- State & Local
- California
California’s state budget increased by about 75 percent in the past eight years, despite no population growth, rising from around $201 billion in fiscal year 2018–19 to more than $350 billion in fiscal year 2026–27. This represents around $25,500 of state spending per household. With such a large rise in spending, the last thing politicians should be asking for is higher taxes.
Yet the state’s Democratic Party has endorsed both Proposition 3, which would make the top personal income tax rate of 13.3 percent permanent, and Proposition 40, which would retroactively take 5 percent of wealth from Californians with a net worth of over $1 billion.
California’s 13.3 percent top personal income tax is the highest in the country. Its genesis was a ballot proposition known as “Temporary Taxes to Fund Education,” which was passed by voters in 2012 after a plea by Governor Jerry Brown. He marketed the 3 percentage point increase on top earners (over $1 million for joint filers) as a temporary sacrifice that would avoid deep cuts to schools and public safety during California’s 2012 fiscal crisis. It also increased tax rates on other high earners and raised sales taxes by 0.25 percentage points, though for four years rather than seven years.
In his 2013 “State of the State” speech, Brown referenced the Bible when stating, “The people have given us seven years of extra taxes. Let us follow the wisdom of Joseph, pay down our debts, and store up reserves against the leaner times that will surely come.”
But those seven years of revenue abundance became fourteen years and counting: In 2016, voters extended those higher tax rates until 2031.
Fast forward from 2016 to 2026, and the state’s Democratic leadership and school unions are asking voters to pass Proposition 3 and make sure those higher taxes never go away.
The “temporary” fix that never ends
The advertisements for Proposition 3, largely funded by $33 million from the California Teachers Association, emphasize saving school funding, but California can always repurpose some of its budget increase to schools. Moreover, schools are already well-funded; the 2026–27 California school budget is $151 billion, which is an estimated $26,800 per child. Assuming an average classroom size of twenty-three students within California schools, the budget works out to about $600,000 per classroom.
There is no doubt that we should be able to deliver a high-quality education based on how much we spend, yet only 29 percent of our eighth-graders are proficient at federal standards in English and just 25 percent in mathematics. And that proficiency bar is not particularly high. For example, it is expected that eighth-graders should be able to order the following numbers from smallest to largest: ½, 0.25, 0.75, and 1/10. This is considered an elementary math question. However, only 55 percent can answer this question correctly.
We should do much better, particularly at this funding level. Note that some California schools are significantly outperforming average school performance while spending about 57 percent less per student. For example, the Kairos Public Schools, a public charter in Vacaville, delivers much better learning outcomes while spending only about $11,200 per student. Kairos schools succeed at a comparatively low budget because they apply a highly effective teaching model that helps kids become self-directed learners—and their teachers are not unionized, which means faculty are not hamstrung by the union work rules that limit teacher effectiveness at other schools. The result: highly engaged students and a near-absence of chronic absenteeism, which is a significant problem within the state’s K–12 system.
California schools don’t have a funding problem. Rather, the problem is a broken educational model that should be fixed immediately, including optimizing existing funding to increase learning outcomes.
Taxing wealth
Proposition 40 is the other tax on the ballot. It would take 5 percent of billionaire wealth, with about 90 percent of the revenue going to health care, primarily Medi-Cal. Like California’s spending on schools, Medi-Cal spending has also increased substantially over the past decade, rising from $89.4 billion for about 13.5 million beneficiaries in 2016–17 to $219.7 billion and about 13.9 million beneficiaries in 2026–27.
Medi-Cal’s budget per beneficiary is about $15,800 per year, yet the agency has chronic problems ensuring that spending is commensurate with the level of care received by patients. Since 2007, Medi-Cal has been on the state auditor’s list of high-risk agencies, reflecting its opinion regarding organizational inefficiencies and concerns about program accountability and effectiveness.
In 2022, the California State Auditor found that fewer than half of enrolled children had received required preventive services over nearly a decade, and that the Department of Health Care Services had not fully implemented eight of fourteen recommendations from its 2019 audit. A 2019 rural care audit found that some patients traveled hundreds of miles to specialists, while the department approved exceptions to access requirements without adequately checking whether health plans had exhausted reasonable alternatives.
Financial oversight has been deficient. In 2018, the state auditor identified at least $4 billion in questionable payments associated with unresolved eligibility discrepancies. Earlier this month, the auditor reported that approximately 26,000 providers flagged for elevated billing risk had not been researched or investigated, and identified almost $31 million in transportation overcharges in 2024–25. Earlier this year, the Legislative Analyst’s Office concluded that inadequate spending data limited legislators’ ability to assess why Medi-Cal costs were rising so much.
These reports demonstrate chronic failures in providing care that should be much better, given the level of spending.
Advocates for Proposition 40 express concerns about changes in eligibility and funding. Eligibility for federal Medicaid will now require eighty hours per month of work, training, or education, which acknowledges the contributions to society that can be made by those who are able to participate in these activities. However, many individuals will be exempted from this requirement, including seniors, caregivers, and those who are physically or mentally unable to work. Proponents also express concern about future funding cuts, but part of these cuts is due to closing a funding loophole that California and a few other states were exploiting.
The possible passage of Proposition 40 has led several California billionaires to declare a change of residence, including Sergei Brin and Larry Page, co-founders of Alphabet (Google), Peter Thiel, co-founder of PayPal and Palantir, and Travis Kalanick, co-founder of Uber. All have moved to a state without state income taxes.
The proponents of Proposition 40 estimate that it will raise $100 billion in revenue and are assuming that those who have left California will still be required to pay the tax retroactively. But Hoover economists Benjamin Jaros and Josh Rauh estimate that if passed, Proposition 40 would result in a net, long-term loss of about $39 billion in revenue. This reflects the forgone state incomes taxes that travel with those billionaires leaving the state and the wealth that has already moved.
Jaros and Rauh also take into account the likelihood that the proposition will be declared unconstitutional if it does pass. The constitutional challenges facing Proposition 40 include a likely due-process challenge because of the retroactive nature of a new tax, as well as a dormant-commerce clause challenge, reflecting the fact that assets located in another state may not be sufficiently connected with California.
California needs its billionaires, who are transformational entrepreneurs who have changed the California economy while creating tens of thousands of jobs. Remember that Nobel laureate economist William Nordhaus estimated that entrepreneurs receive only 2 percent of the social value that they create.
The potential economic damage, including long-term harm to future Medi-Cal funding, arising from the passage of Proposition 40 has led some unions and professional associations who might have been expected to support the initiative to oppose it. Opponents include the California Teachers Association, California Professional Firefighters, the California State Council of Laborers, and the United Brotherhood of Carpenters, and professional associations including the California Medical Association, the California Hospital Association, and the California Dental Association.
Overhaul the budget
California’s economy is amazing in many respects, but its success reflects legacy investments from years ago. Californians need to worry about a net loss of nearly 282,000 private-sector jobs since just before COVID arrived (measured as total nonfarm payroll jobs less government jobs and less health care/social assistance jobs), and the loss of a number of key California business headquarters, including Tesla, Hewlett Packard Enterprise, Oracle, Charles Schwab, and McKesson.
With a budget that has grown 75 percent in the past eight years, California doesn’t have a revenue shortfall; it has a spending problem. And it’s obvious what needs to be done. The entire budget needs to be reviewed, and best budgeting practices should be adopted, with an emphasis on oversight and accountability so that these long-standing shortcomings are corrected.
Before asking for higher taxes, California needs to use the revenue it already has efficiently and effectively.
