California’s State and Local
Revenue Structure After
Proposition 13:
Is Denial an Appropriate Way to Cope?
Robert W. Wassmer
Professor and Chairperson
Department of Public Policy and Administration
California State University, Sacramento
Layout of Presentation
 Introduction
 California’s Revenue Structure: Pre and
Post Proposition 13
 Post-Proposition 13 Outcomes
 How to Better Cope
 “Out of the Box” Revenue Idea
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
2
Introduction
Figure One: State and Local Property Taxes as a Fraction of
General Revenue
0.277
0.219
0.166
0.126
CA 1977
US 1997
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute - Brookings
Institute Tax Policy Center, www.taxpolicycenter.org
 June 1978 approval of Proposition 13
 60% cut in local property taxes
 California’s state and local reliance on property tax
 1977-78: 26% greater than rest of U.S.
 2005-06: 24% below rest of U.S.
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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Introduction
Other Taxes|
0.9%
Property Taxes|
12.6%
Corporate
Incom e Taxes|
3.2%
Inter
governm ental
Revenue| 20.2%
Licence Fees|
3.5%
Property
Taxes| 16.6%
Corporate
Incom e
Taxes| 2.1%
Other Taxes|
2.8%
Inter
governm ental
Revenue|
21.7%
Licence Fees|
1.8%
Misc General
Revenue| 8.3%
Sales/Gross
Receipts Taxes|
18.2%
Current
Charges| 17.2%
Misc General
Revenue| 8.8%
Current
Charges|
15.3%
Individual
Incom e Taxes|
15.9%
General Fund State and Local Revenue
Reliance for State of California, FY 2005-06
Sales/Gross
Receipts
Taxes| 19.0%
Individual
Incom e
Taxes| 11.9%
General Fund State and Local Revenue
Reliance for all United States, FY 2005-06
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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Introduction
 Reasons to pay attention
 2008-09 budget shortfall in
25 states
 CA (15.4%) second only
to AZ (17.8%)
 FL, NV, NJ, and RI >
10%
 CA’s relative size in U.S
 14% of GDP
 Cautionary tale to other
states
 Adopted or considering
similar fiscal reforms
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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California’s Revenue Structure
Figure Two: Real Per-Capita State and Local Total Revenue
Figure Three: State and Local Total Revenue as a Fraction of
Personal Income
$10,524
0.285
$8,509
0.247
0.231
0.208
$6,389
$4,955
CA 1977
US 1997
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute Brookings Institute Tax Policy Center, w w w .taxpolicycenter.org
CA 1977
US 1997
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute Brookings Institute Tax Policy Center, w w w .taxpolicycenter.org
 Sub-national revenue in California and U.S.
increased after Prop 13


Per-capita terms
 CA distance from U.S. has shrunk
Personal income terms
 CA further distanced itself from U.S.
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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California’s Revenue Structure
Figure Four: State and Local Individual Income Taxes as a Fraction
of General Revenue
0.159
0.100
0.103
CA 1977
US 1997
0.119
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute
- Brookings Institute Tax Policy Center, w w w .taxpolicycenter.org
 Greater reliance on personal income taxes
 Highly progressive
 Top rate of 9.3% at $90K married household
 Additional 1% levied on millionaires
 Household incomes > $500K yield 1% returns, 39% revenue
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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California’s Revenue Structure
Figure Five: State and Local Corporate Income Tax as a Fraction of
General Revenue
Figure Six: State and Local Total Current Charges as a Fraction of
General Revenue
0.045
0.172
0.032
0.032
0.021
CA 1977
US 1997
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute Brookings Institute Tax Policy Center, w w w .taxpolicycenter.org
0.091
CA 1977
0.153
0.109
US 1997
CA 2005
US 2005
Source: State and Local Finance Data Query System, Urban Institute Brookings Institute Tax Policy Center, w w w .taxpolicycenter.org
 California reliance on corporate income taxes still
greater than U.S.
 California reliance on current charge revenue now
greater than U.S.
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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California’s Revenue Structure
 Consider in context of

Two-thirds, super-majority vote requirements



Pass state budget (elsewhere only in AR and RI)
Any statewide increase in taxes for revenue (11 states)
Serrano v. Priest

Separation of local finances from local schools
 An anti-tax and initiative constrained environment

Table 1 in paper lists 12 propositions since Prop 13

Prop 98 most infamous
 40% of state’s general fund expenditure to public K-14
State and Local Tax Policy - Out of the Box,
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Post-Prop 13 Outcomes
 Left: Variable stock option and capital gains tax revenue
 Highly pro-cyclical and large percentage of tax revenue
 Right: Personal income growth in state more stable than
state revenue growth

Bigger percentage decline in revenue when income
declines
State and Local Tax Policy - Out of the Box,
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Post-Prop 13 Outcomes
 Left: Roller-coaster budget stabilization goes negative
 Right: Projected operating deficit at start of each recent
state budget cycle
 Structural deficit now pegged at $3 to $8B on $100B+
expenditure
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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Post-Prop 13 Outcomes
 BOOM: Late 1990s in CA economy and income tax
revenues


Windfall revenues spent on education, health, and
human service programs
$4B annual cut in vehicle license fees (VLF)
 BUST: 2002-04 operating deficit forecast at $27B
 Re-elected Governor Davis raises VLF
 After recall: Governor Schwarzenegger lowered VLF,
spending cuts, 30% tuition up for UC/CSU
 BOOM: 2004-05 operating surplus at $3B and
reserve fund at $9B

Deficit bonds paid off early, K-12 expenditure up
 BUST: 2007-09 operating deficit forecast at $20B+
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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How to Better Cope
 Budget process reforms
 Reduce two-thirds voter requirements


Create greater fiscal discipline



Better accounting of tax expenditures
Create more prudent budget reserve fund
Move to multi-year budgeting


55% or complete removal
Two or three year cycle
Improve the public’s and legislator’s
understanding of budget

Simpler presentation of constraints and tradeoffs
State and Local Tax Policy - Out of the Box,
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How to Better Cope
 Revenue reliance reforms
 Increase reliance on more stable tax bases

Less on corporate and personal income tax
 Expand sales tax base and/or fees

Raise more state and local revenue

Reinstate 10 and 11% top personal income tax
brackets
 But need prudent budget reserve method if done

Reduce local govt reliance on state revenue

Touching the “third-rail” of California politics
 Split-role property taxation
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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“Out of the Box” Revenue Idea
 Gov Schwarzenegger's Executive Order S-3-05
 July 2005: Climate change a reality, CA 12th largest
emitter of GHGs, time to take action
 Global Warming Solutions Act (AB 32)
 Sept 2006: By 2010 GHGs down to 2000 level,
2020 to 1990 level, and 2050 down to 80% below
1990

By 2009 mandatory reporting of GHGs and specific
regulatory/market mechanism plan
 Creation of Economic and Technology Advancement
Advisory Committee (ETAAC)
 Report done Feb 2008
State and Local Tax Policy - Out of the Box,
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“Out of the Box” Revenue Idea
 ETAAC suggests some form of cap and trade
(CAT)

Debate over merits of verses carbon taxes (CT)



CAT offers greater certainty on GHG reduction
amount
CT offers greater certainty on GHG tax amount
Debate over allowed GHG credits allocated

Free allocation based on historical emissions or
output, or revenue generating auction
 ETAAC leans toward later (variable price signal)
 “…convene an advisory group, …to prepare a study
outlining several sensible options for recycling
revenues to businesses or individuals” (p. 56).
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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“Out of the Box” Revenue Idea
 Recent proposal for Budget Stabilization Act
 General fund transfers into (out of) fund when revenue
above (below) long-term trend
 Built up to 10% of general fund expenditure
 Also Dept of Finance required to forecast thrice midyear budget situation and across board cuts if deficit
 Suggestion
 Use portion of initial years’ auction revenues to
establish budget stabilization fund
 Estimated that if price per ton of GHG yearly allocation
falls between $5 and $20, annual revenue between $2
and $8 B
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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“Out of the Box” Revenue Idea
 Anticipated concerns

Is auction revenue a tax or fee?

Considered fee if nexus between charge/service
 “Carbon Share: Because the sky belongs to all of us”


If tax, additional two thirds legislative majority to
hurdle
If feds adopt CAT or CT

Auction revenues to state go away
State and Local Tax Policy - Out of the Box,
Georgia State University, May 14, 2008
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