Stanford Progressive

Skeletons in the Budgetary Closet: Proposition 13 and the Stifling of the California Recovery

By Michael Albada, published December, 2010

In the depths of the greatest economic crisis in seventy years with still little end in sight, perhaps it seems petty to return to a proposition from thirty years ago. The focus may be elsewhere, but the importance of this amendment is only magnified by the crisis. California was hit unusually hard by the recession, and economic recovery in the Golden State is imperiled by its own current fiscal disaster. All of the engines of growth – a highly educated workforce, good infrastructure, a friendly and stable atmosphere for business, stability, low crime – are all under attack by a systematic deficit in the California tax code. Even worse, the very mechanisms most effective at helping the state weather the storm – unemployment benefits, MediCal, etc. – are being slashed right when they are needed the most. Though it may seem inopportune, the time is now, particularly after the budget crisis last June, to fundamentally rethink the way the state runs its finances, amend Proposition 13, and establish a more stable foundation for economic growth and social equity for the 21st century.

In a single generation, Californians have witnessed the universal deterioration of public services, from schools, universities and libraries to fire and police departments, roads and health care. The law is complex, but its details are relevant and important to understand. In a nutshell, the bill dramatically slashed one of California’s single largest sources of revenue – property taxes – by 60%. At the time, property taxes provided 28% of the state’s revenue, but the cuts dropped this value down to 13% within just a couple years. These taxes directly funded schools, public services such as health care and police, and infrastructure such as roads and bridges. The impact was sudden and direct: budget shortages across the board, beginning the strangulation of the public sector.
Perhaps the worst-hit area was California’s education system. After a California Supreme Court ruling found unequally funded public school districts unconstitutional in 1976, parents from wealthy areas protested the new law that capped funding and sent excess revenue to poorer districts. These disgruntled parents found their answer in Proposition 13 by simply starving out the public schools. While all schools now nominally received the same funding from the state, real per pupil spending plummeted, leaving the poor, bad schools just as poor and bad as they started. Families in wealthy neighborhoods, on the other hand, donated generously to their local schools, keeping them just as wealthy, and the education system just as inequitable, as before. The story is just as clear in the numbers: when Proposition 13 was passed in 1978, California’s total per-pupil spending was fifth in the nation, but by 2009, it had fallen to 47th, coupled by an equally precipitous drop in student achievement. Education may be a particularly shocking example, but it is far from atypical.

The details of the bill were even more insidious. In addition to slashing tax revenue, the initiative also required a two-thirds majority in both legislative houses for future increases in all state tax rates or even amounts of revenue collected. Proposition 13 even required a two-thirds majority vote in local elections for local governments to raise special taxes. In addition to dramatically cutting the state budget, the bill also effectively prevented the state from raising that revenue elsewhere. As the cuts became apparent over the years, subsequent propositions were proposed and passed that tied certain funds to specific services, which further constrained the state budget and limited the ability of legislators to balance it.

Another side effect of Proposition 13 that we are painfully feeling today is the increased volatility of the state budget. Many states have a balance between personal income taxes, property taxes, and sales taxes, with each amounting to approximately one-third of state revenue, an alignment that reduces dependency on any one source and increases stability. The California government has attempted to make up for decline in property taxes with greater reliance on other forms of taxation – significantly higher personal income taxes, corporate taxes higher than the national average, and an increased reliance on general charges. Yet with property taxes so dramatically reduced in California, the state revenue base is far more dependent upon unstable forms of taxation. When the economy goes into recession, both income and sales taxes decline, dramatically reducing state revenues, producing a fiscal crisis in California during every economic downturn. This has been the governing dynamic for the last thirty years, and thus when the financial crisis hit, the California budget hit a standstill.

Proposition 13 has been a complete disaster for the Golden State. The status quo has been denial – ignore the problem, and hope it will go away. Somehow, Proposition 13 has remained untouchable in California politics. Yet with the state facing an annual budget deficit of $26 billion, that is no longer an option. The crisis presents an opportunity for California voters and politicians to consider the unpopular as a way to increase the state’s fiscal stability. In order to do that, everything must be put on the table, including one of the greatest budget factors in California history – Proposition 13. This stain on our tax code must be amended if the state wants to rebuild its fiscal stability, lay the groundwork for economic growth and job creation, and begin rebuilding the California Dream.

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