Solve California's Budget Crises Reform Prop 13!

“finally began the downward plunge which has brought us to the present time, when we can endure neither our vices or their cure” Livy

The news out of Sacramento is grim, The state of California is on the verge of walking over a fiscal cliff. The state is on the verge of partial bancruptcy. The California is facing an 18-month budget shortfall of $40 billion. Governor Arnold Schwarzenegger and Democrats in the legislature have been unable to come to any compromise to resolve the crisis.
According to the an article in the San Diego Union Tribune, the budget impasse will soon force the state to furlough workers and issue IOUs to thousands of people in lieu of tax refunds and student aid. The pain will start around Feb. 1, when the state will continue to make payments to bondholders and to public education. The state will begin to issue IOUs and furloughs at the end of February.

As a union member, I went to Sacramento in March to lobby the legislature regarding the budget. The problem is still the same. State law requires the legislature to approve a balanced budget and it also requires a two-thirds majority to do so. This would be difficult even in the best of times, but it has become practically impossible since then. The Democrats in the legislature have proposed 18 billion in spending cuts and 9.3 billion in tax increases. But the governor has vetoed these proposals because the democrats didn't give him everything that he requested. Meanwhile the Republicans in the legislature are biding their time until they can derail the whole process by refusing to approve any tax increases.

Unfortunately the budget can not be balanced by spending cuts. To do that, you'd have to stop all payments to individuals and cease to fund the California State University and University of California systems. The budget can't be balance by tax increases alone either. To do that would require raising California's income tax to 15.1%, introdue an oil severance tax and raise the corporate tax rate.

This depressing state of affairs will continue for another few weeks until the legislature and the governor reach some sort of compromise. This compromise will do little more than postpone the day a reconing for a few more months and years.

Perhaps it is time to reconsider the enduring cause of state's budget woes. That cause is Proposition 13. Perhaps it is time to reform Proposition 13. Smith and Lynch (2004) describe the passage of Proposition 13 as the “most notable property tax reform” p. 342. When it was passed in 1978:

This reform radically cut California property tax back to 1 percent of the market value and moved property assessment back to the 1975-76 rolls. In addition it provided for a 2 percent growth rate annually. California’s property tax rate moved from a 2.21 percent average effective tax rate to a 0.98 percent rate with that single reform (Smith & Lynch, 2004, p. 342).

Green (2005) states that “suddenly the state's property owners collectively owed 57% less in property taxes. Local government revenues fell by roughly $7 billion the first year alone.”

But the taxpayer revolt sparked by Propostion 13 did not end with its passage. According to Saxon, Hoene, and Erie (2002), California voters passed a series of initiatives that restricted local governments’ ability to collect revenue. In 1986, Proposition 62, which required a two thirds majority of voters for the passage of general fund taxes. Two years later, Proposition 98 was approved. This initiative required the state to devote 40 percent of its budget to education. In 1996, Proposition 218 was passed. Similar to Proposition 62, it required that all new fees and assessments be approved by a two-thirds vote of the affected electorate (Saxon, Hoene, and Erie, 2002, p. 427).

The effect of this spate of initiatives had three consequences. The first consequence was that by limiting property tax revenues, it diminished the revenue raising capabilities of city and counties and transferred it to the state. The second consequence is that Proposition 13 forced local governments to find other sources of revenue. So cities started balancing their budgets by raising sales taxes and user fees. The final consequence is that local governments were also forced to slash services that were deemed nonessential. In the post Proposition 13 world, the public has shown that it is willing to pay for police and fire protection, but that it is not willing to fund such things as libraries and parks.

One of the problems with Proposition 13 and other budgeting through the ballot box initiatives is that it has totally distorted revenues for both state and local governments. It is now painfully apparent that the State of California is in dire financial straights with structural deficits of approximately $10 billion at least through the year 2008. Neither economic growth or cutting state spending will totally close this gap. The state will soon no longer be able to borrow billions of dollars to paper over its deficits. As the Roman historian Livy said “finally began the downward plunge which has brought us to the present time, when we can endure neither our vices or their cure” (Foster, 1967, p. 7). So state government has come to a place where it can neither endure the consequences of Proposition 13 or effect some cure for it. Perhaps the time has come to ask the public to vote for a cure cure would be a constitutional convention. Green (2005) thinks it’s time for a change,

the measure's untoward consequences--from the disempowerment of local government to the decimation of a once-proud educational system, unequal taxes on equal properties and yawning tax loopholes for business--demand a rigorous reexamination of Proposition 13 and its legacy. In tax lingo, a reassessment.

Capitano Tedeschi

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References

Foster, B. (1967). Livy in Fourteen Volumes: Books I and II. London. William Heinemann LTD.

Green, L. (2005, April 17). Don't be a 'Girlie Man'; As long as California is projecting a potential $10-billion deficit, governor, now is the right time to reconsider Prop. 13. Come on. Los Angeles Times, p. MAG.12. Retrieved October 15, 2005, from ABI/INFORM Global database.

Hoene, C. (2004). Fiscal Structure and the Post-Proposition 13 Fiscal Regime in California's Cities. Public Budgeting & Finance 24, 51-72. Retrieved October 15, 2005, from ABI/INFORM Global database.

Saxton, G. Hoene, C. &, Erie, S. (2002). Fiscal constraints and the loss of home rule: The long-term impacts of California's post-Proposition 13 fiscal regime. American Review of Public Administration 32, 423-454. Retrieved October 15, 2005, from ABI/INFORM Global database.

Smith, R. & Lynch, D. (2004). Public budgeting in America. Upper Saddle River, NJ: Pearson Prentice Hall