What is it?

Prop 2 doubles the cap on California's rainy day fund from 10% to 20% of General Fund tax revenue. And it increases the amount the state saves when capital gains tax revenues are high.

Currently, California can only save up to 10% of the total budget (so if the State's budget were $300B, it could only legally save $30B). Prop 2 would double the maximum savings cap. California has hit the savings cap twice since it was created in 2014 as part of the Budget Stabilization Act that created the rainy day fund.

It would also save more capital gains tax revenue if capital gains account for more than 10% of the state's total tax revenue.

Yearly deposits

The fund gets two kinds of deposits. The first is a fixed slice of 1.5% of General Fund revenue every year. The second kicks in only when capital gains taxes, the most volatile money the state collects, make up more than 8% of General Fund tax revenue: everything above that 8% line is set aside. Prop 2 keeps both rules and adds a third, starting in 2027-28. When capital gains climb past 10% of tax revenue, every dollar above the 10% line is set aside at 150%, with the extra 50 cents coming from other tax revenue. In a normal year nothing changes. In a boom year the state saves more than the windfall itself.

Take a boom year where the state collects $200B in taxes and $30B of it is capital gains. The 8% line is $16B and the 10% line is $20B.

• Current law: the $14B above the 8% line is set aside.
• Prop 2: the $4B between the 8% and 10% lines is set aside as is, and the $10B above the 10% line counts as $15B. The state sets aside $19B, with the extra $5B coming out of other tax revenue.

(The real formula first carves out shares for schools and extra debt payments, but the comparison holds.)

Once the fund hits the 20% cap, money that would have gone in can only be spent on infrastructure.

The Gann limit

Starting in 2027-28, reserve deposits stop counting against the state's constitutional spending limit (the Gann limit) until the year the money is pulled back out and spent. When revenue exceeds that limit for two years, the excess must be split between schools and taxpayer rebates, which is where the 2022 Golden State Stimulus checks came from. Counting deposits later keeps the state further from the limit in boom years, so those rebates become less likely in the years the state saves heavily.

Taking money out

Taking money out still requires the Governor to declare a budget emergency, and the Legislature can withdraw no more than half of the fund's balance in one year, unless money was already withdrawn the year before.

Read the full annotated legal text →

Why vote Yes?

California has a poorly designed tax system. We cap property taxes, starving the state of education funding, so we make up for it with high income and capital gains taxes. But capital gains are unpredictable, so in boom years we might have a $100B surplus and in bust years we might run an $80B deficit. This means a rainy day fund is required to capture the surplus when we're flush so we don't have to cut services or raise taxes when we're not.

Reasonable people can disagree about the right amount to save, and whether the government should be forced to do so, so consider this endorsement a weak yes.

Two things voters may want to consider when deciding how to vote:

1. Both OpenAI and Anthropic are poised to launch record-shattering IPOs in the coming year. If voters enact Prop 2, then the state will save more of that money than it otherwise would, without raising taxes.
2. The flipside is that Prop 2 would make boom-year taxpayer refunds less likely. Rebates like the 2022 stimulus checks happen only when revenue exceeds the state's constitutional spending limit two years running, and Prop 2 counts rainy day deposits against that limit only once the money is spent (see the Gann limit above).

Overall, we think building up the rainy day fund is the right choice.