In Proposition 22, a Cautionary Tale of Piecemeal Reform

This November, voters will be asked to consider yet another constitutional amendment to restrict state discretion over the use certain tax proceeds. Advocates for Proposition 22 argue the amendment is necessary to stop "state raids" on local revenues. In reality, however, many of the problems Proposition 22 seeks to fix have themselves been created by previous reform measures -- many backed by the same interests that now support Proposition 22.

Understanding the origins of Proposition 22, and the likely unintended consequences the measure will produce, requires a short tour of history. It is a drama that unfolds in five acts.

Act I. Our story begins in 1978. During the late 1970s, rapidly appreciating real estate prices resulted in a small crisis in California government, as many residents on fixed income confronted ballooning property tax bills they simply could not afford. That year, California voters adopted Proposition 13, a constitutional amendment that, among other things, limited total property taxes to 1 percent of assessed valuations and further restricted year-on-year increases.

Prior to Proposition 13, local governments including cities, counties, and school districts did not, for the most part, rely on the state for their funding. Instead, each entity set its own property tax rates, and controlled its own fiscal fate. This changed in 1978. Prior to Proposition 13, the average property tax bills, when summed across all of the various local agencies that assessed property taxes, exceeded 2 percent of assessed valuation. After Proposition 13, all of these agencies had to share a smaller pie, capped at 1 percent.

How would this smaller pie be divided? The authors of Proposition 13 did not say -- a smart political move, since this allowed them to not identify and thus not alienate any interest group that was likely to lose services as part of the resulting cuts. Instead, Proposition 13 gave the state legislature the responsibility for apportioning property taxes via statute -- for the first time, getting the state government involved in property taxes.

State lawmakers could have taken the easy route, making all local governments to take significant cuts across the board in proportion to the Proposition 13 property tax reduction, forcing taxpayers to live with the bleak consequences of their decision. Instead, with its own coffers swollen by 1970s inflation -- income tax brackets at the time were not indexed to inflation -- the state gave local governments a bailout, transferring a portion of the property taxes previously collected by schools to cities and counties, and using the state budget to back-fill the revenues of local school districts.

Act II. During the early 1980s, the country faced a serious recession. The state budget deteriorated, state funding for education suffered, and public frustration rose. In 1988, voters passed another constitutional amendment, Proposition 98, guaranteeing public schools a minimum amount of money calculated using several complicated formulas.

Act III. To meet the new school funding guarantee, the state had two options. It could use state revenue dedicated to other important programs and raise taxes. Or it could increase the amount of property taxes going to local schools, partially reversing the bailout it gave to cities and counties after Proposition 13. Facing another tough recession in the early 1990s, the state did the latter, prompting loud complaints from local governments that the state was "stealing" their revenues. (Cities and counties apparently forgot that the revenue was only theirs because the state had decided to shield them from the post-Proposition 13 cuts.)

Act IV. In the wake of the dot-com bust, California faced another large recession and the resulting fiscal crisis. To balance the state budget, lawmakers transferred more local property taxes to schools, further reversing the post-Proposition 13 bailout. In 2004, city and county governments threatened yet another constitutional amendment to shield their property taxes from further raids (including property taxes that had previously gone to school districts, before Proposition 13). Instead, the state legislature negotiated a compromise measure, which voters approved that November. Proposition 1A essentially froze the property tax formulas at their 2004 levels, prohibiting the state from taking back more of its bailout money to fund schools. Beginning in 2008, however, the amendment allowed the state to borrow local property taxes at times of fiscal crisis, as long as the amount was repaid with interest within three years.

Which brings us to Act V. In 2008, with the state budget facing another huge deficit in the wake of the financial crisis, the state borrowed local property taxes. In addition, lawmakers noticed that Proposition 1A covered only city and county governments -- but not the redevelopment agencies that these local governments control. So, to balance the budget and protect schools, the state shifted property taxes that would normally go to redevelopment agencies to local school districts.

Proposition 22 would close this loophole, prohibiting the state from taking further redevelopment tax increment. It would also amend Proposition 1A, no longer allowing the state to borrow local property taxes at times of fiscal distress.

What Proposition 22 does not do, however, is say how the state legislature is supposed to balance the state budget, provide funding for all of the important programs the state pays for, and also give voters the kind of schools they want. In short, while local governments may win, someone else is going to have to lose. State lawmakers will certainly find some other loophole or some other revenue source not covered by Proposition 22 -- because the alternative, cutting basic public services, is both unattractive and highly unpopular among voters.

So, no matter what happens this November, stay tuned for Act VI.

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