Another point which no one has mentioned: Another section of Proposition 13:
“In addition to decreasing property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases of any state tax rates or amounts of revenue collected, including income tax rates. It also requires a two-thirds vote majority in local elections for local governments wishing to increase special taxes.”
In the vast majority of other states all it takes is a simple majority to raise taxes. Thus in California conservatives can easily block tax increases–resulting in the Governor engaging in all kinds of budget gimmicks.
Policy wonk quiz! When you first saw the movie Airplane! did you recognize Howard Jarvis as Man in Taxi?
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Yes, he was very famous at the time. Gann was not
Another property tax issue in California is that commercial property does not technically get transferred in California when there is a new equitable owner if the tax guys set it up correctly. We have hundreds of thousands of very valuable commercial properties that still have the 1978 tax base price.
In no way informed on the matter . Maybe it’s movie industry’s hype contradicts its true financial standard alternatively. So it’s always at odds with itself to be the production center it is by all dead land quantities it has to sustain .
As here in New England we have many neighborhoods built on old forest woodland swamp zones, we require the sump pumps as full contingency to get through the seasons.
They are under such strain of active maintenance and procedure costs, it’s only enough by its relevant prActice, where a person brings all their wealth to their determination.
Had to retype 3 times on the phone that’s the best I’m going to be able to portray it haha
Essentially, an excess of democracy there allows Californians to put up almost any proposition for a vote, and so to vote themselves lower state taxes but higher state expenditures.
Try a little harder. Between 1983 and 2011 California had a Democratic–not Democrat, Democratic–governor for just four years. Until very recently the Republican minority in the legislature was able to hold budget and tax bills hostage at will.
Democratic governor Jerry Brown and the Democratic-controlled legislature have recently begun to put the state back on more sound fiscal footing–in part through very painful budget cuts and, yes, some higher taxes.
The state’s system of legislation by referendum is idiotic, as other have pointed out, but Republicans in this state have done exactly nothing to make the dysfunctional government work better or improve the state’s finances.
No. The majority of judicial appointees have been republican for decades. The governors’ office has been occupied by republicans for well more than half of that time. From 1962 to the present (starting with the first Gov. Brown) 19 years for democrats and 35 years for republicans, with with 15 of those republican years being movie star republicans. Reagan raised taxes more than any other governor in our history, including property taxes, and beginning in 1979 the legislature passed effectively zero taxes except for some emergency sales tax increases during the worst crises because tax increases required two-thirds votes.
Prop 13 has also created a strange system of perverse incentives. A friend of mine recently rebuilt his house almost entirely, yet because the foundation slab was unchanged he still pays the same property taxes on his now-much-more-valuable home.
How I saw it explained once: Commercial property owners found a loophole in Prop 13 big enough to drive all their skyscrapers through. It works like this:
A big company with commercial properties (like buildings) creates a wholly-owned little subsidiary company, and transfers ownership of the property to that subsidiary. (This change of ownership may trigger a reassessment, but these companies had foresight, and did all this in the early days of Prop 13, when the reassessing was still good.) This little subsidiary company exists for the sole purpose of owning that property.
Now, when the parent company wants to sell a property, it doesn’t actually sell the property. It sells the entire subsidiary company, which owns the property. So the buyer buys the subsidiary company and it becomes a subsidiary of the new parent company, and the property goes with it. Since the property did not actually change ownership (it still belongs to the same subsidiary as it did before), there is no reassessment.
By this process, a lot of commercial properties have escaped reassessment and are still taxed at rates of the earlier days. Private non-commercial property owners (homeowners, basically) don’t really have any such trick available to them. Thus, over the years, the property tax burden has increasingly shifted away from corporate entities, and onto homeowners instead.
One line of thinking holds that the early proponents of Prop 13 knew exactly what they were doing.
Or alternatively: My father and his wife tried (long story) to re-build their badly damaged house after the Northridge earthquake, and found that if they just left one not-so-damaged wall standing and re-built the rest of the house around that, they could avoid reassessment, like TSBG says.
Only problem: Somewhere in the chain of communication from the general contractor down to the sub-most-contractor who actually did the work, this detail got lost. The sub-contractor tore down the wall, and thus the opportunity was lost.
Also a new subdivision is probably subject to “Mello-Roos” which adds an additional .5 percent tax for the first 20/25 (I forget which) years to “buy in” to the system the other properties in the area have been paying.
Prop 13 has jack squat to do with the huge fluctuations in California tax revenue that are the root of the OP’s question, and which make its budget feast or famine. For one thing, they just get funneled back to the counties for education. For another, they’re nowhere near in total revenue what the state collects in income taxes. And they don’t vary wildly, from year to year. They vary on a broad 10-20 year cycle along with California’s real estate boom and bust cycle.
The reason is simple to anyone who understands algebra: it’s the state’s fantastically progressive tax structure, which makes the rate of tax you pay rise very steeply with income. If you earn less than the median California income, you’ll probably pay nothing at all. At the very top, you’ll pay nearly 13% on income and the same on capital gains – the highest rates in the nation. You can easily end up forking over to the state about half what you send the Feds, and much more than you pay in SS/Medicare taxes. I vaguely recall hearing that something like a mere 100,000 California taxpayers fork out nearly half the state budget. Could be those numbers are off, but the entire state budget definitely rests on a tiny fraction of the taxpayers.
The end result is that ordinary fluctuations in the income of Californians are tremendously magnified when they influence California’s tax revenue.
A little toy example for the math-challenged, e.g. the majority of California legislators (all numbers are made up, merely representative).
in 2014, Bob earns $100,000 and is in a 8% tax bracket, so he pays $8,000 to the state.
In 2015, Bob does well and earns $120,000 (20% more), which pushes him into the 9% tax bracket, so the state gets $10,800 (35% more) from ol’ Bob. Feast! Let’s get some new programs out there to help people!
In 2016, Bob has a bad year and earns $80,000 (20% less), which pushes him down to the 7% tax bracket, so the state gets $5,600 (30% less). Famine! Panic! We can’t cut the beautiful new programs, because people depend on them now, and it would be terrible to tax the poor people when everyone’s having a bad year so…I know! Let’s impose a surtax on the rich! We’ll make the tax structure a little more progressive, and that will prevent this…
Rinse and repeat. When Californians have a bad year, the state has a really bad year, and when Californians have a good year, the state has a really good year.
It’s not complicated, it’s just math. If function A (tax revenue) depends on on function B (personal income) raised to some power greater than 1 (i.e. the tax rate, not just the taxes, go up with income), then fluctuations in B will cause much larger fluctuations in A, and the higher the power – the more progressive the tax code – the larger the fluctuations.
Boom ‘n’ bust budgets are an inevitable mathematical consequence of progressive tax structures, and the more progressive, the worse it gets.
That’s not to say you couldn’t run the state successfully nevertheless. But you’d have to be superdisciplined and simply not spend any giant surplus from a good tax year, just redeem bonds early, contribute extra to CalPERS, et cetera and wait for the inevitable bad year to follow. But we’re talking about Democrats here, for whom an unspent tax dollar is like a gram of coke in front of a long-time addict.
I’m thinking the primary issue is that Prop 13 has kept stable real estate taxes at far too low a level, forcing the state to increase other, more unstable, taxes to fund operations.
The above dozen or so posts sums it up quite nicely. Democrats and Republicans each blame the other for California’s budget woes, and because it takes a super-majority to change tax rates, until recently that was impossible. Add to that one of the fastest-growing populations in the US in real numbers and you get problems. We finally got a governor back who cares about the state and knows how to handle things, and gave him a super-majority in the State Assembly to back him up, so things are getting rosy again.
From the previous posts, it seemsl ike Prop 13 is consistently blamed, with the inability to raise taxes going hand in hand with that. CA doesn’t have a revenue problem, it has a spending like a drunken sailor problem. Revenues in CA have been quite healthy over time. Here’s a pdf from the state showing historical revenues and expenditures.
This is what i was talking about when i described a “ratchet effect” in the tax system. under Prop 13, it effectively became a one-way system, with moving taxes in one direction (down) being very easy, and moving them in the other direction (up) being almost impossible.
Yes, although it’s a little more complicated than that, because this “excess of democracy” is, in fact, a system that benefits wealthy interest groups the most. To get a measure onto the ballot in the first place, you have to be able to collect hundreds of thousands of signatures, and the easiest way to do that is to pay signature collectors. It’s generally only well-funded groups that can do this, paying collectors to stand outside supermarkets and go door-to-door collecting signatures, while ordinary citizens find it much more difficult to get a proposition in front of the voters.
Peter Schrag discusses this issue in his nice book California: America’s High-Stakes Experiment. He points out that it generally costs over $1.00 per signature in the early stages of a campaign, and if things are getting tight in the last days of the campaign, the cost can go up to $5 per John Hancock. This gets expensive very quickly, especially because you generally have to collect at least 20-30 percent more than you need, to make allowance for duplicates, non-citizens, and other problems that might disqualify signatures.
The ballot initiative, or proposition, was a laudable Progressive-era measure designed to root out government corruption and limit the power of wealthy lobbies like the railroad, but over time it has, in some ways, helped to entrench and even strengthen some of the special interests that it was originally designed to counter.
You funny!
No, it does have something to do with them because Prop 13 has, for much of the time since it was passed, made it virtually impossible for the legislature to regulate tax revenue in response to changing economic conditions. They could drop taxes when revenue was sufficient, but the supermajority requirement made it incredibly difficult to raise them again when that became necessary. The whole “budget feast or famine” that you’re complaining about is. in considerable measure, a product of Prop 13.
This is wrong.
The income tax portion of state revenue MAY rely on a numerical minority, but the state also gets large amounts of tax revenue from very unprogressive sources like sales tax. Someone who earns $40,000 a year pays the same tax rate on a car purchase as someone who makes $400,000 a year. I pay the same amount of state tax per gallon of fuel as someone who earn five times as much as me, and the same as someone who earns half as much as me.
I know you said that you’re using made-up numbers, but if you’re going to offer analysis like this, you need to understand how marginal tax rates work so that you don’t end up offering a dishonest argument.
When you move from the 8% bracket to the 9% bracket in a marginal tax jurisdiction, the extra percentage does NOT apply to your whole income. It only applies to the amount of income over and above the marginal boundary. This means that your figures of a 35% tax increase for an income increase of 20% is wildly exaggerated.
In your example, using your own figures, a person who went from $100,000 per year to $120,000 per year would NOT pay 35% more in tax. That is simply, flat out wrong. If $100,000 was the bracket boundary, he would continue to pay 8% on income up to $100,000, and would pay 9% on income over $100,000. So, in your scenario, his taxes would increase from $8,000 on $100,000 to $9,800 on $120,000. So, his income has gone up 20%, and his taxes have gone up 22.5%. And that’s if the tax bracket is right at $100,000. If it’s at, say, $110,000, then the increase in tax is even smaller.
Also, your initial observation is wrong, because even in the 8% bracket he would not have been paying 8% on every dollar. Here are the [url=http://www.tax-rates.org/california/income-taxactual California tax brackets. At current rates, someone with a taxable income will pay no tax on the first $7582; then 2%, then 4%, then 6%, then 8%, then 9.3%, etc., as their income climbs.
A person with $100,000 in taxable income is in the 9.3% bracket, but actually pays 9.3% only on income over $49,774. So, while he is in the 9.3% bracket, his total tax payment in California is, according to my calculations, $6768, or about 6.8% in total.
We can argue about whether this is too high or too low, but if you’re going to lecture people on income tax problems, at a minimum you need to understand how marginal tax brackets work.
Your section on marginal taxes is a good call out, thanks for writing that so I didn’t have to
The above however, is neither true nor a problem. If you look at the link I provided earlier, from the 1976-77 year to the 2014-15 year, state revenues have increased on average just over 6.35%. Expenditures over that time… 6.68%.
If you look over the last 15 years, state revenues went from 71.9B to 105.4B. That’s a 47.6% increase in revenues over the last 15 years. **CA has a spending problem, not a revenue one. ** (I omitted the increase from the 2000 year to the 2001 year which jumped 22.7% because that would skew the results weirdly, but if you go back 16 years, the increase in revenue is even more dramatic at 80%).
Now during this time the population of CA has also grown significantly, but not nearly at the same rate as revenues have increased. Census data are only at the decade marks, but I think the estimate over the same period is around 25% population growth.
