If it has so much of the world’s economic activity – cars, movies, tech, agriculture, drugs, music, what have you – why is its budget always strained? Is it just a matter of not taxing enough, mismanagement, or is the population just not generating enough money despite all the activity?
It’s feast or famine. They are either $8B in debt, or $8B in surplus… until the next recession hits. I think the issue is that the state’s budget is huge, and in good times there is plenty of money and in bad times there isn’t. A lot of their revenue comes from business-related taxation so you can see how the economy impacts their revenue stream.
In most states during the last recession there were government cut backs and they even got rid of some employees. I don’t think that happened in California. They just waited for the tax revenue to pick up again.
Part of it is the property tax cap (Prop 13) that was voted in in 1978. It has seriously affected revenues and the ability of government to function.
Spending more than the government brings in. Basically politicians buy votes by giving ‘stuff’ to voters. However they can’t raise taxes too much or the voters will rebel. So politicians deficit spend hoping that this government ponzi-scheme doesn’t collapse until they are retired.
Just because the private economy is large, it doesn’t mean that the government is spending living within its means. Yes tax rates are not large enough relative to expenses the government has. You have to raise rates or cut spending. One big reason states are close to bankrupt is that they’ve made pension promises, including health. Promises are “good” to make because people like to receive them. They are easy to make because they don’t affect the current budget if you don’t fund them completely – that is, you as the current government reap the benefits of “being nice” but pass the costs along to future governments who have to balance the budget.
This problem has been exacerbated because people are living longer and health costs have risen so fast. That means that even had the promises made in the past been fully funded, the benefits might now cost more than anticipated. In addition all the money in the pension plan has not continued to grow at the rate anticipated due to the sharp market drop in 2007-8.
Our proposition system effectively allows budget-by-democracy. As Chefguy mentioned, Proposition 13 has prevented property taxes from keeping up with inflation, and numerous subsequent propositions have enacted expensive bond measures for all kinds of things. Somehow they’re always marketed as being cost-free to the taxpayer, even though it should be obvious that someone, someday will have to pay off that bond.
We have a surplus now.
For many years it has been easier to pass spending bills than to pass taxes. That’s one reason.
Prop 13 reduced the amount of tax revenue from stable property taxes and forced the state to get money from income and sales taxes - both of which are hard hit during a recession where the need for money for unemployment and welfare goes up.
Things are much better now that the budget is easier to pass, new taxes are almost as easy as new spending, and the economy is improving. Things got a lot better when the Democrats got a super majority and could pass things without Republican obstruction. And they were reasonably moderate also - maybe too moderate at restoring cuts, but didn’t spend like drunken sailors.
As an example. Of the two houses near me and mine. Two away is a guy who bought his house 30 years ago, and is probably paying $1,00 - $2,000 a year on property taxes for a house easily worth $650K. He is retired, but hardly poor.
I bought my house 17 years ago, and I pay less than $5k a year, and it is worth about $800K.
Between us is a guy who bought his house about two years ago, for $550K or so. I don’t know what he is paying, but it is certainly a lot more than me.
Add to that the fact that business properties are covered also.
It is an insane and unfair system, though I’m benefiting from it.
Another reason is that, particularly in the last couple of decades, California has been highly reliant on investment income–in particular, stock options and the like given to people in tech fields.
This income is dependent on the vagaries of the stock market and is less stable than taxation of straight salary. Politicians get used to high spending in boom years and don’t prepare for bust years. Personally, I think there should be a “rainy day fund” where spare funds are put for above average years (i.e., where the stock market is doing well and there is a high fraction of capital gains taxes).
Between Prop. 13 and intransigent anti-anythingers, the California budget has been a mess for decades. We’ve temporarily dealt with one of the problems. Now we need to deal with the other. But I’m afraid that there is no way even the most modest revising of Prop. 13 would pass the ballot box.
In addition to prop 13 limiting tax revenues, lots of people started passing their homes on to offspring rather than selling them, which meant fewer properties hitting the market to be purchased at higher tax rates. Prop 13 has become California’s “third rail” for politicians, much like Alaska’s Permanent Fund Dividend. The mere mention of adjusting these things is political suicide.
The funny thing is that Proposition 13, which has proven a fucking disaster for rational state budget management, was passed, at least in part, precisely because the government had a rainy day fund.
Relatively high taxes combined with inflation in the 1970s to leave California with a massive surplus that was not really being spent on anything. When criticized about this, some government spokespeople even argued that it could be an effective rainy day fund. One of the biggest arguments made by the supports of Prop 13 was that people should get to keep their own money rather than have the government hang onto it in the form of extra tax revenue.
I’m not arguing, by the way, that there was no need for tax reform in the 1970s. Economic stagnation led to unemployment, while rampant inflation pushed up prices, including housing prices, far too quickly for wages to keep up. Rising house values led to rising property taxes, and in an atmosphere of economic uncertainty, people became justifiably upset that their shrinking level of real income was being hit with higher and higher property taxes.
(The median housing price in California in 1970 was just under $24,000; by 1980 it was almost $85,000)
While an adjustment to the earlier property tax system was a perfectly reasonable step, the way they went about it was completely retarded. They placed a permanent cap on the rate, placed ridiculous limitations on frequency of assessment, and, more generally, put in place a ratchet effect that made it incredibly easy for the legislature to lower taxes, but almost impossible to raise them again if needed.
The result, apart from drastically reduced revenue, was a set of stupid inequities, such as those described by Voyager, where identical houses in the same neighborhood, using identical services, pay drastically different amounts of property tax. Economic studies suggested, also, that the biggest winners in the whole Prop 13 tax shift tended to be landlords and, even more so, large commercial property owners. The burden of taxation became less progressive, shifting more towards lower and middle income groups.
Prop 13 also tends, in some cases, to reduce geographic mobility.
If you’re paying property taxes on a house that was last assessed 25 years ago, and you get offered a job in a new city where you’ll have to buy a house, your decision to move has to take into account the increased tax burden of a house purchased at today’s prices.
I read the OP as asking about state-level finances. How does Proposition 13 affect state taxation? I thought property taxes are strictly local.
This might be a revenue-positive effect, though, to the extent it deters people from leaving the state.
Isn’t everybody always nearly bankrupt?
Did you ever wonder why a person who makes $2-million in a lifetime manages to spend exactly $1,999.997 and dies with the change in his pocket?
Usually, one is not “nearly bankrupt” until the creditors are at the door, and even then only if you can’t find a way to reschedule your debts (which everybody can). California is using hyperbole, and all “nearly bankrupt” means in this case is that they don’t have enough cash flow right now to extricate themselves from debt right now. Just like everybody else.
The more money available to local governments to spend on education, the less the state has to spend.
State employees are paid very well, and so are high level administrators that are not state employees but draw their salaries from the state funds. Think school district superintendents of various levels.
Whenever there is a surplus, which is every recovery, they want a raise that they haven’t had since the last slowdown. Nobody opposes this because all salaries tend to be benchmarked with other departments. Legislators justify a salary increase because CalTrans or Judicial Officers got a raise.
Tax revenues are based on sales taxes, income taxes and property taxes. All such revenues drop dramatically during a slowdown.
That’s the point. Property taxes usually don’t drop dramatically during a slowdown. They did during the last one because of the foreclosure rate, but usually they are more stable than other taxes.
It is not unreasonable for workers who have foregone raises, or even took cuts, during downtimes to want raises during good times. Pensions are a bigger problem than salaries. And the cost of living is high here. If the state wants to compete with Silicon Valley companies for workers, they have to pay something reasonable.
There was another proposition that allowed senior citizens to take their tax rate with them if they moved to a smaller house. I forget the number because it doesn’t get nearly the amount of press that Prop 13 does. Sigh, now I have to look it up.
From an explanitory report by the CA Legislative Analyst’s Office:
Prop 3 If your property it taken by eminent domain, you can transfer your assessed value (not rate, the rate is fixed at 1%) to a similar or smaller (cheaper) property.
Prop 50 If your property is destroyed in a natural disaster, you can transfer your assessed value to a similar or smaller home in the same county
Prop 58 Transfer between spouses or parents and children do not trigger reassessment.
Prop 60 If you’re over 55, you can transfer your assessed value to a similar or smaller property in the same county.
Prop 90 Extends Prop 60 to other counties.
Prop 110 Same deal for disabled homeowners.
Prop 171 Extends Prop 50 to other counties.
Prop 193 Extends Prop 58 to between grandparents and grandchildren if the parents are deceased.
Prop 1 If your property is unusable due to an environmental problem, you can transfer your assessed value.
If you make improvements to your property, the new bits will be assessed separately from the old bits. There are seven propositions naming improvements that can’t be assessed, including installing solar panels and adding accessability features.
Proposition 8 allows you to petition to be assessed at current market value if that value is below your Prop 13 (plus 2%/yr) value. That only lasts until the market value rises to your extended Prop 13 value. In our County, the County just reassessed everyone, dropping nearly everyone’s taxes. They’ve done it four times since 2008. This year was the first time my house value went back up.
Conway is right about the State kicking in for education. According to the state website above, each school district has a “revenue limit” and if the available taxes are less than that, the State makes up the difference. That also applies to Community Colleges.
Also, in the past, if an area was declared blighted, the rising or growth part of the taxes could be transferred to a redevelopment agency to fund redevelopment projects. Those agencies were dissolved in 2012, but they had obligations, so many Cities and Counties declared themselves to be the successor agency to the redevelopment agency and they’re still getting the growth funds. They’re only allowed to pay off agency debts and meet other agency obligations. No new projects allowed.
The website also has a couple of good figures showing the difference in volatility between property and income taxes. This is all just property tax, though. There are other propositions that have established other obligations on the state.
I have a relative who says that if you add up all the obligations it’s more than 100% of the budget. He also says that once an obligation is put in by proposition, it can only be removed by a proposition that gets a bigger percentage of the vote. Not sure what to think about that last claim. Might be horse feathers.
Policy wonk quiz! When you first saw the movie Airplane! did you recognize Howard Jarvis as Man in Taxi?
