tax policy center urban institute and brookings institution california’s fiscal system kim rueben...

Tax Policy CenterUrban Institute and Brookings Institution

California’s Fiscal System

Kim RuebenThe Tax Policy Center

andThe Public Policy Institute of CaliforniaPresentation to the Connecticut Legislative Program Review and

Investigations Committee State & Local Tax Policy ForumOctober 26, 2005

Tax Policy CenterUrban Institute and Brookings Institution

Outline

• California’s Fiscal System and NCSL Measures

• Proposition 13 and its aftermath

Tax Policy CenterUrban Institute and Brookings Institution

California Meets Some NCSL Criteria

• Tax System is Balanced

• Tax System Progressive

• Economically competitive

California State and Local Taxes, 2002

25%

27%

4%

26%

9%

9%

Property Tax Personal Income Tax

Corporate Income Tax General Sales Tax

Selective Sales Tax Other

Tax Policy CenterUrban Institute and Brookings Institution

However, Falls Far Short on Other Measures

• Complementary – Property tax allocation no longer

under local control– Other local sources of revenue

uncertain

• Reliable – Reliance on income tax leads to

excessive volatility– Initiative process leads to changes

and earmarking

• Transparent – Population doesn’t know who funds

what services

Tax Policy CenterUrban Institute and Brookings Institution

And How Balanced System Looks Depends

on Year Considered

Sales Tax

Property Tax

Personal Income Tax

Corporate Income Tax

Other

35.5%

28.6%

24.3%

4.1%7.6%

33.1%

21.9%

33%

5.5%6.6%

United States California

Figure 2State and Local Taxes, FY 2000

Sales Tax

Property Tax

Personal Income Tax

Corporate Income Tax

Other

35.5%

28.6%

24.3%

4.1%7.6%

33.1%

21.9%

33%

5.5%6.6%

United States California

Figure 2State and Local Taxes, FY 2000

Tax Policy CenterUrban Institute and Brookings Institution

Income Tax Fell Due to Fall In Capital Gains and

Stock Option Income

Tax Policy CenterUrban Institute and Brookings Institution

Importantly, Under Current Law Revenues Are Not

Sufficient to Meet Spending

Tax Policy CenterUrban Institute and Brookings Institution

Difficulties in Balancing Budget

• Require supermajority to pass budget

• Large portion of budget ear-marked by prior levels and formula

• Revenue sources cut in flush period hard to restore

• Due to prior legislative actions and initiatives

Tax Policy CenterUrban Institute and Brookings Institution

Outline

• California’s Fiscal System and NCSL Measures

• Proposition 13 and its aftermath

Tax Policy CenterUrban Institute and Brookings Institution

Prelude to Proposition 13• California experienced large

increases in property values• Assessors required to reassess

frequently due to earlier scandal

• Need to reform school finance• Growing property tax

bills/income taxes– Despite state surplus

• Inability of politicians to coordinate tax relief leads to…

Tax Policy CenterUrban Institute and Brookings Institution

Proposition 13

• Limits property tax to 1%• Limits reassessments until

property is sold• 2/3 vote to impose or

increase local special taxes• State responsible for

property tax allocation• 2/3 vote to increase state

taxes

Tax Policy CenterUrban Institute and Brookings Institution

State Response to Passage

• Property tax revenues allocated as was divided in 1975-1976

• First state allocated school share to cities and counties

• However, re-directed to school districts in response to downturn of early 1990s

• Eventually replaced with VLF revenues – then dropped

Tax Policy CenterUrban Institute and Brookings Institution

Aftermath of 13• Local governments require voter

approval for virtually all revenue sources

• Local sales tax in place – change in land use priorities

• Shift in property tax base away from business

Thus:• Changes economic activity• Lock in of housing• Lack of transparency

Tax Policy CenterUrban Institute and Brookings Institution

Other Measures Passed That Build On/Conflict

• Proposition 4 – limits state and local spending

• Proposition 98 – mandates education spending levels

• Other proposals earmark taxes for specific programs– Health care, mental health programs,

day care programs, after school programs, transportation

• Decreasing future flexibility and ability to fund other programs

Tax Policy CenterUrban Institute and Brookings Institution

Conclusions

• While California’s system is relatively progressive and balanced

• System lacks transparency, equity and is not balanced

• Proposition 13 popular but has complicated revenue system