Research & Commentary: Tax Hikes will not Save California’s Schools

Published October 2, 2019

In an effort to increase education funding, the California School Boards Association has introduced a campaign known as “Full and Fair Funding”, which would impose huge tax increases on Californians. The campaign aims to add a ballot initiative to the November 2020 election. The proposed initiative would increase taxes for corporations ­­earning more than $1 million by up to 5 percent while personal income taxes would be raised 2 percent for individuals earning more than $1 million annually and 3 percent for those earning more than $2 million.

The proposal comes amidst growing disagreement on how to properly fund California’s K-12 public school system. Some measures, such as Education Week’s annual state rankings, place California at 38th among the 50 states based on 2015-16 data. According to this report, the Golden State’s public schools are $2,475 below the national average in per pupil spending. However, other studies, including a more recent report from the  U.S. Census Bureau, shows California’s per-pupil spending for 2016-17 was only $58 below the national average.

Although proponents of the new tax claim it is necessary to improve the quality of California’s public education system, evidence demonstrates more education funding often does not improve educational outcomes. For example, real spending per student nationwide has increased by 23.5 percent over the past decade, but education outcomes have not improved. Scores on the National Assessment of Educational Progress test have remained stagnant despite record spending. In fact, a Cato report on school spending found only a 0.075 “correlation between the spending and academic performance changes of the past 40 years, for all 50 states.” This correlation is so minuscule it is described as “essentially no link between state education spending.”

Moreover, lawmakers should remember corporate taxes and regulatory costs are almost never paid paid by companies. Rather, these increased costs are paid by small business owners, workers (through lower wages), and customers (through higher prices). According to the Tax Foundation, workers bear 50-100 percent of the corporate income tax burden. Furthermore, corporate taxes are especially harmful to economic growth because capital can easily be moved to a lower-tax state or off-shored.

Even worse, relying on a fluctuating tax with a small base (like so-called millionaire taxes) can lead to huge budget deficits. California already has the highest marginal income tax rate in the country at 13.3 percent. According to the Los Angeles Daily News, California’s top 1 percent of earners currently pay more than half of the state’s total income tax. Of course, this should make the relocation of high-income taxpayers a real concern for Golden State lawmakers.

Although some supporters of the new tax argue large-scale relocation by wealthy taxpayers is not likely to occur, the negative effect of Maryland’s millionaire tax provide a stark example of what the new tax’s effect could be. In 2009, Maryland enacted a millionaire tax projected to raise an additional $106 million per year. Instead of providing the anticipated revenue increase, just one year after the tax became law.

Instead of throwing more money into the public-school system monopoly, California residents should demand competition and education choice. Overwhelming evidence shows that education choice improves student safety, produces better education outcomes, increases parental satisfaction, and increases per-pupil funding for the students who choose to remain in public schools. Education freedom can be accomplished via several measures. For example, education savings accounts (ESA), private accounts managed by parents, could be used to fund all types of educational expenses. Parents can use the funds to pay for online classes, private school tuition, personal tutors, books and other curricular materials, or even save for higher education. ESAs would allow all California families to meet their child’s educational needs—at a much lower cost.

Rather than increase taxes on businesses and hard-working, productive residents, California’s elected officials should make the state a more attractive place for businesses and workers. This simple and achievable goal would best be accomplished by reducing spending, lowering tax rates, and reducing unnecessary regulations.

The documents cited below examine millionaire taxes and their history of failing to shore up budgets and increase revenue.

Does Spending More on Education Improve Academic Achievement?
Dan Lips and Shanea Watkins of The Heritage Foundation discuss the rising cost of education and whether increasing education spending has improved education outcomes. “Taxpayers have invested considerable resources in the nation’s public schools. However, ever-increasing funding of Education has not led to similarly improved student performance. Instead of simply increasing funding for public Education, federal and state policymakers should implement Education reforms designed to improve resource allocation and boost student performance,” wrote Lips and Watkins.

School Spending and Student Achievement in Michigan: What’s the Relationship?
In this report, Ben DeGrow and Edward C. Hoang of the Mackinac Center for Public Policy examine the relationship between school spending and student achievement in Michigan. “The results suggest that there is only a very limited correlation between these two factors. Only one out of the 28 academic outputs analyzed showed a result that was positive and statistically significant, or different from zero,” the authors reported.

Everything You Know About State Education Rankings Is Wrong
In this ranking, Reason Foundation uses on learning related metrics to create a more accurate ranking of state education. These rankings better reflect quality and efficiency, rather than per pupil spending, graduation rates, pre-K enrollment, and aggregated student data.

The 123s of School Choice
In this report, EcChoice experts review more than 140 empirical studies on school choice programs. They summarize these results making it easy for policy makers and others to quickly see what is working and what is not.

Ten State Solutions to Emerging Issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

The Benefits of Cutting the Corporate Income Tax Rate
Erica York of the Tax Foundation argues economic evidence suggests that corporate income taxes are the most harmful type of tax and that workers bear a disproportionate share of the burden. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.

Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms
This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners. The study finds that firm owners bear roughly 40 percent of the incidence, while workers and landowners bear 30-35 percent and 25-30 percent, respectively.

Taxing the Rich Will Bankrupt Your State
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

Should We Raise Taxes on the Rich?
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.

Seven Myths About Taxing the Rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. It would inhibit economic growth by stifling job creation. Although some see raising taxes on the rich as a silver bullet for fiscal woes, the reality is that it slows the economy, he writes.

Education Savings Accounts: The Future of School Choice Has Arrived
In this Heartland Policy Brief, Policy Analyst Tim Benson discusses how universal ESA programs offer the most comprehensive range of educational choices to parents; describes the six ESA programs currently in operation; and reviews possible state-level constitutional challenges to ESA programs.


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