It has been 35 years since California voters overwhelmingly approved Proposition 13, a measure that, as Governor Jerry Brown put it in 2011, “started the centralization of power” in the state. He should know because he was also governor in 1978 and helped oversee that shift.
At the time, Californians were enraged that their inflation-fueled home values were accompanied by rising local property taxes. The referendum limited those taxes to 1 percent of their property’s value.
At the time, advocates of Proposition 13 claimed it would limit government spending. They were wrong. Proposition 13 simply shifted revenue collection from localities — which rely on property taxes — to Sacramento, the state capital. Taxation moved from relatively stable property taxes to erratic income taxes and regressive sales levies. By moving to income taxes that treat capital gains as ordinary income, California raises much of its revenue from a boom-or-bust system.
That’s why state revenue is rising today as the stock market reaches new highs, just as state revenue rose alongside robust markets in 1999 and 2007, allowing Governors Gray Davis and Arnold Schwarzenegger to temporarily proclaim the budget balanced, just as Brown can do now.
When stocks fell, however, revenue tanked. As an example, when California’s economy shrank by 2.8 percent in 2009, state revenue contracted by 10 times as much because of the larger decline in stock markets.
Those temporarily balanced budgets were followed by years of deficits and tax increases. In the absence of reform, that will inevitably happen time and time again.
The state also moved to rely more on sales taxes on goods, raising the rate by more than 60 percent since 1970. In parts of California, the sales-tax rate on goods exceeds 9 percent. This system is inherently regressive, because low-income people spend a much larger share of their incomes than wealthy people do on the consumption of taxable goods.
There is a solution.
The California Legislature and Brown could adopt a sweeping tax-reform measure combined with a request to voters to repeal Proposition 13 (only the electorate has that power). Legislators already have two tax-reform models in front of them, one from the Commission on the 21st Century Economy, and the other by the Think Long Committee for California. To varying degrees, they reduce sales- and income-tax rates, and they impose sales taxes on services and severance levies on oil and gas.
Yet neither of those proposals would do anything about repealing Proposition 13. That leaves untouched a significant source of stable revenue and fails to tax real estate, California’s biggest industry, which, because of the state’s climate and other advantages, would still attract capital, even with higher property taxes.
It’s crazy to tax incomes and goods that can move to other states but be barred from raising levies on real estate and resources such as oil that can’t be moved. Accordingly, no California reform would be complete without enacting a severance tax and getting rid of Proposition 13.
Repealing it might seem politically impossible. Homeowners who are worried about higher property taxes would have to be guaranteed a long phase-in period, low increases and meaningful cuts in sales- and income-tax rates.
Governments would first need to reduce pension and health-care liabilities because, if not, most of the new revenue raised from lifting Proposition 13 would go to retired employees, instead of to current services. Of course, there would be opposition from oil and gas companies, commercial-property owners and government employees.
Overcoming their opposition would require a great politician. No one would play that role better than Jerry Brown. He has high approval ratings, and he knows he won’t solve the state’s core budget issues — or fulfill his dreams for high-speed rail and other legacy-building projects — unless he addresses the tax system, pensions and health care. If he seeks and wins re-election in 2014, what else could be more important?
To his credit, Brown has started to move government closer to the people by devolving some functions from the state to local governments. Now he needs to devolve revenue generation, as well. Doing so would move more power to local governments and school districts.
He will have allies: environmentalists who favor taxes on fossil fuels, local governments and school districts desperate for more control over their affairs, education reformers who support decentralization, anti-poverty advocates keen to shield welfare and other government aid from being siphoned off for pensions and health-care costs, businesses and taxpayers attracted by lower sales- and income-tax rates, and good-government groups in favor of more local control. Even conservatives are beginning to understand that Proposition 13 moved power to Sacramento and, if anything, boosted spending.
I worry that Brown wants to run for president before the next California budget crisis rears its ugly head. Yet who else can take responsibility for creating a sustainable revenue system and establishing effective government in California?
(David Crane, a former financial-services executive, is a lecturer at Stanford University and president of Govern for California, a nonpartisan government-reform group. He was an economic adviser to California Governor Arnold Schwarzenegger from 2004 to 2011. The opinions expressed are his own.)
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