Credit: commons.wikimedia.org

California Gov. Jerry Brown says passage of Proposition 30 in November is crucial to help move the state towards a balanced budget. If the proposition passes, estimated new revenue will be $6.8 - $9 billion. This will not be enough to balance the budget and further spending cuts will happen. However, if Prop 30 does not pass, then devastating spending cuts of $6 billion will almost certainly occur.

"The state has already cut $56 billion from essential state and local services over the past four years. Students, cops, teachers, firemen simply cannot afford another $6 billion cut projected to take place should Prop 30 fail to pass," says the Santa Monica College student newspaper.

Proposition 30 will raise sales tax to 7.50% from 7.25%, a 0.25% hike, and increase taxes on high earners for seven years. Those with taxable incomes of $250,000 to less than $300,000 will pay 10.3% state income tax, an increase of 9.71%. Taxable incomes of $300,000 to less than $500,000 will have an 11.3% rate, an increase of 17.7%. Those with taxable incomes more than $500,000 will have a 12.3% rate, a substantial increase of 24.39%.

This "millionaire's tax" is problematic not just because the wealthy could decide to move out-of-state but more importantly because it is dependent on their capital gains, which have proven to be highly volatile and difficult to predict. For example, the current California budget assumed $2 billion in revenue from the Facebook IPO, based on a stock price of $42 by now. Instead, Facebook stock is trading at less than half that price. The shortfall in expected revenue will be several hundred million.

"California’s leaders have no one to blame but themselves for pegging the state’s fiscal future to the vagaries of the stock market. The state’s steeply progressive income tax rates – which cause it to spend with abandon during flush times and generate fiscal crises when incomes dip – are driving it toward fiscal ruin," opines the San Diego Union-Tribune.

Polls show that Proposition 30 has a small lead. Yesterday was the biggest day yet for contributions for the Prop 30 campaign, with a total of $2.8 million, primarily from the California Hospitals Association and the California Teachers Association. Interestingly, a major challenge to Prop 30 could come from Molly Munger who is spending millions on her competing tax measure, Prop 38. The conventional wisdom is that having competing tax measures on the same ballot reduces support for both of them.