Every year California’s TK-12 school districts are keenly focused on policymakers’ spending decisions to support education for the state’s nearly six million public school students. These annual spending decisions are heavily influenced by the health of California’s economy and state and local government revenues. While significant attention is paid to the level and allocation of spending to support TK-12 school districts, the sources of revenue that provide that funding often receive less scrutiny. Yet, understanding California’s revenue system is critically important for appreciating TK-12 education funding; where that funding comes from, why it lacks stability, how it is allocated, and what can be done to improve it.
State and local government revenues are key factors that determine the amount of funding California’s TK-12 school districts receive each year and how state policymakers and local school districts allocate those dollars. Numerous limitations enacted by voters and policymakers have constrained state and local government ability to raise revenue. In turn, these constraints limit state and local government funding for school districts and their spending to support students. A key example is Proposition 13. The enactment of this constraint nearly half a century ago has limited local governments’ ability to raise revenue from a fundamental source: local property taxes. Prop. 13’s restrictions on property tax support for local school districts led to the state General Fund, instead of local property taxes, becoming the largest source of funding for TK-12 education. This shift meant state revenue sources, not local property taxes, became the critical factor for determining the level of funding for TK-12 school districts and addressing funding inequities among them.
California’s General Fund revenue primarily comes from three sources: the personal income tax, the sales and use tax, and the corporation tax. While these revenue sources have consistently ranked among the top three factors that determine state General Fund revenue, the share of state resources comprised by these sources has changed significantly over the past 50 years. Since the enactment of Prop. 13 in 1978 the state’s General Fund has grown increasingly reliant on the personal income tax as a revenue source. California’s personal income tax is highly progressive due to graduated tax rates that generate more revenue from those with higher incomes. The progressivity of the state’s personal income tax rates coupled with the variability in income of wealthy Californians means revenues generated by the state’s personal income tax can fluctuate significantly from year to year. Thus, while the state’s personal income tax draws revenue from those most able to pay, its reliance on high income Californians can create instability in General Fund revenue and challenges for policymakers.
General Fund revenue instability creates uncertainty that can inhibit legislative spending, including spending to support TK-12 public school students. Despite a state constitutional requirement to spend a minimum level each year to support the state’s K-12 school districts and community colleges, the California legislature has broad authority for allocation of the state’s Proposition 98 funding guarantee. For example, the legislature may choose to allocate TK-14 education spending for one-time, instead of ongoing, purposes. Policymakers often use fluctuations in annual General Fund revenue to justify one-time spending. However, the inconsistency of one-time funding can curtail school district allocation of dollars toward ongoing commitments such as hiring teachers, a critical factor that affects student learning.
Compounding the variability in state General Fund revenue, and its effect on allocations of dollars to TK-12 schools, are numerous constraints that have limited the level of state General Fund revenue. In addition to limiting the capacity of local school districts to raise revenue, Prop. 13 created another key constraint by requiring a two-thirds vote of each house of the legislature to increase state revenues. As state General Fund revenue has become the critical factor that affects the amount of funding provided to California’s TK-12 schools annually, constraints on the sources of General Fund revenue have limited funding that supports students. Soon after Prop. 13, California spending per K-12 pupil began to lag the rest of the U.S. and stayed below the national average between the beginning of the 1980s and the mid 2010s.
Constraints on state and local revenue and the erosion of K-12 spending had significant impacts on California students. Eventually the state was sued due to claims it did not provide equal access to basic educational resources such as textbooks, safe facilities, and qualified teachers. Settlement of the Williams lawsuit in 2004 provided some modest additional funding for TK-12 education, but it did not address constraints that limit state and local governments’ ability to raise revenue. These constraints have limited the legislature’s capacity to fund schools and other state priorities such as health care and child care.
A few years after the Williams settlement, the Great Recession caused steep reductions in state General Fund revenues and dramatic cuts to funding for TK-12 schools and other state priorities, including social safety net programs. To forestall additional spending cuts, California voters approved a state ballot measure in 2012 that temporarily increased state taxes. Proposition 30 increased personal income tax rates on high-income Californians and added a one-quarter cent increase to the state sales tax. While the sales tax increase expired in 2018, California voters extended Prop. 30’s personal income tax rates through 2030 by approving a 2016 state ballot measure—Proposition 55.
Revenues generated by Prop. 30/55 have increased education funding and provided fiscal resources that helped restructure the state’s education finance formula. However, Prop. 30/55 taxes will expire in 2030. And, even with the boost to state revenues from Prop. 30/55, funding for California’s TK-12 schools continues to fall short relative to the state’s fiscal capacity. Education Law Center (ELC) has analyzed states’ efforts to support school funding for more than 15 years. To measure a state’s effort, ELC calculates state and local revenue received by each state’s PreK-12 school districts as a percentage of state economic activity as measured by each state’s Gross Domestic Product (GDP). Despite significant improvement since 2012-13, as a share of state GDP, California’s K-12 school districts received less from state and local sources in 2022-23 than they did in 2007-08 prior to the Great Recession. California measured 3.4% on ELC’s effort index in 2007-08, 2.7% in 2012-13, and 3.3% in 2022-23. Moreover, while California’s effort to support TK-12 schools has improved over the past few years, its TK-12 school district revenues as a share of state GDP also falls short when compared with other states and significantly lags the top ranked states with large populations and comparably sized economies. California’s ELC effort index ranking was 35th or below between 2007-08 and 2020-21 and in the bottom 10 states for 7 of those years. California’s climb to 20th in ELC’s 2022-23 effort index ranking, while notable, does not adjust for cost-of-living differentials and remains far below New York, New Jersey, Pennsylvania and Illinois, which all rank in the top 10 and have consistently scored above 3.5% on ELC’s effort index over the past 15 years.
