Few Californians Understand the State's Tax System. Fact.
A crazy-quilt of money flows that is hard to figure out
Buried in a major new poll on Californians' attitudes toward government is a finding that explains many things: Only six percent of adults can identify where the bulk of the state's money comes from, and how it is spent.
If you don't understand the tax system, or how your tax dollars are being used, you're not going to be very comfortable with tax increases, or spending cuts, or anything else politicians might do to try to solve the state budget crisis.
But you can't blame the public for not being able to follow the money. State and local finance in the state has become so byzantine that even the professionals barely understand it. Here, then, is an attempt to sort some of the myths from the facts.
Myth The state budget crisis is the result of Proposition 13's limits on property taxes, combined with spendthrift politicians and greedy public employee unions.
Fact The state budget crisis is mainly the result of a crushing fall in revenue. In the pre-meltdown days of late 2007, the state legislative analyst's five-year forecast projected that in the 2011-12 fiscal year, the state would have revenue of about $125 billion. Now, revenue for that year is projected to be $83.5 billion. The dropoff results from lower income tax and sales tax collections, which account for more than two-thirds of all state revenue.
Myth Local governments and schools are mostly financed by local property tax revenue.
Fact Proposition 13, by limiting local property taxes so dramatically, forced the state to step in as the main funder of many services. By way of example, Alameda County gets almost 30 percent of its total budget from the state, and an additional 18 percent from the federal government. Only 13 percent comes from property taxes. The city of Fremont, in Alameda County, gets about half its general fund revenue from property taxes, 16 percent from sales taxes, and the rest from a grab-bag of smaller revenue sources. (More than 75 percent of the city's budget is spent on police and fire protection.) The Fremont school district gets 29 percent of its funding directly from property taxes, with the bulk of its money coming from the state.
Myth Local officials can decide how to spend local property tax revenue.
Fact Proposition 13 established a formula for divvying up property tax revenue among counties, cities, schools and assorted special districts. This formula varies by locality, but whatever the split was in 1978, when the landmark initiative was passed, remains the split today; the rules establishing this were part of the implementation of Proposition 13.
Myth Proposition 13 has de-funded government across the board, forcing permanent, dramatic reductions in government services.
Fact California has high income and sales tax rates, and the state ranks in the upper tier nationally in overall tax burden. Both of these tax sources are much more volatile than property taxes, however, and decline much more quickly when the economy goes south.
Myth Tinkering with Proposition 13 is political poison, and there is no chance anyone will take on this issue.
Fact Proposition 13 has been tinkered with many times, mainly to expand it (by allowing low tax assessments to be passed on within a family, for example). There is growing sentiment that applying Proposition 13 to business property, and maintaining the crazy-quilt of money flows among government entities that Proposition 13 has created, should be reconsidered.
Myth Californians simply do not want to pay more taxes, routinely rejecting any ballot measure calling for tax increases.
Fact Many of the tax measures on local ballots in recent years -- especially so-called parcel taxes (a form of property tax) to bolster school funding -- have passed. The Public Policy Institute of California poll released last week found that a remarkable 71 percent of adults favor tax increases to help close the budget gap and prevent further cuts in education funding. Of course, how Californians will vote on Gov. Jerry Brown's proposal to extend a series of temporary tax increases remains to be seen.
Brown is determined to push many state government services to the local level, with the goal of creating a more direct connection between taxes paid and services received. This will take time -- but it's one key to heightening taxpayers' understanding and bringing rationality to state and local finances.
Andrew S
I was very interested to read about the Public Policy Institute poll that found 71% of Californians willing to take a hit with higher taxes if doing so would close the budget gap and prevent further cuts in education. Count me in that 71%. Even though we may pay some of the highest taxes in the U.S., we're still considerably below that of Germany - whose economy has not suffered as strongly as ours in this recession.
My warning to Governor Brown and the legislature is: Tax me, but do it wisely. Taxpayers are not a revenue spigot to turn on when all else fails. Increased taxes need to be a part of an overall plan that includes increasing efficiency, reducing waste, cutting spending, and growing state revenues.
I opposed San Francisco Prop B last year because its savings would have amounted to a throwaway drop in the bucket without an overall plan. If city leadership develops a methodical plan that includes all areas of the budget, I'll support it even if it means more wage & benefit give-backs. That goes double for the state.
d h
Mr. Weber's response on where local schools and cities get their funding doesn't tell the whole story.
According to the Alameda County Tax Assessor annual report, 41 cents of every 2010-11 property tax dollar will go to schools, 18 cents will go to cities, 13 cents will go to special districts, 15 cents will go to the County, and 13 cents will go to redevelopment agencies in the County.
http://www.acgov.org/assessor/annual_report.pdf
The other important thing to note is that schools are funded first with local property tax dollars, after which the State tops up their funding bucket with State money generated from income and sales taxes. While State law defines allocations, local property tax money does not "go to the state" to be re-allocated to the schools.
This is why Jerry Brown wants to eliminate redevelopment agencies, which siphon off over $5 billion in property taxes each year. Redevelopment diverts local property tax revenues and forces the State to provide greater payments to the schools to make up for what redevelopment takes away.
The City of Alameda, in Alameda County, gets roughly 31% of it's income from local property taxes, and another 7.5% from its share of local sales taxes. (About 1% of the 8.75% goes to the City, the rest to the State.)
http://www.cityofalamedaca.gov/getdoc.cfm?id=247
Jon Spangler
I take issue with the interpretations in Weber's first Myth and Fact.
1. Commercial properties change hands less frequently, resulting in less state income from the commercial sector.
2. If the property taxes assessed on commercial property were adjusted upwards so that businesses paid their fair share of the overall property tax burden (even the percentage of property tax revenue that they contributed in the earliest years of Proposition 13), state tax revenues would be higher.
3) This would make state revenue slightly less volatile, as a higher overall percentage of state income would be from property taxes, which are a more stable source year-to-year.
voltairesmistress
I think Mr. Weber's usually good analysis of California politics is a bit off here. Proposition 13 is surely to blame for the shift from property to income taxes as the main source of revenue for California state government. And most people do know that property taxe, high at purchase, become a bargain if one stays in one's home or business property long enough. The state did not stop spending increasing amounts of money after 1978, it simply shifted the burden to personal income taxes, now the 2nd or 3rd highest state income taxes in the United States.
He's right that income tax receipts (and to a much smaller extent sales tax receipts) are volatile and dip dangerously during recessions, precisely when governments need to pay out more for social services.
But he's wrong to dismiss the state and local governments' continued growth, or to ignroe the tsunami of costs our obligations to pension and health benefits of government employees are causing now and in the future. That's because state govt. salaries and retirement benefits went up under the false assumption that the stock market would produce a steady 8% return. Without an overhaul of taxes rates and sources, government spending priorities, and a re-think of reasonable rates of return on state pension funds, California will continue to have budget deficits year in and year out.
The situation right now is a emergency room case. The situation for decades now has been one of a chronic disease of increasing severity. The many years of California budget band aids and magic tricks (think, pushing one quarter of the state's deficit each year into the next year's budget calculations) did not start in 2008 with the recession, but indeed much earlier.