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