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This article appears in the Winter 2016 issue of The American Prospect magazine. Subscribe here.
Seen from Washington or New York, California looks like a brilliant fiscal success, even without comparing it with the Republican moronarchy in Washington, the budget disasters of Sam Brownback’s tax-cutting Kansas or Bobby Jindal’s Louisiana, or the scandalous budgetary finagling that’s earned Chris Christie’s New Jersey the second-lowest credit rating in the nation.
In 2012, California voters, with a strong push from Governor Jerry Brown, passed Proposition 30, which raised the sales-tax rate and created a new bracket for the highest-income taxpayers. For those making more than $1 million, the marginal rate is now 13.3 percent, making California’s tax structure far and away the most progressive of any state in the nation.
And despite dire warnings from the right, there has been no great exodus of California millionaires rushing for cover in Texas, Arizona, or other low-tax states. California, moreover, has regained a significantly larger percentage of the jobs lost in the 2008–2009 recession than the nation as a whole. The state’s unemployment rate, at 5.8 percent as of October 2015, is still higher than the nation’s 5.0 percent, but less than half what it was in 2008.
A year before Proposition 30 passed, Brown, ending a long and nasty battle with Amazon, had also negotiated and signed the so-called Amazon law, which, like those in a dozen other states, requires big Internet retailers to collect sales taxes on their California sales just as the brick-and-mortar stores on Main Street had long been required to do. In 2010, voters had also approved an initiative that ended California’s constitutional requirement, one of the few in the nation, that state budgets may only be passed by a two-thirds vote of the legislature. The majority-vote rule that replaced it thus ended decades of filibuster-like budget battles. One veteran liberal activist, Lenny Goldberg of the California Tax Reform Association, says that in California even the Republicans have become “pretty reasonable.”
Now, as Kansas and other tax-cutting states are starving education and social services, California’s tax increases are generating an additional $6 billion to $7 billion a year, most of it for the K-12 schools. The Golden State, famously enmeshed in budgetary impasses a few years before, inflicting major cutbacks on needed public programs, is for the moment again celebrated as the nation’s shining example of progressive public policies. Until recently, there had even been talk about the 77-year-old Brown again running for president.
California Governor Jerry Brown appears at a rally for precinct walkers from the Service Employees International Union (SEIU), urging they go all out in support of Proposition 30, in downtown Los Angeles Saturday, November 3, 2012.
But let’s not overdo it. California’s tax system—indeed its whole fiscal structure—is still a dysfunctional mess, nearly as illogical, inequitable, and inefficient as it has been for the previous 40 years. The tax limits and the restrictions on government imposed by Proposition 13, the sweeping property-tax reduction and limitation initiative passed by voters during the great tax revolt that began in 1978, are still on the books, and, according to the polls, as beloved by voters as ever.
Despite the infusion of the new money coming from the state’s high-tech-driven economic recovery and the taxes generated by Proposition 30, California is still struggling to get its per-pupil spending up to the national average. In March 2015, the state was 29th in the nation, about $975 below the national average. It charges some 20 times as much in higher-education tuition and fees as it did 40 years ago—more than $13,000 a year for in-state students, versus $647 in 1975–1976. Students now pay more in tuition than the state contributes to university support.
Nearly all states have jacked up tuition at their public universities. But when Berkeley and UCLA, like the universities of Michigan and Virginia, begin to skew their admissions policies toward out-of-state students, who pay vastly more than others, and become increasingly privatized institutions, the blow to talented in-state applicants and to the very idea of high-quality public education is especially painful. No state had once prided itself more on its essentially tuition-free system of higher education than California had. Privately, Berkeley faculty members concede that they now have an increasingly hard time competing for the hottest faculty prospects with Stanford, the Ivies, and other better-endowed private institutions. Berkeley has an official student-faculty ratio of 17 to 1; Stanford’s is either 4 to 1 or 11 to 1, depending on whose numbers you use.
THE LIST OF PROPOSITION 13's CASUALTIES goes on: The condition of California’s roads, once models for the world, is rated as among the worst in the nation. Its huge public-employee pension funds and retiree health-care systems are dangerously underfunded. A few months ago, the Public Policy Institute of California estimated that unfunded liabilities for the state’s future public-employee retirees had reached “historic levels”—roughly $135 billion—which, if not addressed, would consume an increasing share of state and local budgets, money that would be needed for current purposes, not to support the employees of the past.
(Those pension shortfalls, too, are partly attributable to the effects of Proposition 13: In tight years when there was no money for public-employee pay raises, cities, counties, and school districts would appease cops, firefighters, and teachers with generous, though unfunded, retirement commitments.)
Worse, the crippling restrictions on state and local governments that Proposition 13 imposed in 1978 and the resulting distortions in the state’s tax burden remain firmly locked into the California constitution. Local governments can’t impose a parcel tax on property—a tax where each piece of property, whether mansion or hovel, pays the same tax, as opposed to ad-valorem taxes based on the value of the property—without a two-thirds vote of the local electorate. They can’t raise the ad-valorem property-tax rate at all. That means that Californians, in the words of California Forward, a nonpartisan think tank, “do not have an effective mechanism to channel local citizens’ enthusiasm for local schools,” which before the passage of Proposition 13 were largely funded by local property taxes, and have since been supported by money from the state. Nor can the legislature increase sales or income taxes without a two-thirds vote. On revenue issues in the California legislature, the minority rules.
Because Proposition 13 doesn’t allow property to be reassessed except when ownership changes, it creates huge inequities. Neighboring residents pay vastly different property-tax bills on identical homes, depending on when they bought those homes.
Similarly, Proposition 13 stifles business competition: The longtime retailer on Main Street is assessed according to what he paid in 1975 before Proposition 13 was passed, or whenever he bought or built his store in the years since; his new would-be competitor next door pays for an identical building on the basis of the elevated prices of the contemporary market.
That, as Goldberg points out, turns all the principles of good economics on their head. The system doesn’t capture gains in the value of a successful business or the increased value of the property next door; instead, it penalizes innovation and new enterprise. And since it doesn’t raise the assessment of unused parcels adjacent to successful businesses, it fosters speculation and does nothing to encourage the highest and best use of those parcels.
Worse, because the provisions of Proposition 13 on changes of ownership have allowed corporate lawyers to find great loopholes for commercial property transactions, usually through lease arrangements (rather than outright purchases) on blatantly under-assessed land, the initiative, purportedly designed to protect homeowners, has generated a huge shift of the tax burden from commercial to residential property. In 1978, homeowners paid 55 percent of property taxes; today, they pay 72 percent.
It has also distorted local planning priorities. For many years, property taxes on manufacturing plants didn’t generate as much revenue as sales taxes were thought to generate from retail developments on the same land. As a result, until about a decade ago, there were intense beggar-thy-neighbor battles between adjacent communities for shopping malls and auto malls, but little interest in clean industry and the much better-paying jobs it would bring. Now, after some locals bent over backward and spent millions to build infrastructure to attract the shopping malls, some of those malls have been going bust.
The Old Jerry, at his worst: Governor Jerry Brown with Howard Jarvis in 1978, espousing extreme fiscal austerity in the wake of Proposition 13's enactment.
GOLDBERG OF THE CALIFORNIA TAX REFORM ASSOCIATION has long been working to promote a change to Proposition 13 that would require commercial property, but not residential property, to be reassessed periodically according to its current value, regardless of changes of ownership. He points out that in fact majority ownership of corporations, as shares of stock are bought and sold, probably changes every three years. Some legislators and a group of liberal organizations and policy experts, under the slogan “Make It Fair,” have been working on legislation to enact that change, which would pin commercial property assessments to current values.
But the prospects for enacting this kind of reform aren’t great. The most recent poll, from the Public Policy Institute of California in September 2015, shows voters narrowly favoring such an initiative (51 percent to 42 percent), but corporate and anti-tax groups almost always beat this kind of measure. Not surprisingly, Brown has shown no enthusiasm for it. He called it “a tar baby,” something he doesn’t want to get entangled in. Brown, who in any case never lost his high Jesuitical regard for austerity and the morally salutary effects of hair shirts, doesn’t like involving himself in long shots.
For similar reasons, Brown has no enthusiasm for extending Proposition 30’s high-end income-tax rate, which expires in 2018. He’d promised it would be temporary when it was on the ballot in 2012, and he seems intent on sticking to that. A coalition of public-employee unions has launched a campaign to extend it, and while the PPIC poll cited above shows voters favor the extension by 55 percent to 37 percent, that lead is also likely to evaporate if the issue goes on the ballot.
There are valid reasons other than Brownian austerity for the governor’s reluctance to support any extension of Proposition 30’s upper-income brackets. Because of Proposition 13’s caps on local property taxes, the state and local governments have become heavily dependent on California’s progressive but highly volatile income-tax system. In good times, the income tax on high earners generates ample revenue, much of it from capital gains. But in lean times, state revenues drop precipitously, producing the wild boom-and-bust swings from which California’s revenues have famously suffered for more than three decades.
Bruce Cain and Roger Noll of Stanford, the former a political scientist, the other an economist, pointed that out some years ago: California, more than other states, relies disproportionately on the income tax. The state generates the revenue through the income tax, then transfers most of it to the locals, who spend it on schools, health care, public safety, and other major services. (This leads, they argue, “to a lack of clear accountability for the state’s recurring fiscal crisis.” Is the problem poor fiscal management by the locals or by the state? Or, more broadly, is the problem rooted in what’s often called “ballot-box budgeting,” the programs created by initiative—tougher prison sentencing laws, for example—for which the voters don’t provide the needed additional revenues?)
Conservatives blame California’s high upper-bracket rates for the volatility of its revenues. But just as plausibly, the revenue swings can be pinned to the lack of sufficient property-tax revenues, which are far more reliable and less dependent on the business cycle and thus serve as a kind of flywheel through the economic cycles.
So might an economically more rational sales-tax system that would tax major services—lawyers, accountants, business consultants, data processing—just as it now taxes the sale of cars and washing machines. The share of the economy generated by services is now much greater than the share generated by the sale of goods, and it continues to grow.
State Senator Bob Hertzberg, a Los Angeles Democrat and a former speaker of the state assembly, is pushing such a reform, combined with a reduced reliance on the income tax, which he believes would significantly reduce the boom-and-bust swings in state revenues. Hertzberg says many states tax some combination of services. Still, given the polls, the bill’s chances of eventually passing look slim. And in combining the sales-tax measure with the income-tax cut, obviously designed to draw voter support for the sales-tax measure, Hertzberg’s proposal might do little but exacerbate the effects of the state’s huge income gaps.
In November 2014, California voters passed the Rainy Day Budget Stabilization Fund Act, requiring the state to set aside a small percentage of boom-time revenues in a reserve account, which will soften the effects of the downturns, but in tight times for not much more than a year.
Add all that up and you get a glimpse of the governmental and fiscal messes that Proposition 13 and its plebiscitary progeny have generated. In poll after poll, however, voters say they trust the initiative process more than they trust government. That’s hardly surprising, given the vicious cycle in which every ballot measure further constrains all branches of government, limiting their ability to raise funds and allocate them to meet the most pressing needs and most important projects. The reforms of the past four or five years have put a dent in that process—but only a dent.
FOR ANYONE LOOKING TO CALIFORNIA for encouragement about the future, probably the most positive signs—and they are significant—are social and demographic.
In 1994, California voters overwhelmingly approved Proposition 187, sponsored by Governor Pete Wilson and other Republicans, one of the harshest anti-immigrant measures in modern American history. Until federal courts struck it down, it excluded undocumented immigrants, including young children, from the public schools and virtually all other public services, and it required teachers, nurses, cops, and other public employees to report to the authorities anyone believed to be here illegally. Two years later, voters also approved Proposition 209, which prohibited affirmative action in public education, contracting, and employment, an initiative that became a model for Michigan, Washington, and five other states.
But by 2010, when Arizona passed its notorious S.B. 1070 with its long list of anti-immigrant measures, California had become a majority-minority state and firmly Democratic in party registration, in part because of the Latino backlash against Proposition 187. It now charges undocumented immigrants the same tuition as all other in-state students in its public colleges, and makes them eligible for financial aid. After a decade of political battles, the state now issues driver’s licenses to undocumented immigrants. California continues to lead the nation in environmental regulation.
Meanwhile, Jerry Brown—who in his first terms as governor (1975–1983) had looked down on and sometimes outright disparaged his governor-father Pat Brown’s progressive public projects in water, transportation, and education—has been pushing his own multibillion-dollar plan to build a European-style bullet train from San Francisco to Los Angeles, and his own immense construction scheme to move more water from one end of the state to the other.
The New Jerry, at his most visionary: With Japanese Prime Minister Shinzo Abe in San Francisco in April 2015.
There are serious doubts about each, and fierce resistance from many quarters to both, so that the chances that both would be finished within the next quarter of a century, if ever, are slim. But for those who recall the (sometimes unjustifiably excessive) optimism of the postwar decades, even the hope of doing something so grand and ambitious has been refreshing.
Perhaps because of its sheer size, its ethnic and social diversity, and its economic heft—the eighth-largest economy in the world, as some Californians like to remind themselves—California’s ups and downs have always been magnified by outsiders. Californians themselves have often encouraged this. Things had better work here, Joan Didion famously said long ago, because this is where we run out of continent. And in our treatment of a diverse and ever-changing population, California is, one hopes, a precursor of, and maybe a model for, the rest of the nation.
But on tax reform—by whatever definition—California’s baby steps have barely moved the state out from under the shadow of Proposition 13 and its other tax-limitation follow-ups. They have not broken through most of the crippling restrictions on state and local government action or restored the progressive communitarian ethic that grew out of the Depression and the common effort of World War II.
And because of the economic and cultural tribalism fostered by the Internet, the cell phone, and their associated technologies, we may never get it back. Democrats dominate the politics of California, in large measure because of the Republicans’ long disregard of the state’s ethnic minorities and their disdain for gender and other major social issues. But the state’s dominant streak has been individualistic and libertarian, not New Deal–progressive. With the increasing presence of Latinos in the electorate, that may be starting to change, but it hasn’t yet. Next to the California of a half-century ago, today’s tax policy and political culture still look depressingly backward. Compared with those of other states today, however, they look like a shining example.