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California’s Fiscal System

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. Outline.

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California’s Fiscal System

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  1. 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

  2. Outline • California’s Fiscal System and NCSL Measures • Proposition 13 and its aftermath

  3. California Meets Some NCSL Criteria • Tax System is Balanced • Tax System Progressive • Economically competitive

  4. 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

  5. And How Balanced System Looks Depends on Year Considered

  6. Income Tax Fell Due to Fall In Capital Gains and Stock Option Income

  7. Importantly, Under Current Law Revenues Are Not Sufficient to Meet Spending

  8. 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

  9. Outline • California’s Fiscal System and NCSL Measures • Proposition 13 and its aftermath

  10. 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…

  11. 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

  12. State Response to Passage • Property tax revenues allocated as was divided in 1975-1976 • 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

  13. 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

  14. 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

  15. 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

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