California: What Proposition 13 Has Wrought

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Democratic lawmakers presented a budget proposal this week that will allow California to finally close its massive $15.2 billion budget deficit. Their goal is to shift the burden of closing the deficit onto business and higher income state residents instead of cutting public services. Among its more notable provisions, the plan would reinstate a 10 percent income tax bracket for married couples with incomes over $321,000 and an 11 percent bracket for couples with incomes over $642,000. These are the rates that were in place in the mid-1990s under conservative Republican Governor Pete Wilson.

California Republicans have pledged to block tax increases in any and all circumstances. This position forces Republicans to embrace a program of draconian cuts to education, health care, transportation, and public safety. They are likely to get their way, thanks to Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority.

California has faced ongoing budget deficits since 2002 that it has rolled over from year to year mainly through borrowing, exemplified by a recent proposal to borrow from future lottery revenues. California has the lowest bond rating of any state besides Louisiana, and it does not currently have money to fulfill obligations past September.

Property Tax Limitation Backfires

Proposition 13 has caused the state to have a structural imbalance between revenues and expenditures that is not likely to close without fundamental changes. Another restriction it mandated limits property tax increases to 2 percent per year. Because local authorities are unable to raise the revenues they need, they rely on state aid to finance their services.

Prop 13 mandates that only a change of land ownership will bring its assessed value in line with market value. Now, with home values in sharp decline all over California, homeowners are witnessing the curious and maddening phenomenon of their property taxes continuing to increase. This is because the assessment ratios are still far below market price and have room to continue growing 2% per year.

Democrats and Republicans in Sacramento should consider not only slightly higher income taxes on California's wealthiest, but also a fundamental restructuring of the state's dysfunctional tax code, starting with the elimination of Proposition 13.

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