While much attention has focused on the Proposition 40 “Billionaire Tax Act,” Californians will vote this November on another consequential tax measure. Proposition 3 would make permanent the state’s higher income tax rates on high earners.
Voters approved those rates in 2012 as a temporary measure that raised marginal tax rates by one to three percentage points. When combined with the state’s additional one percent surcharge on millionaire incomes, the result was a top income tax rate of 13.3 percent.
Voters in 2016 then extended these temporary rates through 2030. Proposition 3 would remove the expiration date. If it fails, the rates would remain scheduled to revert in 2031 to 10.3% for millionaire incomes and 9.3% for everyone else.
A central selling point of these higher tax rates was education: the original measure promised that the new tax revenue would help fund California’s public schools and community colleges.
There are three reasons voters should oppose Proposition 3.
First, the high bracket income tax rates at this point are actually money losers for California.
The LAO estimates that Proposition 3 would raise between $5 billion and $15 billion a year, but that number does not account for how high earners actually respond to the tax. Factor in behavioral effects and the picture looks very different. Our team’s research on the 2012 Prop 30 rate increases finds that a substantial share of the projected revenue gains were eroded through outmigration of top earners, and even more through reduced generated or reported income among those who stayed.
That erosion accelerated after 2017, when the federal Tax Cuts and Jobs Act capped the federal deduction for state and local taxes at $10,000. Before the cap, high-income Californians could write off much of their state tax bill against federal taxes, softening the effective burden of the top marginal rate. Once the SALT cap took effect, California’s top earners began bearing close to the full weight of the state’s top rates for the first time, sharply raising the true marginal tax rate they face and, with it, the incentive to relocate or restructure income. Based on our estimates, the state since 2018 is now losing more in departed or eroded tax base than it collects from what remains.
Second, while the tax rates may feel remote to many voters, they are much closer than many might think.
Supporters of Proposition 3 emphasize that the higher rates are paid by the wealthiest 2% of Californians. The Legislative Analyst’s Office backs up the number: about 2% of California taxpayers pay these rates in any given year. But an annual snapshot doesn’t tell us how many Californians will encounter them at some point in their lives.
The higher rates currently begin at about $371,000 in taxable income for single filers and $742,000 for married couples filing jointly. These figures include more than salaries and business income. They also include capital gains, including one-time taxable gains from the sale of a home or a small business.
Many longtime California homeowners may find sales of their homes in which they invested their lifetime savings taxed at the higher rates. California follows federal law in generally allowing a homeowner to exclude up to $250,000 of gain on the sale of a primary residence, or $500,000 for a married couple filing jointly. Those limits were set in 1997 and have never been adjusted for inflation. Gains above the exclusion become taxable income and, combined with a homeowner’s other income, can push a seller into the brackets Proposition 3 would make permanent.
A 2025 analysis by Redfin shows that 62% of homes sold in California had gains of more than $250,000 and 33% gains of more than $500,000 — equivalent to 9.34 million and 4.95 million homes, respectively, based on California’s current housing stock. This means that significant shares of voters will have capital gains that will increase their taxable income.
Third, higher revenues do not necessarily translate into additional classroom resources. California has directed the progressive tax brackets’ revenue to school districts, while at the same time requiring those districts to devote increasing resources to pension costs. By our calculations, total annual pension contributions associated with California’s K-12 school districts (excluding teachers’ own contributions) rose by roughly $8.5 billion between 2015 and 2023, reaching approximately $13 billion. This increase in pension costs has consumed most of the annual revenues generated by the higher tax rates.
Over the past two decades, retirement spending for school employees has significantly outpaced overall education spending. Our dashboard of school district budgets reveals that in California, the share of total school employee spending swallowed by pension contributions nearly doubled, from 7 percent to over 13 percent by 2023.
To put that shifting composition into perspective: had local school districts maintained their 2015 shares, it would have freed up nearly $6 billion for actual education priorities last year alone. The tax rates that are up for consideration under Prop 3 are to a large extent tax rates that fund increased retirement benefits for teachers and school employees.
Even substantial new revenue cannot meaningfully improve classroom resources if pension obligations continue to absorb an ever-growing share of education spending. Taxpayers have a say in whether they want to just go along with ever-increasing resources being devoted to teachers’ retirement or whether they prefer for the state to focus on ensuring that existing resources reach students.
Before California makes these higher tax rates permanent, voters should demand that Sacramento explain how their money will translate into better outcomes for students and taxpayers.
Joshua Rauh is the George P. Shultz senior fellow in Economics at the Hoover Institution and a finance professor at the Stanford Graduate School of Business. Gregory Kearney is a research associate at the Hoover Institution.