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Yesterday’s Bonanza is Today’s Headache for the Golden State

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By Lowell L. Kalapa

This year marks the 25th anniversary of California’s Proposition 13, that tax cutting initiative that froze real property tax to no more than 1% of the assessed value of the real or personal property and limited the growth in the assessed value of the property to not more than 2% per year.
This was probably the beginning of California’s current fiscal headaches, including the much touted $238 billion deficit which contributed to the recall of Governor Gray Davis. Because Proposition 13 limited the ability of local government to raise revenues to pay for the services it provided in the past, a shift occurred in how those services were financed.
The initial shift took place in the form of imposing all sorts of fees on identifiable services such as for the use of public libraries. Because bond buyers did not see the promise of being repaid by local governments in California because of the inflexible Proposition 13, state and local lawmakers had to devise a way to pay for public improvement. This need for financing infrastructure was especially critical in the development of new housing or commercial areas within a local community, one of the few ways that a local government could generate more real property taxes.
California officials devised a set of “fees” imposed on purchasers of newly developed property that paid for the infrastructure necessary to develop that property. Called Mello Roose after its coauthors, it was nothing more than a property tax in disguise as its promoters claimed that it was deductible for income tax purposes.
Lacking the ability to raise the funds for education at the local level, the spotlight shifted to the state legislature where all tax increases must be approved with a two-thirds super majority approval. Lacking the ability to garner a super majority vote for increasing general taxes, the California legislature resorted to the usual suspect, increases in specific excise taxes like those imposed on cigarettes. They also decided to earmark the tax for education making the idea more saleable to voters.
California enjoyed a huge bubble in its economy largely due to the dot com explosion that began in the early 1990’s and burst a couple of years ago. And like Hawaii, instead of maintaining fiscal discipline in the midst of this economic exuberance, state government spent wildly like a drunken sailor. Thousands of jobs were added to the public payroll at both the state and local level, projects were undertaken at break neck speed, and new programs were initiated almost without thought.
Then the electricity crisis hit followed by the burst of the dot com bubble. And suddenly California hit a brick wall. Well not really, the financial crisis had been brewing ever since Proposition 13 was passed. Because the Golden State had managed to contort is financing system, no one wanted to take responsibility for paying for government’s costs. Lawmakers attempted to hide the cost of government by resorting to a system of fees and earmarked taxes so only a narrow constituency would be injured by the new fee or earmarked tax.
To give readers an idea of the fees and tax increases that caused the furor that led to the recall of the governor, they included: tuition and fees were increased by 25% for the University of California system, and 30% for the state university system while community college fees were increased by 63% for each unit; new fees were set for court security and for continuance motions and the trial motion fee was increased by more than 40%; recreation fees for fishing and hunting were upped by 7%, but the most controversial increase was a vehicle license fee based on 2% of the value of the vehicle estimated to generate more than $4 billion annually.
Because it is difficult to garner a two-thirds super majority approval, lawmakers smarting from the sting of voter reaction to the increased vehicle fees have resorted to devious tactics to circumvent the super majority requirement by using a provision which allows for a revenue neutral bill to get rid of the vehicle tax increase.
The law provides that a two-thirds majority is not required if the measure remains revenue neutral, thus, if the vehicle tax increase is replaced with another source of revenue, then the super majority is not required. Before the ruckus of the recall, lawmakers actually had considered raising income taxes by adopting two new income tax brackets on high income taxpayers raising the top tax rate from 9.3% to 11% and a more than 25% increase in the cigarette tax. That idea has been shelved for now, but it may come back to haunt lawmakers and the new administration again next year.

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