The Gallagher measure has saved Colorado homeowners an estimated $35 billion in residential property taxes, according to the Colorado Sun, alleviating the financial impact of the state’s rising cost of living. But the drop in property tax revenue also has choked off badly needed money for the public sector. Worst hit has been rural communities that can least afford shrinking budgets. The amendment has also shifted more costs to the state, creating a financial strain on its budget. 

“Policymakers for years had sought a compromise that would protect local services from steep cuts while maintaining some of Gallagher’s protections for homeowners,” according to the Sun
. “But in the face of uncharted economic territory — and a pandemic-induced $3 billion state budget deficit — state lawmakers are instead asking voters in November to repeal it entirely and without a replacement.”

The repeal effort has unprecedented bipartisan support. It was put on the ballot by Democrats and Republicans in the state Legislature. If the amendment to repeal fails to pass, estimates show that when property tax assessments are reset in 2021, some property owners would see their taxes drop by a fifth, denying an estimated $490 million to school systems and $200 million to county governments.

Arizona’s Proposition 208

According to one national ranking, Arizona has the third worst public school system in the country. One factor behind the poor performance has been the spartan level of per-pupil funding, the second lowest in the nation, according to the Arizona Center for Economic Progress. Other rankings place its teachers at the lowest level among 50 states.

Proposition 208 will raise the tax on incomes over $250,000 to pay for better teacher salaries and a host of school support initiatives, ranging from better services for deaf and blind students to grants that support career and technical programs.

The 3.5 percent income tax surcharge is expected to raise $827 million. Proponents of the initiative say the funds will go a long way towards alleviating the chronic teacher shortage by boosting salaries.

But opponents claim Prop. 208 is too loosely worded and that money for teachers could end up paying for support and administrative personnel. The Goldwater Institute also contends the proposition will affect more than wealthy earners. “It would wreak economic harm upon Arizonans of all income levels in every industry in the state,” according to a study by the Institute.

But COVID-19 has exacerbated Arizona’s public school troubles, with even more teachers leaving the system, not only because of poor pay, but because of health concerns. The bleeding has to stop, according to backers of 208. School costs continue to increase, thanks to the pandemic, making the need for more funds more important than ever.

Illinois' Graduated Income Tax Amendment

It’s being called one of the biggest changes in state taxation in decades. Illinois voters will be asked whether the state’s Constitution should be amended to replace its current flat income tax with a graduated rate tax structure that increases the levy as income rises. The proposed amendment is a signature policy proposal by Gov. J.B. Pritzker and is expected to generate $3.4 billion in new revenue. The Pritzker administration has estimated that budget revenue for this year and next is expected to fall short by $6.5 billion. If passed, the amendment will take effect in January 2021.

As of 2019, 43 states taxed personal income, with 11 states levying a flat income tax rate. Illinois taxes income at a flat rate of 4.95 percent. The amendment would eliminate the flat rate and replace it with six graduated rates of income taxation that would range from 4.95 percent to 7.99 percent, making Illinois the state with the sixth highest top bracket rate in the country.

Proponents of the amendment say it will take some of the tax burden off middle-class taxpayers and shift it to the wealthy (only taxpayers earning $250,000 or more will see their taxes increase). But opponents predict the shift to a graduated tax just opens the door to future tax increases; it will raise Illinois tax rates at a time when neighboring states are lowering their flat rates; and it will boost the business tax rate to one of the highest in the country. According to the Tax Foundation, which opposes the amendment, if the proposal is implemented, “Illinois is projected to decline from 36th to 47th on the State Business Tax Climate Index, which measures tax structure.”

Maryland's State Budget Amendment

Does the Maryland governor have too much budget control? That’s the reasoning behind the first question on Maryland’s ballot that would tilt power back to the Legislature, allowing it to increase, decrease or add items to the state budget. Currently, the Assembly can only reduce the state’s operating budget.

Democrats in the state Legislature are in favor of the amendment, saying it will advance the state’s ability to set a balanced budget. So, too, is the state’s largest newspaper, the Baltimore Sun. In an editorial, it said the proposed amendment to the state Constitution would alter that balance of power to give lawmakers a bigger say. But it would leave the governor with the power of a line-item veto to strip out any wasteful or unnecessary spending, which could advance only with a three-fifths override vote from the state Legislature. Nor could legislators increase overall spending; they’d still have to approve a balanced budget.

But state Republicans oppose the amendment. “The language is misleading; this has nothing to do with a balanced budget,” said Republican House Delegate Matt Morgan. “This legislation transfers budgetary power from the Governor, who is elected statewide to a few legislators that control the levers of power. This is the stuff you might see on the House of Cards."

Tod is the managing editor of Governing and the contributing editor of our sister publication, Government Technology. He was previously the editor of Public CIO, e.Republic’s award-winning publication for IT executives in the public sector, and is the author of several books on information management.