PROP 3: The Permanent High-Income Tax Initiative

• What?
  A permanent extension of the 1, 2, and 3 percentage point personal income tax surcharges on high earners, which would otherwise expire after the 2030 tax year.
• Where?
  Statewide, written into the state constitution at Article XIII, Section 36.
• When?
  On the November 3, 2026, ballot. If it passes, the rates never expire. If it fails, the last tax year of the higher rates is 2030.
• Why?
  The measure’s sponsors, led by the California Teachers Association, frame making the tax permanent as protecting school and children’s healthcare funding from what would otherwise be a revenue loss. Opponents, led by the California Taxpayers Association, argue that Californians already pay among the nation’s highest taxes and that Sacramento should fix its excessive spending before making temporary taxes permanent.

The LAO’s estimate that the Prop 30 income tax surcharge is worth from $5 billion to $15 billion in revenue is effectively a static figure: It assumes that high earners keep living, working, and reporting income in California exactly as they would without the tax. Hoover Institution research examines this assumption directly. Using the full dataset of California tax returns, Hoover Senior Fellow Joshua D. Rauh and coauthor Ryan Shyu studied what happened after Proposition 30 raised top rates in 2012—0.8 percent more of the top-bracket tax base left the state in 2013 than otherwise would have been expected without the tax change. Moreover, the high earners who stayed reported substantially less taxable income; counterintuitively, this was actually the larger effect. Together, these responses erased 45.2 percent of the expected revenue gain in the first year and 60.9 percent of the total gain within the first two years.

A companion Hoover analysis noted that the 2017 federal tax reform which created a cap on state and local tax deductions hit high-income Californians with a force equivalent to 82 percent of another Proposition 30 tax increase. It suggested that the state was likely on the wrong side of the Laffer curve, meaning that increasing the top income tax rates was actually reducing the total tax revenue collected.

Similarly, in an October 2026 op-ed on Proposition 3 itself, Rauh and Hoover fellow Gregory Kearney argue that the top-bracket tax rates are now money losers for California. Before the 2017 cap on state and local tax deductions, high-income Californians could deduct much of their state tax bill on their federal returns. This had the effect of softening the impact of the income tax surcharges. Once the cap took effect, the surcharges imposed by Prop 30 began bearing close to their full weight on the state’s high-income households, which sharpened the incentive to move or restructure income. By the authors’ estimates, since 2018 the state has been losing more tax revenue from departing taxpayers or erosion of the tax base than it collects from those that remain.

Supporters of Prop 3 reply that high earners have not fled California, pointing to studies that find modest migration among millionaires. But Rauh’s earlier findings show why that reply misses the point: Departures accounted for less than a tenth of the lost revenue. Most of the erosion came from taxpayers who stayed and reported less income. This could have occurred by realizing fewer capital gains, shifting business activity to other taxing jurisdictions, or simply working less (or perhaps accepting other forms of income). Effectively, Prop 30 has provided a textbook example of how a tax base can shrink without anyone moving away.

Proposition 3 would also enshrine a revenue structure that Hoover research identifies as a major source of California’s fiscal instability. Hoover Senior Fellow Lee E. Ohanian shows that the top 1 percent of California households now provides roughly 40 to 50 percent of all personal income tax revenue and that the top 10 percent pay almost 90 percent. Because high-earning households tend to receive a large portion of their income from the stock market, which is highly variable, California’s personal income tax revenue surged by 55 percent in 2021 and then fell nearly 35 percent in 2023.

This feast-or-famine paradigm creates complications for funding ongoing programs and exposes California to revenue risk that it has little control over. Rauh and coauthor Jillian Ludwig describe this fragility as “baked into the system” and recommend steering more capital gains revenue into reserves rather than ongoing spending. Proposition 3 does the opposite: It treats the most volatile revenue in the state as a permanent foundation for ongoing commitments.

Moreover, the phrase “the top 2 percent of tax filers” somewhat misrepresents who pays the Prop 30 income tax surcharges. This is because those who pay the tax are not solely a group of consistent high earners. Some Californians would cross the relevant tax threshold only in the year they sell a home they have owned for decades or a small business they built. Capital gains from home sales are taxable when they exceed the home-sale exclusion of $250,000 for single filers and $500,000 for joint filers. Citing a 2025 Redfin analysis, Rauh and Kearney note that 62 percent of California homes have appreciated at least $250,000 in value over their last sale price, and 33 percent had appreciated by at least $500,000. This suggests that a sizable share of California homeowners would see large one-time gains that could push them into the surcharge brackets in the year they sell. Owners of pass-through businesses, who report business profits on their personal returns, would also face these surcharges in successful years or years where they sell their businesses.

The biggest argument made in favor of Proposition 3 is premised on public schools not losing existing funding. However, Hoover research raises the question of where the increased funding has actually gone. By Rauh and Kearney’s calculations, the annual pension contributions for California’s K–12 school districts almost tripled between 2015 and 2023 to about $13 billion (excluding teachers’ own contributions). Over that period, the share of school employee spending devoted to pensions nearly doubled, from about 7 percent to more than 13 percent. If school districts had held pension costs at their 2015 share, Rauh and Kearney estimate, nearly $6 billion more would have been available for other education priorities last year alone. In other words, Prop 30’s income tax surcharges appear to a large extent to be funding increased retirement benefits.

Proposition 3 would turn a tax that voters were told was temporary into a permanent feature of the California Constitution. Compared with current law, it raises taxes on high earners from 2031 onward. Hoover Institution research suggests the revenue it protects is considerably smaller than the official estimate because the state’s most mobile taxpayers respond to higher rates by leaving or by reporting less income. It would also lock in California’s reliance on a narrow and volatile tax base while doing nothing to address the pension costs that have absorbed much of the money raised in the name of schools.