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What's different about California's budget? | Print |  E-mail
Written by Chris J. Magyar   
Monday, 05 January 2009

Comparing the Golden State’s tax structure to other states

Property Tax

All states were not created equal. The hodgepodge map of borders within the continental United States was primarily drawn during a period of rapid population movement—when politicians had no inkling of what the territories’ eventual population density and makeup would be—and during a period of intense national struggle—plenty of states inherited their borders due solely to the slavery question, and plenty more were slapped together in the aftermath of the civil war, when the notion of federal unity trumped any idea of state independence.

Thus, particularly out west, we have come to find ourselves in seemingly arbitrary circumstances where state residencies are concerned. The interesting part is that each state has taken a radically different approach to its revenue, almost as if the western half of the continent were a petrie dish for tax experiments. Alaska, Nevada, Washington, Texas and Wyoming have no income tax. Oregon has no sales tax. Arizona, Colorado and Oklahoma all manage to keep the overall state and local tax burden to less than 10 percent of per capita income. And then there’s California.

California has the third-largest land area, and although Texas and Alaska are larger, our borders contain, hands-down, the most diverse climate, geography, population, and economic needs in the United States. California is easily a bigger dang mess of random parts than any other state in the union, and it contains the most citizens to boot.

Given that we are a part of a great system of federal government—a worldwide model in how to balance local and national interests in a diverse country—one would assume that the size and scope of California’s economy would lead its politicians to implement a decentralized, federal-style structure of government and taxation. The odd part is, we’re almost the opposite, with the state garnishing more and more of the tax revenue for its dissemination, leaving counties and municipalities begging for scraps to serve their communities’ particular unique needs.

From a financial standpoint, California has one thing that all other states envy: real estate. Only Hawaii has a higher statewide median home value (the Aloha State’s was $555,400 in 2007, compared to California’s $532,300, and no other state even comes near the $400,000 mark). While states do not typically garner property taxes directly, the ability of home values to bankroll local governments and school districts often relieves the state’s budget burden enough for it to be creative with revenue, or ignore potential revenue streams like income and sales tax altogether.

California, however, does not tax its homeowners as much as most states. In 2007, property taxes were just 0.5 percent of home value, good for eighth lowest in the nation. Other populous states with high home values get much more from property taxes: Illinois (median home value of $208,000) is seventh highest in the nation at 1.53 percent taxation; New York ($311,000) is 17th highest at 1.12 percent; and New Jersey ($372,000) is fifth highest at 1.63 percent. The reason California’s on the opposite end of the scale, of course, is 1978’s Proposition 13, a ballot initiative passed in the wake of a California Supreme Court decision that property taxes could not constitutionally fund school districts. Annoyed that property taxes might be redistributed away from local issues, and fearful that suddenly escalating property taxes might render many people homeless, voters passed the ballot proposition at the June primary by 65 percent, capping the amount of property tax at 1 percent of actual sale price statewide, with no more than a 2 percent valuation increase in any given year. The move slashed property taxes by an average of 57 percent, and set up a system in which housing turnover is stymied, and property owners enjoy a form of rent control that further increases home values. The proposition also instituted the two-thirds majority approval rule for any tax increase measure.

Schwarzenegger Calls Special Session On California Budget

The double-whammy of centralizing property tax revenues, then capping them, meant that this giant state with diverse economic and social needs suddenly left its municipalities and counties without a major source of revenue, and limited the state’s ability to make up the difference. As a result, unlike some of its western neighbors, California has had to take the tax-it-all approach and rely upon the state legislature to mete out adequate funding to various local agencies. Those local agencies, meanwhile, were left with a “shop or die” mentality, as sales taxes and hotel taxes are the only substantial means of raising revenue. (Proposition 1A, passed in 2004 and in effect as of 2006, is an attempt to protect local revenues from state appropriation, though it can be suspended by the governor.)

There’s no way to delve into all the arguments for and against Proposition 13 in this space. The mechanism appears to be locked in politically in any case, as alternative proposals in the past and recent polls all indicate that a majority of Californians would vote for Prop 13 again. There’s also evidence that the cap produces a slow and steady increase of revenues to the state, even in economic downturns, lessening the volatility of the state’s revenue stream. (The California Taxpayer’s Association calls it a “reservoir … a reserve of value that will accrue to local entities each year.”) But it does make California’s revenue stream different from other states with similarly large and diverse population centers.

Compare California to New York. Now, the Empire State is one of the most heavily taxed in the nation, and few people would wish that upon themselves (or the notorious oddities of Albany politics), but it has set up a system of layered state and local taxes on all levels. New York derives 58 percent of its revenue from state income tax, compared to California’s 42 percent. Both states rank in the top five in terms of income tax burdens. New York derives 18 percent of its revenue from state sales taxes, compared to California’s 26 percent. The two states have more or less similar revenue profiles from there, including identical 9 percent corporate tax revenues.

Sales Tax

Thus, the state of New York depends much more heavily upon wages than spending for its revenue. However, those are just the state taxes. New York has some of the highest local sales tax rates in the nation, and, as mentioned earlier, a fairly high taxation rate on property. New York City also imposes about a 3 percent income tax rate on its residents, further insulating the metropolis from the vagaries of state politics. Ohio, Pennsylvania, Maryland, Michigan and Kentucky also extensively use local income taxation for their larger cities. (San Francisco does have a local income tax of 1.5 percent, but it’s imposed on the employers, not the employees.)

The upshot is that California’s state legislature has a disproportionate amount of responsibility for doling out funds, compared to other states. However, California also has two laws on the books that make this task difficult: 1) the budget must be approved by two-thirds of the state legislature, and 2) the proposition system allows voters to approve, by a simple majority, a statute dictating spending, such as 1988’s Proposition 98, which requires that education receive a certain percentage of state government funds (a direct consequence, again, of the California Supreme Court taking away property taxes from local school districts).

Since Prop 13 took effect, California has consistently hovered between 10 and 11 percent per capita taxation, high enough to be in the top 10 of all states since 1990. There is some room, but not much, to be taxed more. But the question that might be asked, if the current budget gridlock yields serious financing reform in Sacramento in its aftermath (a big “if”), is whether or not California is taxing itself the right way. In general, sales taxes are the most regressive, property taxes are the closest to proportional, and income taxes are the most progressive. Why does our state rely so heavily on the most regressive tax, and why does it in turn force local municipalities to rely on that regressive tax even more? Why does it refrain from funding itself with most proportional tax, especially given the high value of property? And why are the most progressive locations in California unable to tap into the most progressive tax system to sever their dependence on Sacramento?

The current system of approving budgets in Sacramento means there will inevitably be strange compromises required every year in order to get the two-thirds majority necessary to pass a budget. However, the sheer size and diversity of California also means that any budget coming from the capital will inevitably short-change every region in some way or another.

Prop 13 kicked off what was called a “tax revolt” across the country, as other states passed referenda to limit taxation and rein in lawmakers. As we struggle through the current financial crisis, however, with each little fish begging for food from a bigger fish somewhere else (and California’s leading the charge for a federal bailout of states), maybe it’s time to wonder if a revolt wasn’t enough. Maybe as citizens it’s time to consider something more mature, like reform.

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Look at how we got where we are, to see the solution. Any money the state gets they will use to raise tghe pay and benefits of state employees. They now retire on 70 to 90 percent of their pay, and are always screaming for more. The gov is destroying our lives and futures to enrich these people. It is way past time to tell them Hell No No More
whathappeded , January 05, 2009
I don't think Prop 13 is the panacea so many claim it to be
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While I have MAJOR objections to tossing the elderly out of their homes because they can no longer pay rising property taxes with their limited incomes, I think there is something severely wrong with a property tax system in which relatively recent homebuyers are the ones who absorb the increases in a property's tax base and pay them. They end up being the bagholders and California's housing market may be seeing the effects of that now.

Such bubblefication also gives plenty of incentive for local governments to bubblefy their neighborhoods by aiding and abetting the tearing down of old homes which generated little tax revenue and encouraging the building of too many new mega monstro McMansions and bubbleminiums, which will generate more tax revenue.
sbarr10 , January 21, 2009
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The plight of the elderly often comes up in Prop 13 discussions. (Strange how only in California do people worry about this.) I wonder how much Prop 13 preservation is due to this genuine concern, and how much is self-interest. For instance, if there were a sunset proposition that discarded Prop 13 for any principle homeowner under the age of 65, and put in a graduated property tax for the lowest income brackets, would it pass? My guess is: no.
Chris J. Magyar , January 21, 2009
Seniors have options.
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If you are at least 62, make no more than $35,500 household income and have at least 20% equity, you can postpone paying some or all of your property taxes and accrued interest on those deferred taxes till you move, sell or both you and your spouse die.
Disabuser , January 24, 2009

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