Tuesday, December 1, 2009

Is Proposition 13 the reason behind this mess? Part 2

This is the second part of the two part investigative piece on Proposition 13 that explores whether Proposition 13 is to blame for the mess going on in the California Budget Crisis. This part explores whether Proposition 13 is truly the case as to why California is in it's budget woes. 
If you want to read the first part, click on the following link-

Is the two-thirds majority vote requirement in Prop 13 to blame for being a hindrance to this economy?

A claim like this is an overstatement. First off, according to Joel D Fox, former president of the Howard Jarvis Taxpayers Association, Proposition 13 is not responsible for the two-thirds vote requirement to pass the state budget or the two-thirds vote of the people to raise local taxes for special purposes. The two-thirds vote on the budget was established more than seventy years back in 1933 for budgets that exceeded 5% growth over the previous year’s budget. In 1962, that two-thirds standard was applied to all state budgets after the constitutional revision. The supermajority vote requirements is not limited to just California, but the United States in general. In fact the two-thirds vote can be found numerous times in the United States Constitution. Because the two-thirds supermajority has been long instilled in our constitution, it makes a good point that the two-thirds vote brings a sense of overall agreement to important decisions. If there were no two-thirds supermajority voting requirement, it would be obviously unfair if a tax can be passed by people who don't have to pay that tax. 

In contrast, Joel Stein of Times magazine states that for the sake of California's economy, it's best for the people to not vote because their vote has taken not helped California progress. To read the article, click here

Is there a need to reform Prop 13’s property tax cap in order to make up for the tax revenue that was lost?
Although the California property tax revenue was cut by 57% in 1978 due to Proposition 13, that only put California down from being one of the most taxed states to an above average taxed state. According to the CCSCE (Center for Continuing Study of the California Economy), due to the passing of Proposition 13, California ranked 45th in effective property tax rates at .477%; however, we still generate enough capita from property tax at $1,151 per capita to be ranked 27th in the nation. That is fairly high compared to bottom ranked Alabama, which makes $455 per capita from property taxes. Even though property tax revenue was lowered the year Prop 13 was implemented, that did not hurt California from raising enough tax revenues above inflation.
According to George Rebane of the Bastiat Triangle Association-
The important and revealing metric to assess the impact of Prop 13 is the inflation adjusted per capita revenues that the state has enjoyed over this period.  Everyone knows that since Prop 13 the state has found many other areas and activities from which to squeeze tribute out of us during the last 27 years.  So let’s see if the passage of Prop 13 has somehow caused collected property taxes to fall behind in contributing their share to the state’s coffers.

1980 per capita property tax was $6,360,000,000/24,000,000 = $265.00.
 2007 per capita property tax was $43,160,000,000/38,000,000 = $1,135.80.

The CPI increase gave us a total inflation of 202.4/88 – 1 = 2.3 – 1 = 1.3 = 130%.

The inflation adjusted 2007 per capita property tax then becomes $1,135.80/2.3 = $493.82.
The inflation adjusted percent increase is then $493.82/$265.00 - 1 = 1.864 – 1 = 86.4% more than inflation increased during the 27 year interval.

Putting it another way, the state’s annual property tax revenues increased at a rate
(1.864)^(1/27) – 1 = 1.023 – 1 = 2.3% over that of inflation.  And since the average annual inflation rate over that period was (2.3)^(1/27) – 1 = 1.031 – 1 = 3.1%, the state pulled in property tax revenues that grew at a 2.3%/3.1% = 74.2% higher rate than needed to keep pace with the 1980 per capita property tax receipts.” (2009)

Proposition 13 shifted cities’ revenue focus away from property taxes and move towards other revenue sources. According to Associate Economics Professor Gary Richardson of University of California, Irvine, “So for local governments that likes to tax property and find it convenient to tax property, this Prop 13 puts a crimp as to what they can do. That (Property tax) was a very convenient method for them to raise revenue for their citizens. So that’s going to shift the types of governments or the taxation to other areas and it might have an effect on the composition of government. If local government can’t pull some strings (because) they can’t raise money through property taxes, they’ll try to raise money through other means or other government units will have to pick up the slack.”  Since then majority of our general funds have been coming from, ranking from highest to lowest, Personal Income taxes, Sales tax, Property tax, Corporate Income tax, and other miscellaneous taxes. According to the CCSCE, California’s personal income tax collection per person is $1,418, ranking the 6th highest in the nation. Our 9.55% income tax rate is the 4th highest in the nation and for incomes more than $1 million per year, there is a 10.3% tax rate, the highest tax rate for incomes more than $1 million in the nation. California also boasts the highest sales tax rate in the nation with an 8.5% sales tax rate for customers, 2.25% higher than the national mean, 6%. Not only does California boast the highest sales tax rate, it also has the highest Corporate income tax rate at an 8.84% flat rate. Overall, California ranks 6th in tax burden percentage in the United States with an estimated 10.5% of income going to taxes compared to the 9.7% national average. Clearly not much has changed compared to 1978 before Prop 13 was implemented into our state’s system when CaliforniaAmerica had a tax burden percentage of 11.7% compared to the national average of 10.3%. In conclusion, it is clearly an overstatement to mention that Proposition 13’s property tax cap has diminished our tax revenue when we still remain one of the highest taxed states in the United States.

So if California is the highest taxed state in the United States, why isn't our revenue increasing as it should? Why did California's expenditure drop from $91,547.0 to $84,582.9 (in millions)?
Thomas Del Beccaro, Vice Chairman of the California Republican party, states three reasons why. "(1) the national economy, (2) that so many Californians have left over the last 5 years and (3) millions of Californians are now unemployed.  All together that means a shrinking taxpayer base." With taxpayers fleeing from California, we lose taxes along with them too. 

What about the Commercial Property owners? Couldn’t the State of California have made much more revenue if they weren’t given the grand benefits of Prop 13’s property tax cap?

As mentioned before in Part 1, “a corporation owning commercial property is bought out or merged, but the property remains in the ownership (deeded) of the corporation, then the property can effectively change ownership and avoid Prop 13’s provision that fixes the amount of tax based on the property’s resale value.” Although this has greatly reduced the property tax businesses have to pay to maintain property, this does not mean that businesses have the benefit of paying less taxes. Prof. Richardson stated, “We have plenty of mechanisms to tax businesses. If a business is not paying enough in one type of tax, consider another tax. If Disneyland (referring to the example in part 1) is not paying enough property tax, then just add a one dollar surcharge on ticket prices (Corporate income tax).” 

Although taxing corporations through other means can help raise revenue lost from the property tax cap, we ultimately forget that it's people who pay taxes. If the government Imposes a new tax (corporate income or sales) on Disneyland, Disney may lower dividends to stockholders or lower the wages of the workers. If possible, they can do both along with raising ticket prices. In other words, it's possible that stockholders, workers, and visitors at Disneyland are altogether paying for the tax on Disney. (Cited from economics FAQ from Pitzer.edu)

To see how the California’s Government changed since the enactment of Prop 13, check out this link: http://www.hjta.org/propositions/proposition-13/analysis-government-revenues-california-enactment-proposition-13

Is it Prop 13’s fault for the declining quality and spending in our K-12 education?

Prop 13 has some effect on the spending of K-12, but it’s certainly not the only thing going on. First off, there is certainly more money in the school system now than before Prop 13. Even though there has also been more students in school than in there were back in 1978 when Prop 13 passed, more money is spent on the students, in real per capita dollars. A study by the Center for Government Analysis shows that there is a 30% more spending per pupil than there was back in 1978. So why the problem in K-12 education does persists? According to Joel D. Fox, “…education is not just about money. Too much administration, union rigidity, parental involvement or lack thereof are all issues. And the problem is not just in California…There are many problems with public education in this country that do not revolve around money.”

Secondly, Proposition 98 ensures a minimum funding guarantee for k-14 education (elementary to community colleges). This ballot initiative, passed in 1988, binds the state funding to ensure that K-14 will receive consistent funding.  The California Department of Finances states that, “The state's share of the guarantee is derived by subtracting local property tax revenues (the local share of the guarantee) from the total guarantee amount. Proposition 98's share of overall General Fund tax proceeds averages about 43 percent. As a percentage of new (additional) General Fund tax revenues, Proposition 98 gets approximately 54 percent, depending upon the factors and tests. For example, for an increase in General Fund tax proceeds of $100 million, Proposition 98 would get about $54 million on the average.” However, there are consequences from ballot initiatives like Prop 98 (earmarking initiatives) that is damaging California’s economy which will be explained later.

Now what about the funding for UCs and other California public universities? Is Prop 13 to blame for the cut spending of our public universities?

Before we go point fingers at Proposition 13 for the spending cuts on public universities in California, we must realize we’re in a nationwide recession where other states are cutting spending on services and that proposition 13 is just one of many ballot initiatives that are limited to our state. During an economic recession, taxes fall and spending cuts must be made, but earmarked taxes limit the government’s choices as to what spending should be cut. Political Economy Professor Linda Cohen remarks “I think it’s important to know we’re in a very serious economic recession. All states are under a crisis so whether or not we have Prop 13, we would’ve been in recession. By repealing or reforming Proposition 13, we’re not going to get a quick fix. The reason why things got exacerbated is because of (California’s) bad fiscal structure.” So what makes California’s fiscal structure different from other states? “California does a lot more earmarking through propositions and California’s revenues are more volatile than other states,” answers Prof. Richardson. Throughout California’s fiscal history, there have been many ballot initiatives to give guaranteed spending to certain services from California’s tax revenue, designating a certain minimum percentage of the tax revenues to that service without allowing the legislature to cut spending on those services. “When we do earmarking, we’re tying the hands of the government and we’re letting special interest dictate spending outside of the legislative process, and that often does not generally lead to good outcome,” comments Prof. Richardson. Facts from the CCSCE show that in the 2006-2007 fiscal year, out of the $170 billion in state and local tax revenue, the personal and corporate income tax making up $63 billion, went to general funding while property tax revenue ($42 billion) went to schools, cities, counties and special districts, sales tax ($45 billion) went to state government, local government, and transportation agencies, and the miscellaneous tax ($20 billion) went to local government. All the tax revenues that did not go to general funds went to services that were able to pass ballot initiatives such as highway maintenance, transportation, K-12 education, water bonds, Parks and recreation, and etc. Meanwhile, the government had to figure out how to split the $63 billion amongst the general funding services such as prisons, youth rehab, healthcare, tax relief, higher education, resources, labor and workforce, and etc. Because of the low tax caused by the recession, the government is left to cut spending to help the state survive in this deficit. The problem is the government is not allowed to cut spending on any of the services that receive funding from earmarked taxes leaving them to only cut spending on whatever is covered by the general funding such as prisons, rehabilitation centers, healthcare, tax reliefs and higher education. Because the government is only allowed to cut spending on whatever programs and services are covered by general funding, this has led to the cut spending on higher education such as UCs. 

Although it would have been beneficiary for public universities if they weren't as many earmarked taxes as there are today, to believe that there will be a significant increase is just a mere speculation. Prof. Richardson states, "When there's a downturn (earmark) you think 'Well maybe the decisions (Budget cuts and spending) would have been different.' Well that is kind of a speculation. It's not clear if the decision was different. I suspect we would have gotten less of a cut, but I'm not a 100% of that." Even if there were no earmarked taxes, giving Government more options as to what services should get cut spending, it is possible that the government still would have chosen higher education to take the damage.

So if not Prop 13 what is to blame for the California Budget Crisis?

According to Prof. Dan Mitchell of UCLA, “At the peak of the business cycle, the state was already taking in less in revenue than it was expending. The faltering economy and the loss of taxable gains from the stock market worsened the deficit and brought about the current fiasco.” In time of a nationwide recession, every state is hit hard economically due to lack of consumer confidence in spending, stock market crashes, the weakening value of the dollar, and layoffs which has led to lower tax. The unfortunate problem is California is hit the hardest. “The budget downturn is worse in California and that has nothing to do with our fiscal structure of our government, that has to do with the economy and that our economy was hit harder by these shocks. The government problems are what transmit the shock to through government to government services. But the shocks of the economy are not caused by Government budget structure. The government budget structure is not the reason why couple of years ago people were building these houses out in the desert that people did not want to pay for or the rate they had to pay for to sustain them. And that seems to be the big part of the California budget crisis,” explains Prof. Richardson. So if neither the California fiscal structure nor the Prop 13 is the cause of the California Budget Crisis, what is the main cause? Simply put by Prof. Richardson, it’s the main cause of the recession itself, the United States Housing bubble.

To understand what caused the United States Housing Bubble, please check on this link to learn more- http://www.wealthdaily.com/articles/united+states-housing-bubble/1145


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