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Restoring Elected Officials’ Ability to Raise Revenues Would Increase Transparency, Accountability

By Jean Ross, executive director of the California Budget Project.

For related commentaries and content, please visit the Untangling the State-Local Fiscal Relationship page.

It may seem too simplistic to fault Proposition 13 for the tensions between the state and local governments. Yet the fact is that California’s landmark ballot measure capping local property tax rates also—by necessity—inserted the state into decisions that once were the purview of local governments. Proposition 13 required the state to take on responsibilities previously entrusted to local governments and school districts, particularly in the area of public education. It did so by dramatically reducing the resources available for local services. But perhaps even more important, it gave state lawmakers the power to allocate local property tax revenues and changed the requirement for increasing state tax revenues from a majority to a two-thirds vote of the legislature. Subsequent measures—including those sponsored by the proponents of Proposition 13—curtailed the ability of local governments to respond to local needs and residents’ preferences by requiring voter approval for any tax increase and locking in the allocation of local revenues based on outdated formulas.

Proposition 13 and its aftermath thus not only obscured the flow of tax dollars, but also made the lines of authority overly programmatic and budget decisions less transparent. The Public Policy Institute of California’s own public opinion research documents the fact that a significant majority of Californians lack the most basic knowledge about how state lawmakers spend their tax dollars. These findings suggest that very few voters probably understand that seven out of every 10 cents spent through the state’s General Fund flows to local governments, individuals, or health-care providers. Yet voters are routinely asked to weigh in on ballot measures that earmark portions of California’s severely limited tax dollars. And they are asked to freeze pre-1978 revenue allocation formulas that have profound implications for budgets at all levels of government, yet are so complex that even experts can’t agree on their meaning.

Disentangling the complex relationship between the state and local governments requires an understanding of local government and school finance, both before and after the passage of Proposition 13. Prior to voters’ approval of the measure in 1978, each city, county, school district, and special district independently established a property tax rate to raise the revenues needed to support the upcoming year’s budget. Local elected officials were accountable to voters—for whom those dollars were spent— for the amount of tax paid. In response to Proposition 13's dramatic reduction in local property taxes—collections were slashed by 60 percent overnight—the state stepped in, assumed a larger share of the cost of funding our public schools, and divided the remaining much smaller pot of property tax dollars among counties, cities, and special districts.

This worked reasonably well until the 1990s, when the state experienced what was then the most severe budget crisis since the Great Depression. In 1993, state lawmakers used the powers granted by Proposition 13 to shift more of the cost of schools back onto the local property tax. To help close state budget gaps, property taxes were reallocated from cities, counties, and special districts to schools. This shift reduced the amount of money the state was required to provide to schools under Proposition 98. Thus, an increase in the share of funds provided from local resources reduced the state’s obligation to schools on a dollar-for-dollar basis, albeit at the expense of local governments.

As it stands today, local governments craft budgets with one hand tied behind their backs, responsible for allocating resources among competing spending priorities but lacking the authority to raise the revenues to pay for them. While proponents of lower taxes argue that strict limits on taxing authority lead to fiscal responsibility and accountability, California’s experiences over the past several decades suggest that just the opposite may be true.

The explosive growth of redevelopment after the passage of Proposition 13 provides an excellent case in point. A considerable body of research—including that done by PPIC— suggests that redevelopment is often inefficient and fails to generate significant growth. Prior to Proposition 13, a city council that diverted property tax dollars to redevelopment would likely increase the property tax rate to maintain funding for police, fire, and other essential local services. This gave voters a clear incentive to ensure that redevelopment dollars were spent prudently and at the same time, forced policymakers to directly weigh the tradeoffs between competing uses of resources. After Proposition 13, local governments—primarily cities—could "export” most of the cost of redevelopment to the state because of the interrelation with the Proposition 98 funding guarantee. As a result, voters have little incentive to monitor how redevelopment dollars are spent, while the complex financial relationships and perverse incentives and disincentives make it virtually impossible for voters to understand how their tax dollars are spent or to hold policymakers accountable.

By severing the link between the authority to raise taxes and the authority to spend them, Proposition 13 also lessened the incentive for voters to watch over school and local government budget deliberations because spending decisions no longer translated into higher tax bills. And, as state lawmakers assumed a larger share of responsibility for financing local services—particularly schools—they felt entitled to exert more direction over programs and priorities. After all, whoever pays the piper gets to call the tune.

The solutions to this problem are at once simple and complex. Simple since it would take just a three-word change in the state’s Constitution to allow legislators to raise state taxes by majority vote, lessening the incentive to balance state budgets by shifting costs to local governments in bad budget years. Similarly, deleting a few dozen words from the state’s Constitution would restore locally elected officials’ power to increase revenues.

The far more complex and politically challenging task would be to "unlock” budget lock-ins and realign outdated allocation formulas. These were enshrined in the Constitution in the wake of Proposition 13—often at the behest of local governments seeking to prevent state policymakers from shifting dollars or responsibilities to ease the state’s repeated budget crises.

Allowing California’s elected officials to raise revenues by majority vote would go a long way toward removing the incentive for the state to balance its budget on the back of local governments. In the ideal world, this change would be accompanied by a realignment of revenues and responsibilities premised on two basic commitments: to ensure that all Californians have access to good schools and quality services, and to promote transparency and accountability with respect to fiscal and programmatic decision-making.

Transparency may provide the path to greater transparency. Until voters understand the complex relationship between the state and California’s local governments, they are likely to view major changes with understandable skepticism. Let’s hope that three decades of patchwork policymaking can be undone in fewer years than it took to create.