Californians approve massive tax hike on the wealthy

November 7, 2012: 3:46 PM ET
jerry brown
California Gov. Jerry Brown wants to raise taxes on the rich to pay for education
NEW YORK (CNNMoney)

Californians approved a measure Tuesday that raises taxes on the wealthy and hikes the state sales tax. It is expected to bring in $6 billion a year, on average, over five years.

Proposition 30, which Governor Jerry Brown has lobbied heavily for, captured 54% of the vote. Its approval prevents massive budget cuts to the state's public schools and universities.

Brown built the tax hike into his budget so its passage was critical. Among the hardest hit by the Great Recession, California has had to slash billions of dollars from its budget in recent years to close yawning deficits.

Taking a gamble, Brown went directly to the people with the tax measure this year after losing a battle with Republican lawmakers in 2011 to put the increase before voters.

"Last night, Californians made the courageous decision to protect our schools and colleges and strengthen the California dream," said Brown on Wednesday, marking the victory.

Californians were more open to tax increases than their peers elsewhere on Tuesday. Arizona residents turned down a proposal making a temporary sales tax increase permanent to raise money for education, while South Dakota voters rejected a sales tax increase that would have funded education and Medicaid.

The measure creates three new personal income tax brackets for rich residents and adds a quarter-cent to the sales tax. The higher tax rates, which hit single filers making $250,000 and up and married taxpayers earning at least $500,000, last for seven years, and push the top tax rate to 12.3% for filers earning $500,000 and above, or $1 million per couple. It is effective starting with the 2012 tax year.

The sales tax hike, which brings that levy to 7.5%, starts Jan. 1 and lasts for four years.

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The wealthiest 1% of Californians -- those with annual incomes of $533,000 or more -- will shoulder nearly 79% of the tax increase, according to the California Budget Project, a research group that endorsed the proposition. They will see their taxes rise by 1.1% of their income, while the bottom four-fifths of the state's residents will see an increase of between 0.1% and 0.2% of their incomes.

Proposition 30 amends the state constitution so the increases cannot be changed or extended without voter approval.

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The measure is expected to raise $8.5 billion in new revenue, according to the Department of Finance. Some $2.9 billion will go to schools, while the remaining $5.6 billion can go toward closing budget gaps.

But the Legislative Analyst's Office warns that the measure depends heavily on the income of the wealthiest residents, which is volatile and difficult to predict.

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