Tax Policy Center Urban Institute and Brookings Institution California’s Fiscal System Kim Rueben The Tax Policy Center and The Public Policy Institute of California Presentation to the Connecticut Legislative Program Review and Investigations Committee State & Local Tax Policy Forum October 26, 2005

Tax Policy Center Urban Institute and Brookings Institution Outline California’s Fiscal System and NCSL Measures Proposition 13 and its aftermath

Tax Policy Center Urban Institute and Brookings Institution California Meets Some NCSL Criteria Tax System is Balanced Tax System Progressive Economically competitive

Tax Policy Center Urban 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 Center Urban Institute and Brookings Institution And How Balanced System Looks Depends on Year Considered

Tax Policy Center Urban Institute and Brookings Institution Income Tax Fell Due to Fall In Capital Gains and Stock Option Income

Tax Policy Center Urban Institute and Brookings Institution Importantly, Under Current Law Revenues Are Not Sufficient to Meet Spending

Tax Policy Center Urban 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 Center Urban Institute and Brookings Institution Outline California’s Fiscal System and NCSL Measures Proposition 13 and its aftermath

Tax Policy Center Urban 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 Center Urban 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 Center Urban Institute and Brookings Institution State Response to Passage Property tax revenues allocated as was divided in 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 Center Urban 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 Center Urban 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 Center Urban 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