BACKGROUND PAPER

Proposition 13:

Its Impact on the Nation's

Economy, Federal Revenues,

and Federal Expenditures

July 1978

Congress of the United States

Congressional Budget Office

Washington, D.C.
CONGRESSIONAL BUDGET OFFICE .,,„ .. R|v|in

U.S. CONGRESS n .

WASHINGTON, D.C. 20515 Director

ERRATA SHEET

PROPOSITION 13: ITS IMPACT ON THE NATION'S

ECONOMY, FEDERAL REVENUES, AND FEDERAL EXPENDITURES

CHAPTER II.

Page 5. third line of second paragraph

"$7,044" should be "$7,044 million"

CHAPTER III.

Page 12. Table 5, column headed Federal Revenue Gain in FY 1980,

entry for Rental-Occupied Residential should be

"179," not "175"

Page 14. line 13 of last paragraph

"$1,028," should be "$1,028 million"

"$1,311" should be "$1,311 million"
PROPOSITION 13: ITS IMPACT ON THE NATION'S

ECONOMY, FEDERAL REVENUES, AND FEDERAL EXPENDITURES

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402

PREFACE

Although limited to California, Proposition 13 has generated

much interest in Washington and throughout the nation, and its

implications have been the topic of considerable speculation.

This report was written in response to a request from Chairman

Robert N. Giaimo to provide the Committee on the Budget of the

House of Representatives with an analysis of the likely effect of

Proposition 13 on the nation's economy and the federal budget.

The report was prepared by Peggy L. Cuciti, Peter Karpoff, Nancy

B. Morawetz, Cornelia J. Motheral, and Robert D. Reischauer, with

assistance from many program specialists at the Congressional

Budget Office. Numerous individuals in the California government

and in the Executive Branch provided valuable information

and insights. The paper was typed by Janet L. Fain and Jill Bury

and edited by Patricia H. Johnston. In keeping with the mandate

of the Congressional Budget Office, the report contains no

recommendations•

Alice M. Rivlin

Director

July 1978

iii

CONTENTS

Page

PREFACE lii

SUMMARY ix

CHAPTER I. INTRODUCTION 1

CHAPTER II. THE IMPACT OF PROPOSITION 13 ON THE NATIONAL

ECONOMY 5

Assumptions 5

Effects on the Economy 7

CHAPTER III. THE IMPACT OF PROPOSITION 13 ON FEDERAL

REVENUES 11

Direct Effects 11

Indirect Effects 14

CHAPTER IV. THE IMPACT OF PROPOSITION 13 ON FEDERAL

SPENDING 15

Introduction •• . 15

Possible Effects on Major Federal Programs . 17

Conclusion 26

CHAPTER V. REPERCUSSIONS ELSEWHERE 27

APPENDIX 31

TABLES

Page

TABLE 1. REVENUE LOSS RESULTING FROM PROPOSITION 13,

BY TYPE OF GOVERNMENT, FISCAL YEAR 1978-1979 . . 3

TABLE 2. DISTRIBUTION OF INITIAL TAX RELIEF, BY TYPE

OF PROPERTY, FISCAL YEAR 1978-1979 4

TABLE 3. REVENUE LOSS REMAINING AFTER DISTRIBUTION OF

INCREASED STATE AID TO LOCAL GOVERNMENTS,

FISCAL YEAR 1978-1979 6

TABLE 4. ESTIMATED CHANGES IN ECONOMIC ACTIVITY CAUSED

BY PROPOSITION 13 . 9

TABLE 5. TAX SAVINGS FROM PROPOSITION 13 AND THEIR

EFFECTS ON FEDERAL REVENUES 12

TABLE 6. ASSUMPTIONS FOR CALCULATING FEDERAL REVENUE

GAIN 13

TABLE 7. OWN SOURCE REVENUE AND PROPERTY TAX BURDENS

AND PERCENT CHANGE IN BURDENS FOR CALIFORNIA

COMPARED TO SELECTED STATES, FISCAL YEAR 1972

TO FISCAL YEAR 1977 28

TABLE 8. STATE GOVERNMENTS WITH OPERATING SURPLUSES IN

FISCAL YEAR 1978 IN EXCESS OF 6 PERCENT OF

EXPENDITURES 30

APPENDIX TABLE. MATCHING AND MAINTENANCE OF EFFORT

REQUIREMENTS FOR SELECTED LARGE FEDERAL GRANT

PROGRAMS 33

vil

SUMMARY

Proposition 13, an amendment to the California Constitution

that limits local property tax rates and makes it more difficult

to increase other state and local taxes, will reduce the property

tax revenues of California local governments by some $7,044

million in fiscal year 1978-1979. Spending cutbacks will not be

as deep as implied by the revenue loss because the state has

agreed to distribute $4,122 million of its accumulated surplus to

its local governments; because some localities have surpluses of

their own to tap; and because some jurisdictions will raise fees,

users' charges, and nonproperty taxes.

In the near term, Proposition 13 will have an insignificant

effect on the nation's economy. The property tax cut will

stimulate economic activity, but only slowly because much of it

will be retained by businesses. It will also lead to a lower

price level because property taxes are a part of the housing

component of the Consumer Price Index (CPI). The cutbacks in

state and local spending resulting from Proposition 13, however,

should depress the economy. On balance Proposition 13 will cause:

o Marginally lower levels of real economic activity

through the first half of calendar year 1979 and marginally higher levels of real activity by mid-1980.

o An employment loss of about 60,000 by the end of 1978

that will gradually diminish in size.

o A reduction in the Consumer Price Index of 0.2 percent by

the end of 1978 and 0.4 percent by mid-1980.

Federal revenues should increase by about $600 million

in fiscal year 1979 and $900 million in fiscal year 1980 because

of Proposition 13. These increases are the net result of two

offsetting factors. First, because individual and business taxpayers will have smaller property tax deductions to claim on

their federal tax returns, federal corporate and individual

income tax collections will rise. Second, the impact of Proposition 13 on the price level and on the level of economic activity

will lower the current dollar value of national income and this,

ix
taken alone, will cause federal tax collections to be lower than

they would have been in the absence of Proposition 13.

Total federal expenditures will not be significantly affected by Proposition 13. Expenditure cutbacks by California and

its localities will lead to layoffs that could increase spending

for transfer programs such as unemployment compensation and

food stamps. On the other hand, the impact of the property tax

cut on the price level will lower anticipated federal spending

for social security, civil service retirement, and other programs

whose spending levels are tied directly or indirectly to the

CPI.

Expenditure cutbacks could lead to lower federal spending

by reducing California's participation in federal grant programs

that have matching requirements. For example, an expected denial

of the cost-of-living increase in welfare benefits will simultaneously reduce federal as well as state and local expenditures.

Budget cuts could also lead to California governments violating

the maintenance of effort provisions contained in many federal

grant programs. The employment and training, education, and

transit areas appear to be the most susceptible to this situation

occuring. Overall, however, these provisions are not expected to

pose serious problems. Moreover, while California may lose

some federal aid, much of this money would be reallocated to

other states at a later date. Thus, while the level of federal

spending in the near term might be lower than would be the case

if Proposition 13 had not been adopted, it could be higher after

the funds are reallocated.

Many of the factors thought to be responsible for the

passage of Proposition 13—the high tax rates, rapid rate of tax

increases, and presence of surpluses—are not conditions unique

to California. Thus similar taxpayer revolts could occur else

where or public officials could attempt to preempt such revolts

by providing tax relief before required to do so by the voters.

Such relief is likely to be financed by slowing the rate of

increase in expenditures and by spending down surpluses rather

than by cutting back real service levels. If such actions

spread to a significant number of states, the impact on the

nation's economy and the federal budget could become significant.

Unless the reductions in taxes are at least twice as large as the

accompanying slowdown or cut in expenditures, the net effect is

likely to be a slowdown in economic activity and employment

growth.
CHAPTER I. INTRODUCTION

On June 6, 1978 California voters approved Proposition

13, an amendment to the State Constitution that limits effective

local property tax rates and makes it more difficult for the

State of California and its local governments to increase

other taxes. The immediate impact of Proposition 13 will be to

reduce the property tax receipts of local governments during

Calfornia fiscal year 1978-1979 by about $7,044 million or 57

percent. \_l The extent to which this reduction will result in

lower expenditures and reduced public services is not yet known.

Much will depend upon how much of their accumulated surpluses

California and its local governments decide to spend and how much

new revenue local governments decide to raise from nonproperty

taxes, fees, and users' charges.

While Proposition 13 applies only to California, the amounts

involved are large enough to have nationwide effects on the

economy and on the federal budget. Proposition 13 may also

affect the behavior of other states and localities. This report

describes the main elements of Proposition 13 and then examines

its probable effects on the na-tional economy, federal revenues,

and federal expenditures. The final chapter speculates on the

possible effect of similar actions in other states.

Description of Proposition 13

Proposition 13 places restrictions on property tax rates,

assessment practices, and increases in state taxes and local

special taxes. Specifically:

JY The fiscal year in California runs from July 1 to June 30

and is indicated in this paper by "fiscal year" followed

by two hyphenated years. "Fiscal year" followed by a single

year refers to the federal fiscal year, which runs from

Oc'tober 1 to September 30.
o Property tax rates will be limited to 1 percent of full

cash value plus the rate needed to service bonded indebtedness approved by the voters before the beginning of

fiscal year 1978-1979. The one percent rate will be

levied by each county and divided in proportion to past

property tax collections among the county government and

the municipalities, school districts, and special districts within the county. _2/

o Assessed values—which are supposed to be 25 percent of

full value—will be rolled back to the levels on the

1975-1976 assessment rolls; where these levels do

not reflect a property's 1975 value, the assessment will

be increased to this level. Assessed values will be

increased annually to reflect inflation, but by no

more than 2 percent per year. Upon sale a property

will be reassessed at its market value if that value

exceeds the 1975-1976 assessment adjusted by 2 percent

per year. Newly constructed properties will be assessed

at market value.

o Statutes to increase state taxes will have to be approved

by two-thirds of the elected members of each of the

Legislature's two houses and no new state ad-valorem,

sales, or transaction tax on real property will be

permitted.

o Special taxes, except for taxes on real property, can

be imposed by local governments only after approval by

two-thirds of the jurisdiction's voters and only if such

taxes conform to the powers granted to the locality under

the state's statutes and constitution. The two-thirds

restriction presumably would not apply to taxes proposed

for general purposes (for example, local sales tax) by a

general local government (that is, a city or county).

_2/ The rate required to service voterr-approved bonded indebtedness is estimated to average about 0.25 percent. Under a

recently enacted law, the pro-rata distribution of the

receipts from the county-wide one percent tax will be

allocated in proportion to the three-year average of tax

collections by the county government, each municipality and

special district, and the tax collections for fiscal year

1978-1979 for each school district.
Initially, Proposition 13 will reduce the total revenues

of local governments by 23 percent. School districts, which rely

heavily on property taxes, would be most affected; cities and

nonenterprise special districts, the least (see Table 1). _3/

TABLE 1. REVENUE LOSS RESULTING FROM PROPOSITION 13, BY TYPE OF

GOVERNMENT, FISCAL YEAR 1978-1979

Cities _§/

Counties b/

School Districts

Revenue

Loss (in

millions

of dollars)

806

2,236

3,539

As a Percent

Property

Tax Receipts

60.0

58.8

54.7

of:

Total

Revenues

15.2

28.9

29.2

Special Districts

(Enterprise)

Special Districts

(Nonenterprise)

Total

216

247

7,044

55.7

55.8

56.6

22.4

5.6

23.4

SOURCE: Summary of the California Legislature Conference Report

on SB 154 Relative to Implementation of Proposition 13

and State Assistance to Local Governments, June 23,

1978.

al Excludes San Francisco,

b/ Includes San Francisco.

_3/ Enterprise special districts run such activities as electric

and water utilities, waste disposal, transit, hospitals, and

airports. Nonenterprise special districts provide such

services as fire protection, flood control, local and regional planning, recreation, parks, and streets and roads.
Of the $7,044 million reduction in property tax payments,

about one-third will accrue initially to homeowners and 17

percent to owners of rental units (see Table 2). Commercial,

industrial, and agricultural property owners will receive 41

percent of the reduction. The remainder will represent savings

to the state government in the form of reduced state tax relief

subventions that replace local revenues lost because of homeowner and business inventory exemptions.

TABLE 2. DISTRIBUTION OF INITIAL TAX RELIEF, BY TYPE OF PROPERTY,

FISCAL YEAR 1978-1979

As a PerInitial Tax Relief cent of

(millions of dollars) Total Relief

Owner-Occupied Residential

Rental-Occupied Residential

Commercial and Industrial

Agricultural

State

Total

2,341

1,200

1,916

944

643

7,044

33.2

17.0

27.2

13.4

9.1

100.0

SOURCE: Legislative Analyst, An Analysis of Proposition 13, The

Jarvis-Gann Property Tax Initiative. May 1978, California Legislature, Sacramento, California.
CHAPTER II. THE IMPACT OF PROPOSITION 13 ON THE NATIONAL ECONOMY

The Impact of Proposition 13 on the nation's economy will

depend largely upon the degree to which public sector spending

is reduced in California, the composition of these spending

cuts, and the size of the property tax reduction.

ASSUMPTIONS

The state and its localities have accumulated substantial

surpluses over the past few years that could be used to cushion

the impact of the $7,044 reduction in property tax receipts

on public spending. The state has enacted a program that will

provide $4,122 million in additional aid to localities over the

next fiscal year, offsetting 59 percent of their revenue loss

(see Table 3). No decision has been made concerning the amount

that the state will distribute in subsequent years, although

estimates suggest that the state's surplus will be sufficient to

provide substantial continued aid. _!/• The size of the surpluses

and reserves held by local governments and the extent to which

localities might use these funds to mitigate the impact of the

property tax reduction is unknown.

In addition to using state and local surpluses, spending

cuts can be avoided by raising other taxes, fees, and users'

charges. While increased state taxes seem unlikely in the next

_!_/ The simulations in this chapter assume that the state will

provide $3,750 million in additional aid to localities

in fiscal year 1979-1980.
TABLE 3. REVENUE LOSS REMAINING AFTER DISTRIBUTION OF INCREASED

STATE AID TO LOCAL GOVERNMENTS, FISCAL YEAR 1978-1979

Cities b/

Counties cj

School Districts

Increased

State Aid

(millions

of dollars)

250

1,480

2,267

Net Revenue Loss a/

(millions

of

dollars)

556

756

1,272

(as a percent of

revenues)

10.5

9.8

10.5

Special Districts

(Nonenterprise)

Special Districts

(Enterprise)

Total

125 91

0 d/ 247

4,122 2,922

9.5

5.6

9.7

SOURCE: Summary of the California Legislature Conference Report

on SB 154 Relative to Implementation of Proposition

13 and State Assistance to Local Governments, June 23,

1978.

a/ Loss of property tax revenues resulting from Proposition

13 minus increased state aid.

b/ Excludes San Francisco.

£/ Includes San Francisco.

&_l While most of the $125 million would go to nonenterprise

special districts, a small but unknown portion will be

received by enterprise special districts.
year, some localities that are empowered to do so may impose or

raise payroll, business, or other taxes. Increased fees and

users' charges are more likely; a number of jurisdictions

have already indicated an intention to raise transit fares and

impose or raise charges for services such as trash collection.

If, in addition to the increased state aid, $350 million a

year from local surpluses are used to offset the property tax

revenue loss and if other local taxes, fees, and users' charges

are increased by $250 million in fiscal year 1978-1979 and by

$750 million in fiscal year 1979-1980, then local services will

have to be reduced by about $2,322 million in fiscal year 1978-

1979 and $3,068 million in 1979-1980. _2/ To these reductions

must be added the expenditure cuts of about $500 million that are

expected to be instituted by the state through a wage and hiring

freezes, an elimination of scheduled cost-of-living increases for

welfare recipients, and other cutbacks. In addition, it is

logical to presume that bond-financed capital spending by local

governments will be cut back. This could occur because the tax

rate limitation could raise the risk, and hence interest rates,

of new bonds and because new debt must be serviced from revenues

subject to the tax rate limitation and therefore will compete

directly for funds with existing services. In total, state and

local expenditure cutbacks are assumed to be $3,072 million in

fiscal year 1978-1979 and $3,818 million in fiscal year 1979-

1980. For local governments this would represent a cutback of

about 10 percent from spending levels that were expected before

the passage of Proposition 13.

EFFECTS ON THE ECONOMY

A portion of these spending cuts will take the form of

reduced purchases and services by California governments. This

will depress the economy and reduce aggregate output and incomes.

The cuts derived from denying cost-of-living increases to state

and local employees and welfare recipients will, however, first

reduce incomes without reducing real aggregate output. In fact,

lower salary rates will reduce the GNP deflator (a broad measure

of inflation) by lowering the component that measures the price

of state and local government output.

2_l It should be noted that these and other references to reductions mean reductions from the levels that would have existed

in the absence of Proposition 13 and not reductions from

current expenditure, tax, or service levels.
While very small relative to the size of the national

economy, the $6,401 million reduction in property taxes paid by

individuals and businesses will have a stimulative economic

effect. 3_/ The after-tax incomes of California's homeowners and

owners of business property will rise, leading to increases in

consumption expenditures and business investment spending.

Renter's incomes, after paying taxes and housing costs, could

rise if the property tax reductions on rental property are passed

through reduced rents.

In general the spending cuts of the State of California

and its localities can be expected to have a more depressing

effect on the economy per dollar than the stimulative effect the

tax cut will provide. This is the case because individuals will

save some of their tax reduction. In addition, the tax cut that

is initially received by business—some two-thirds of the total

—is estimated to have a relatively small stimulative effect per

dollar, since in the short run a substantial portion of changes

in business after-tax revenues typically is not spent on consumption or fixed investment or passed on as price reductions.

The property tax cut will also lower the price level.

The reduction in homeowner's tax payments will directly lower the

Consumer Price Index (CPI) through its housing component.

Further reductions in the CPI will occur if lower taxes on

business properties are passed on to consumers in the form of

reduced rents and prices. These deflationary effects will be

partially offset by increases in fees and users' charges.

Taking account of these complex and partially offsetting

effects, Proposition 13 should have very minor—if not insignificant—near-term effects on the economy. Specifically:

o Real economic activity should be slightly depressed

through the first half of calendar year 1979 because the

spending cuts will have a more immediate impact than the

tax reduction. By mid-1980 real economic activity may be

marginally higher because of Proposition 13.

_3/ This would be partially offset by the increases in federal

and state tax liabilities, discussed in Chapter 3, and any

increases in local taxes, fees, or users' charges.

8
o By the end of 1978 total employment could be 60,000

less than would be the case without Proposition 13,

representing a negligible effect on the unemployment

rate. The expenditure cutback in the labor-intensive

public sector is the main reason for this result. By

mid-1980 employment will have recovered somewhat as the

stimulative effects create jobs in the private sector,

but still may be slightly lower than the level that could

be expected in the absence of Proposition 13.

o The Consumer Price Index may be 0.2 percent lower

by the end of 1978 and 0.4 percent lower by mid-1980.

o With real GNP little changed and prices lower, nominal

or current-dollar GNP will be lower (see Table 4).

TABLE 4. ESTIMATED CHANGES IN ECONOMIC ACTIVITY CAUSED BY

PROPOSITION 13: BY CALENDAR YEAR AND QUARTER

1979:1 1980:2

GNP (billions of 1972 dollars) - 1 1

GNP (billions of current dollars) - 6 - 8

Employment (thousands) -60 -30

Consumer Price Index (percent) - 0.2 - 0.4

Over a longer term, tax reductions of the sort provided by

Proposition 13 may also affect incentives to work and to invest

in such a way as to stimulate output. Tax reductions in a

single state may affect the distribution of investment by attracting economic development from other states. . ,This effect

could benefit California at the expense of other states without

having much impact on the national economy.
Some economists think that tax reductions in a single state

could also increase national output through net increases in work

effort or capital spending. Property tax reductions, however,

seem unlikely to have much effect on work effort, and a property

tax reduction of the type embodied in Proposition 13 is not well

designed to increase the supply of new business capital. Its

greater impact is on the rate of return on existing property. New

construction will not benefit from the assessment rollback,

although it will receive the benefit of the 2 percent limitation

on annual assessment increases which will build up slowly over

the years. Moreover, there is a good deal of uncertainty as to

whether some of the reduction in property taxes on businesses

might be offset by increased local charges and business taxes or

rescinded by subsequent legislation or amendment. In sum, there

might eventually be a further net increase in nonresidential

investment resulting from the California business property tax

cuts, but both the increase and its size and timing are highly

uncertain.

The stimulus to residential investment is also uncertain.

The benefit is greatest to present owners, and should induce them

to hold on to present properties longer than would otherwise have

been the case. Properties held by their current owners might

rent more cheaply than newly built properties because of the

assessment rollback; competition from existing properties thus

could hold down the return on new residential investment.

In sum, the effects on the national economy of the tax and

spending cuts resulting from Proposition 13 are likely to be

insignificant. A good deal of uncertainly surrounds such estimates, however, because there is no prior experience from which

to gauge the effects of large, localized reductions in taxes and

services.

10
CHAPTER III. THE IMPACT OF PROPOSITION 13 ON FEDERAL REVENUES

Proposition 13 will have both a direct and an indirect

effect on federal revenues. The direct effect of the property

tax reductions in California arises because individual and

business taxpayers will have smaller property tax deductions to

claim on their federal returns and hence higher tax liabilities.

The indirect effect derives from Proposition 13's effect on the

economy and, taken alone, reduces federal revenue. In total,

federal revenues are projected to increase by $600 million in

fiscal year 1979 and by $900 million in fiscal year 1980 as a

result of Proposition 13.

DIRECT EFFECTS

For individuals the amount of added federal tax liability

resulting from smaller property tax deductions will depend upon

the timing of property tax payments and the federal tax rates

facing property owners. Because California real property taxes

are paid in December and April, only half of the reduced property

tax deductions of homeowners are likely to appear in the April

1979 tax returns that largely determine fiscal year 1979 individual income tax collections. Based on the income distribution of

California homeowners (including those who take the standard

deductions and thus do not benefit from itemized property tax

deductions), about 20 percent of the reduced property tax payments will be offset by htgher federal tax liabilities. Thus in

fiscal year 1979 federal individual income tax receipts will rise

by about $230 million because of the fall in property tax payments caused by Proposition 13; in 1980 the increase will be $490

million (see Table 5). l_l

Reduced property tax payments will, through the same mechanism, increase taxpayer liabilities on the California income

tax. In turn, this will decrease federal revenues by increasing the amount of state taxes Californians will be able

to take as an itemized deductions on the federal income tax.

This effect is small and has not been included in these

estimates.

11
TABLE 5. TAX SAVINGS FROM PROPOSITION 13 AND THEIR EFFECTS ON

FEDERAL REVENUES: IN MILLIONS OF DOLLARS

California

Fiscal Year

1978-1979

Tax Saving

Direct Effects 6,401 a./

Owner-Occupied Residential 2,341

Rental-Occupied Residential 1,200

Commerical & Industrial 1,916

Agricultural 944

Indirect Effects

Total

/

Federal Revenue Gain

Federal Fiscal Year

1979

1,028

230

200

329

269

- 400

628

1980

1,311

490

175

281

361

- 400

911

aj This entry, plus $643 million in reduced state costs for

property tax relief, represents the $7,044 million reduction

in California property taxes for 1978-1979.

The direct increase in federal revenues attributable to

the property tax cuts on rental, commercial, Industrial, and

agricultural property will depend not only on the timing of

the tax payments and the marginal federal rates faced by the

taxpayers, but also on the degree to which the tax savings

accruing to businesses are shifted—that is, passed on to consumers. Rental property owners and businesses probably will take

their deductions for property taxes more quickly than home

owners; on the average they also face higher marginal federal tax

rates (see Table 6).

12
TABLE 6. ASSUMPTIONS FOR CALCULATING FEDERAL REVENUE GAIN:

IN PERCENTS

Proportion Shifted Fiscal Year Claimed

First Later

Year Years 1979 1980

Owner-Occupied Residential

Rental-Occupied Residential

Commercial & Industrial

Agricultural

0

33

20

0

0

67

45

10

•50

75

75

75

50

25

25

25

Property tax reductions for businesses and landlords,

like any cost reduction, could be kept as added profit or

shifted to consumers in the form of reduced prices. The extent

to which such shifting occurs depends upon market structures and

competitive pressures; little is known about the specific degree

of shifting to expect. The estimates presented in Table 5 assume

that:

o Tenants eventually receive about two-thirds of the

property tax reductions on rental property in the

form of lower rents.

o About 45 percent of the reduction on commercial and

industrial property is passed on to consumers in the form

of lower prices. This shifting occurs primarily among

commercial firms that largely compete in a localized

market area* Substantial shifting should also occur

among regulated public utilities that may be required to

pass on their savings from reduced property taxes.

Industrial fitms will face less competitive pressure to

reduce prices because they often compete with out-ofstate firms not receiving property tax relief.

13
o A very small fraction of the reduced property taxes on

agricultural land will be reflected in lower prices

because agricultural products are usually sold in

national or world markets where production costs have

little impact on prices in the short run (see Table

6).

Based on these assumptions, federal revenues from rental,

commercial, industrial, and agricultural firms should rise

by $798 million in fiscal year 1979 and $817 million in 1980 (see

Table 5). Together with the increases from homeowners, federal

revenues should rise by $1,028 million and $1,311 million,

respectively, in fiscal years 1979 and 1980 because of the direct

effects of Proposition 13. But these gains will be partially

offset by the indirect effects of Proposition 13 on federal

revenues.

INDIRECT EFFECTS

The indirect effects of Proposition 13 on federal revenues

will be felt through two channels of change in the economy.

The first of these is through prices. As was mentioned before,

the California action has a deflationary effect, since property

taxes are a component of the Consumer Price Index (CPI). Even

though property taxes elsewhere will be unaffected, the expected

rise in the cost of living, as measured by the national Consumer

Price Index, will be dampened and with it wage and price increases. As current dollar incomes grow less rapidly, federal

revenues will also grow less rapidly.

The second channel through which Proposition 13 will affect

federal revenues is its overall effect on economic activity.

Lower property taxes increase the after-tax incomes of consumers.

Some of this goes into savings and some into the purchase of

imports; but much will be spent stimulating U.S. business

activity and profits. The resultant growth of incomes will raise

federal tax revenues. Working in the opposite direction, of

course, will be the cutback in state and local spending which

will have a depressing effect on economic activity, incomes, and

federal revenues. The net indirect effect of Proposition

13 on the economy will be a loss of federal revenues of $400

million in both fiscal years 1979 and 1980. When balanced

against the direct gains of $1,028 in fiscal year 1979 and $1,311

in fiscal year 1980, the net federal revenue gain should be about

$600 million in fiscal year 1979 and $900 million in 1980 (see

Table 5).

14
CHAPTER IV. THE IMPACT OF PROPOSITION 13 ON FEDERAL SPENDING

INTRODUCTION

Proposition 13 could affect federal expenditures in numerous ways. Overall, however, it appears that federal expenditures will be little affected by Proposition 13, in part because

of offsetting effects in different programs.

The nature and direction of the changes in federal expenditures will depend on decisions—many of which are yet to be

made—by the state legislature, local government officials, and

voters in California. First, the impact on federal expenditures

will depend on the amount of surpluses spent and revenues raised

to replace lost property tax receipts. Second, for the state and

local budget reductions that are required, the impact on federal

expenditures will depend on how they are accomplished. For

example, freezing the wages of public employees would have less

of an impact on federal expenditures than would laying off

employees and having them receive unemployment compensation;

cutting back library services, which receive little federal aid,

would have less of an impact on the federal budget than would

reducing welfare grants, which are heavily aided.

There are three major mechanisms through which federal

expenditures could change as a result of Proposition 13:

o State and local expenditure cutbacks could violate

the maintenance of effort or nondisplacement requirements

of federal grant-in-aid programs. Since a major objective of many federal grant programs is to stimulate

additional state and local activity in support of national priorities, maintenance of effort provisions

appear in many of the statutes and regulations governing

these programs. Some of these provisions are written

in general terms and require that federal funds be

used to supplement and not supplant state and local

funds. Other maintenance of effort provisions are more

specific—requiring the recipient to maintain the same

level of effort (for example, spend as many dollars) on a

supported activity as it did in a prior period. Budget

15
reductions In California could cause a loss of all or part

of the grants from programs governed by the latter type

of maintenance of effort provision. Roughly half of the

largest grant programs have maintenance of effort requirements (see Appendix Table).

Expenditure cutbacks could .jeopardize the funds necessary

to meet the matching requirements of federal grant

programs. Nearly two-thirds of federal grant programs

accounting for nearly four-fifths of federal aid dollars

include some nonfederal matching requirements. !_/

If federal grant programs support services on which the

recipients place a relatively low priority or if other

items in local budgets are mandated by state law, California governments might choose to withdraw their matching amount even though, with the loss of federal money,

the cutback in services would far exceed their own

budgetary savings. Such actions are more likely to occur

if the program requires a relatively large match, if the

match comes from local governments rather than the

state, and if property taxes are used to support the

local contribution.

If California fails to meet either maintenance of effort

or matching requirements and thus loses some amount of

its federal grant money, there may or may not be a

corresponding reduction in total federal expenditures.

In most grant programs, funds unused by California

would be redistributed to other eligible recipients.

Reallocations may be delayed to give California an

opportunity to make use of its funding; this could

result in lower than expected federal spending in the

next few years and increased levels of spending later

on. It is possible, however, that budget authority may

lapse before reallocations are made. In certain costsharing entitlement programs, such as Aid to Families

with Dependent Children (AFDC) and medicaid, a reduction

in California's grant would necessarily imply a reduction

in overall spending.

_!/ Advisory Commission on Intergovernmental Relations, Categorical Grants; Their Role and Design an Assessment and

Proposed Policies, Report A-52, Washington, 1978.

16
o The Impact of the expenditure cutbacks on individuals

and on the economy will affect federal expenditures.

Public and private sector employees who are laid off

because of Proposition 13 could receive unemployment

compensation, food stamps or other transfer program

benefits. The elimination of the cost-of-living increase

in the AFDC programs will entitle AFDC recipients to

larger food stamp benefits. If tuition is imposed on

community college students to replace lost property tax

revenue support, spending in the Basic Education Opportunity Grant program could rise.

The small decrease in the Consumer Price Index arising

from the reduction in property taxes will reduce benefit

increases in the social security, civil service retirement, and other programs that are tied to the CPI.

The following sections point out the manner in which

federal spending in some major federal programs might be affected

by Proposition 13 through one or more of the mechanisms just

described.

POSSIBLE EFFECTS ON MAJOR FEDERAL PROGRAMS

Mass Transit Assistance

Of all the transportation modes, mass transit is most

likely to be affected by the passage of Proposition 13. Several

major California transit operators run the risk of violating

the maintenance of effort requirement incorporated in the Section

5 formula grant program of the Urban Mass Transportation Act

(UMTA). In order to qualify for Section 5 funds, transit operating assistance from state and local governments must be greater ,

than the average of the two previous years. If state and local

financial resources are reduced and increases in fares are

substituted for state and local operating subsidies, federal

grant payments of up to $50 million, out of a total allocation to

the state of $120 million, could be jeopardized.

Only those operators that rely heavily on the property tax

are likely to face difficulties in qualifying for continued

federal operating assistance. Even they may avoid noncompliance

because UMTA allows the maintenance of effort calculation to be

made either on an operator-by-operator basis or on the basis of

17
a combined financial statement for all transit operators in an

urbanized area. On a pooled basis, operators in Los Angeles and

San Francisco, which otherwise might have difficulty, could

probably meet the maintenance of effort requirement since both

areas have at least one major operator (RTD and BART, respectively) that is largely independent of property taxes. Other

systems dependent on property taxes, for which pooling is not an

option, receive roughly $10 million in formula grants. Loss of

this amount could also be avoided if the state decides to allow a

portion of the proceeds of a one-quarter percent sales tax,

currently earmarked for capital improvements, to be used for

operations instead.

Participation in the DMTA capital grant program could also

be affected by Proposition 13 if local governments divert funds

to operations and, therefore, find it difficult to fund the 20

percent match that is required. Overall, federal spending

on mass transit capital grant programs would not be affected,

because monies not used by California will be allocated to other

states.

Highway Aid

The federal-aid highway program provides funds covering

between 70 and 90 percent of the costs of construction, reconstruction, and rehabilitation of highways on the federal-aid

highway system. Federal obligations for highway projects in

California will be roughly $500 million in fiscal year 1978.

Projects on state-administered highways (constituting

42 percent of mileage on the federal-aid system in California)

are unlikely to be affected by Proposition 13 since the state

matching contribution derives largely from earmarked state

highway user taxes. Federal funding for locally administered

highways could be affected since about half of local matching

dollars come from property taxes or general fund appropriations. About $200 million in federal funds would appear to be at

stake. However, even with local financial difficulties, federalaid highway funds are unlikely to go unused in California

since the State Department of Transportation has indicated that

it will provide extra funds to localities if needed for major

highway projects and will itself make use of any federal contract authority freed up by Proposition 13.

18
Airport Aid

Under the Airport Development Aid Program (ADAP) the

federal government provides between 50 and 90 percent of the

cost of capital improvements. In fiscal year 1977 $29.8 million

was obligated for projects in California. Roughly 80 percent of

this amount went to air carrier and commuter airports. Since

these airports tend to rely on revenue bonds rather than local

taxes to raise matching funds, their participation in the ADAP

program is unlikely to be affected by the passage of Proposition

13. General aviation airports, however, could have difficulty

securing federal funds since they do rely on local taxes to raise

the nonfederal share of project costs. Thus Proposition 13 could

result in a reduction of a few million dollars per year in ADAP

funds going to California.

Education

As a result of the passage of Proposition 13, local education agencies may be forced to make budget cuts that place

them in violation of the maintenance of effort requirements that

are included in most education laws. Generally, in order to

qualify for aid, a local education agency must have spent as much

on the aided activity in the preceding year as it did in the

year before that. Noncompliance with the maintenance of effort

requirements generally disqualifies the recipient for the full

amount of the grant in question. However, three programs,

Elementary and Secondary Education Act (ESEA) Title I, ESEA Title

IV, and Adult Education, allow a 5 percent reduction in expenditures without violation of maintenance of effort and provide for

a waiver of the requirement under certain circumstances. Under

"exceptional" circumstances, an applicant's grant is reduced by

the percentage by which it is out of compliance. Under "very

exceptional" circumstances, no penalty is assessed. These waivers

can be used only once and spending levels during the waiver year

cannot be used in the computation of a new base to determine

maintenance of effort in future years. Reauthorization legislation pending in both the House and the Senate would remove the

"very exceptional" option. Thus spending cuts in fiscal year

19
1979, the first after Proposition 13, could affect grants totaling as much as $385 million in fiscal year 1980. _2/

While several of the programs providing aid to postsecondary

educational institutions also have maintenance of effort requirements, compliance by California is less in doubt since recipient

institutions tend not to be dependent on property tax revenues.

Only community colleges in California rely very heavily on

the property tax for support. If tuitions are imposed to offset

part or all of the revenue loss, federal expenditures in the

Basic Education Opportunity Grant (BEOG) program could rise.

Employment and Training Programs

If in response to Proposition 13 local governments lay

off regular employees or impose a hiring freeze, Comprehensive

Employment and Training Act (CETA) program regulations require

that CETA public service employees engaged in substantially

similar work must either be laid off or transferred to other

unaffected departments or nonprofit organizations. There is

nothing in the law that precludes laid-off regular employees from

obtaining unaffected CETA Title VI positions if they meet the

eligibility criteria. On the other hand, deliberate attempts by

prime sponsors to transfer large numbers of regular employees to

CETA jobs through layoffs would probably be a violation of law.

Whether or not there are acceptable ways of accomplishing the

same thing is uncertain. Several years ago New York and Detroit

were able to rehire laid-off regular employees under a somewhat

weaker set of maintenance of effort regulations.

Because California officials will attempt to minimize the

loss of funds and because the law reauthorizing the CETA program

for 1979 has not yet been passed, it is difficult to estimate

2J Since many of the education programs are forward funded,

this amount represents California's share of funds expected

to be appropriated in 1979 and spent in 1980 in the following programs: compensatory education (ESEA Title I);

vocational education; adult education; grant for libraries,

learning resources, education innovation, and support (ESEA

Title IV); Indian education; education of the handicapped;

and emergency school aid (desegregation assistance).

20
how much of this or the next year's allocation will be lost

if maintenance of effort provisions are violated. The Department

of Labor estimates that California will be allocated roughly

$500 million in fiscal year 1978 under Titles II and VI to

support 55,000 public service employment jobs in state and local

government agencies*

Work experience and public service employment funded under

other titles of the Comprehensive Employment and Training Act

could also be affected by the passage of Proposition 13. Funding

for these programs could be lost either because agency layoffs

result in violation of maintenance of effort requirements or

because supervisory personnel, equipment, and other overhead

(such as classrooms and transportation) usually provided by state

and local government agencies might no longer be available* The

Summer Youth and Youth Employment and Demonstration Projects

Act programs, accounting for grants of $80 million and $67

million, respectively, in fiscal year 1978, are most likely to be

affected.

Unemployment Insurance

As part of the transition provisions of the Unemployment

Compensation Amendments of 1976 (Public Law 94-566), which

mandated the extention of unemployment insurance to state and

local government employees, the federal government will pay part

of any benefits based on employment prior to the full implementation of the law. In California the transition provisions apply

through April 1979. Thus the federal government can be expected

to share the cost of benefits paid to public employees laid off

as a result of the passage of Proposition 13. For public

employees laid off before the end of July, the federal government

will pay all of the benefits, thus creating a significant incentive to cut the payroll quickly. In each succeeding three-month

period, the federal share is reduced by 25 percent so that

benefits accruing to any public employee laid off after April

1979 would be paid entirely from the state trust fund and the

financial burden would fall on the former employing jurisdiction.

Based on the past experience of covered unemployed workers

in California, an average laid-off public employee might be

expected to receive unemployment benefits totaling $1,445 over a

17-week period* The federal budget impact would depend on the

21
timing of layoffs but could total as much as $14.5 million for

every 10,000 public employees laid off before August 1978.

The depressing effect that the expenditure cuts will have

on the economy in the short run could lead to a small decline

in the number of jobs in the private sector. This could lead to

an increase in regular unemployment insurance benefits of $4 to

$6 million.

Social Services

The Title XX Social Services program of the Social Security

Act requires a 25 percent state-local match in order to qualify

for federal funds. Proposition 13 is not expected to affect

California's participation in this program since current spending

from state-local sources for social services is far in excess of

the amount required to match California's federal grant allocation.

Health

Proposition 13 is expected to have little budgetary effect

in the health area; neither total federal spending nor the

amount going to California is expected to be affected. Few of

the categorial health programs have matching requirements and, of

those that do, the burden falls primarily on the state. The

California state government has agreed to pay, at least for one

year, the local share of medicaid costs, which previously was

paid by county governments partially out of property tax revenues .

Welfare

Under the Aid to Families with Dependent Children (AFDC)

program, the federal government pays a portion of the cost of

providing benefits to eligible families. Since the program is

open-ended .and the state determines benefit levels and eligibility standards, the state, to a large extent, determines total

program costs and hence federal expenditures. In a move necessitated by Proposition 13, California reduced costs in its AFDC

program by eliminating a scheduled cost-of-living increase. The

state expects this to result in total budget savings of about

22
$144 million in fiscal year 1978-1979, of which $71 million will

accrue to the federal government. Recently passed state legislation calls for the local share of welfare costs to be paid for by

the state in fiscal year 1978-1979.

Food Stamps

As a result of the decision to withhold cost-of-living

increases in the AFDC program in California, food stamp benefits

might be expected to increase by roughly $25 million. These

benefits are paid fully by the federal government. Expenditures

in the food stamp program could also increase if layoffs of

public employees reduce some family incomes enough to qualify for

food stamps. If California decides to deny the cost-of-living

increase for the state supplement portion of Supplemental Security Income payments, it could endanger the state's cash-out

status in the food stamp program. Should this occur, food stamp

expenditures could increase by $35 to $70 million.

Child Nutrition Programs

Even though the National School Lunch program includes both

a matching and maintenance of effort requirement, California

is unlikely to have difficulty qualifying for continued assistance. State spending, both from general tax sources and

charges to participating students, is so far in excess of the

amounts required by the federal grant program that spending cuts

could take place without jeopardizing federal assistance.

A number of summer schools and public and private nonprofit summer day care camps may not operate this summer as

a result of local government budget cuts. Approximately $18.7

million in federal funds has been allocated to California for

summer food programs. Decisions already taken to abandon programs will result in the return of at least $4 million in federal

funds.

Proposition 13 could cause a decrease in federally funded

school breakfast programs. Most of these programs operate before

normal school hours and thus involve additional expenditures for

janitorial and supervisory personnel. If budget cutbacks force

reduced working hours for these, personnel, schools could terminate their breakfast programs.

23
Housing Programs

Under the Section 8 housing assistance programs, the federal

government makes payments to landlords equal to the difference

between the rental charge—set at or below a government established maximum fair market rent—and 25 percent of tenant income. Reductions in property taxes should slow the rate of rent

increases and may even result in absolute rent reductions. So

long as these changes are reflected in maximum rent schedules,

which are determined administratively by HUD, Proposition 13

might be expected to reduce slightly federal outlays in the

Section 8 programs. This effect, however, could be offset by

state actions denying a cost-of-living increases to AFDC recipients. For the 25 percent of Section 8 tenants that are welfare

recipients, this would mean lower tenant contributions towards

rent than otherwise would have been expected. At least in the

short run, the income and rental effect should cancel each other

out, resulting in little or no change in federal outlays.

Because public housing projects are government-owned, and

hence pay no property taxes, the reduction in property taxes

resulting from Proposition 13 will have no effect on operating

expenses. However, the freeze on welfare benefits under AFDC

will reduce tenant incomes below anticipated levels, thus reducing rent collections and ultimately increasing federal operating

subsidy payments. Because tenant incomes are only recertified

once a year, the effect of the AFDC benefit freeze is likely to

be delayed. Operating subsidy requirements during fiscal year

1979 could increase by $0.4 million and, if the freeze were

extended into 1980, by $1.3 million in that fiscal year.

Social Security and Government Retirement Programs

Proposition 13 will cause a slight reduction in the Consumer Price Index and thus federal budget savings in programs

such as social security and the government retirement programs

in which benefits are indexed to price changes. Because of this,

federal outlays could be reduced by $100 million in fiscal year

1979 and $330 million in fiscal year 1980.

24
General Revenue Sharing

Proposition 13 could result in a reduced share of federal

revenue sharing funds going to California since tax effort is a

key factor in the formula used for distributing funds. Since

there is a lag in data collection, however, no impact would be

expected in either fiscal year 1979 or 1980. If the program is

reauthorized without change and without an increase in the

funding level, then California governments could suffer a reduction of under $100 million in their revenue sharing payments in

fiscal years 1981 or 1982. State and localities elsewhere would

receive correspondingly higher payments.

Wastewater Treatment Facility Construction Grants

Under the Environmental Protection Administration's construction grant program, the federal government provides 75

percent of the cost of approved projects. In California, remaining costs are split equally by the state and the responsible

local government. California's participation in this program

could be reduced if Proposition 13 makes it difficult for California governments to raise their share of project costs.

The state's ability to finance its share is relatively

assured; it recently received voter approval for the issuance of

$300 million in bonds to support the construction of wastewater

treatment plants and the state's access to money markets is not

in doubt. At the local level, however, there is greater concern. Traditionally funds have been raised by issuing general

obligation bonds. With the limitation on local property taxes

imposed by Proposition 13, these bonds are likely to be considered by the market to be a relatively risky investment. At

a minimum, local governments will face higher borrowing charges

and may in some instances have difficulty gaining access to

the market. Local governments might substitute revenue bonds,

but these bonds generally have higher interest costs. Increases

in interest charges would increase total project costs, perhaps

reducing local public support for wastewater treatment facilities, and imperiling lo'cal bond approval.

Under federal legislation, California has a two-year time

period to secure federal obligation of funds allocated for

its use. Funds unobligated after two years can be reallocated

to other states. Assuming a fiscal year 1979 appropriation

25
of $4.2 billion for the construction program, approximately

$340 million would be allocated to California. If California had

a program slowdown of 50 percent, $170 million would be reallocated to other states in fiscal year 1981. Since treatment

plants take a long time to design and build, the spendout of

federal funds is relatively slow; outlays would be reduced by

$5 million in 1979 and $30 million in fiscal year 1980. In

later years, outlays would increase as the states receiving

California's unused funds got their projects underway.

CONCLUSION

Total federal spending should not change much as a result

of Proposition 13. There may be a small reduction largely as a

result of price changes. Maintenance of effort and matching

requirements could endanger California's participation in some

grant programs. Even so, the impact on total federal spending

should be small since funds can generally be reallocated to

other eligible states and localities. California faces the

greatest likelihood of losing federal funds for public service

employment, UMTA operating and capital assistance, and various

education programs, although in the last instance the effect

would not be felt until fiscal year 1980.

26
CHAPTER V. REPERCUSSIONS ELSEWHERE

The conclusion that Proposition 13 will have relatively

minor effects on the economy and on federal revenues and expenditures is predicated on the assumption that the property tax and

expenditure cuts will be limited to California. California's

actions could, however, be the forerunner of similar steps in

other states, thus magnifying the impact on the economy, the

federal budget, and the federal system. California-like initiatives might occur elsewhere because some of the conditions

believed to have contributed to taxpayer dissatisfaction in

California are also present in other states:

o While the burden of state and local revenues and property

taxes in California is high, both in per capita terms and

in relation to personal income, there are several states

with heavier burdens (see Table 7).

o The increase in California's tax burdens, another of the

factors commonly cited as responsible for the voter

appeal of Proposition 13, does not appear to be much

different from the national average. Between fiscal

years 1972 and 1977 per capita revenue burdens in California increased by 64 percent, slightly faster than

the national average. Burdens, measured as a fraction of

personal income, increased by 5.5 percent, or 2.2 percent

faster than the national average. During the same

period, property tax collections, measured as a percent

of personal income decreased both in California (-8.6

percent) and in the nation (-7.3 percent). _!_/ In active

real estate markets in California and elsewhere, however,

assessments and property tax burdens have been rising

faster than the state-wide averages imply and for a

significant number of taxpayers, tax liabilities may have

risen much faster than incomes. In such situations

dissatisfaction with a tax system that does not distinguish real from current dollar increases in income and

wealth is strong.

J7 Firm data for last year are unavailable; however, rough

estimates of the California and national situations suggest

that property tax collections per capita increased slightly

faster in California than than they did in the nation as a

whole.

27
TABLE 7. OWN SOURCE REVENUES AND PROPERTY TAX BURDENS AND PERCENT CHANGE IN BURDENS FOR CALIFORNIA COMPARED TO

SELECTED STATES, a/ FISCAL YEAR 1972 TO FISCAL YEAR 1977

to

o»

Property Tax Collections Own Source Revenue Collections

As a Percent of

Per Capita

Fiscal Year Percent

California

U.S. Average

Alabama

Arkansas

Georgia

Indiana

Louisiana

Massachusetts

Minnesota

New Jersey

New York

Oregon

Wisconsin

1977

Dollars

465

292

60

111

191

242

100

490

272

465

446

362

294

Change

1972-77

42.2

44.1

41.8

48.5

59.9

10.0

30.0

51.4

17.4

50.0

53.7

62.5

13.7

Personal

Fiscal Year

1977

Dollars

6.5

4.6

1.2

2.3

3.5

3.9

1.9

7.4

4.4

6.3

6.3

5.8

4.8

Income

Percent

Change

1972-77

-8.6

-7.3

-15.1

- 8.3

2.8

-29.3

-21.6

4.0

-24.3

-3.0

9.2

0.6

-28.0

Per Capita

Fiscal Year Percent

1977

Dollars

1,360

1,041

743

671

865

863

906

1,166

1,214

1,119

1,493

1,140

1,100

Change

1972-77

64.2

60.5

68.4

60.4

62.9

51.1

57.1

59.9

62.5

68.0

59.3

87.4

52.3

b/

As a Percent of

Personal

Fiscal Year

1977

Dollars

19.0

16.3

14.5

13.6

15.6

13.9

16.9

17.6

19.6

15.2

21.2

18.2

18.0

Income

Percent

Change

1972-77

5.5

3.3

0.8

-1.0

4.6

-2.9

-5.4

9.9

4.7

8.6

13.1

16.1

-3.6

SOURCE: U.S. Bureau of the Census, Governmental Finances, Vol. 1971-72 and unpublished data*

a/ States were selected because they were among the highest or lowest ranked states on the basis of

property tax collections per capita or changes in property tax collections per capita.

b/ Includes all revenue collected by state and local governments from taxes, charges, fees, etc. Excluded

are federal grant payments, utility revenues, liquor store revenues, and insurance-trust revenues.
o The large public sector surpluses accumulated in California may be paralleled by smaller surpluses elsewhere.

Such surpluses could have contributed to the revolt by

angering taxpayers who saw their taxes rise without

commensurate service increases; the surpluses also

allowed voters to support Proposition 13, comfortable in

the knowledge that major service cutbacks could be

avoided by spending accumulated funds. In the National

Income and Product Accounts, the aggregate state and

local sector surplus, exclusive of social insurance

funds, was $13.7 billion in 1977. While these data are

not broken down geographically, information collected by

the National Association of State Budget Officers suggests that few state governments have accumulated surpluses of the magnitude of California (see Table 8).

If, as appears to be the case, the situation in California

is not sharply different from that in other states, similar

budget and tax reductions might be undertaken elsewhere. Tax and

expenditure limitation proposals are already under consideration

in several states, but few are as extreme as Proposition 13.

Most would limit the rate of future expenditure or revenue

growth, but would not reduce revenues or expenditures below

current levels.

It is probable that state and local officials will respond

to the signal sent by California taxpayers, even if not required

to do so by their own voters. In most instances their response

will not involve service cutbacks; rather they are more likely

to provide tax relief by slowing down the rate of increase in

expenditures or by spending down surpluses. If governments

reduce taxes without changing spending plans, the net effect

on the economy would be stimulative. Price reductions would

also result if property or sales taxes were cut. If tax relief

is financed by holding down the growth in expenditures, however,

rather than by using up accumulated surpluses, the stimulative

effect of the tax cuts on the economy will be offset. The

previous analysis of the California situation suggests that

unless the magnitude of the tax cut is significantly larger

than the accompanying reduction in expenditures—in other words,

unless roughly half of the tax reduction is financed through

a spending of accumulated surpluses—tax and spending cuts

would tend to reduce near-term aggregate economic activity and

employment.

29
TABLE 8. STATE GOVERNMENTS WITH OPERATING SURPLUSES IN FISCAL YEAR 1978

IN EXCESS OF 6 PERCENT OF EXPENDITURES a/

State

Alaska

North Dakota

Arkansas

Utah

Texas

California

Nevada

Wisconsin

Kansas

South Dakota

Montana

Oregon

Nebraska

Vermont

Indiana

New Mexico

SOURCE: National

Governors

Projected Surplus

(in millions of dollars)

570.1

157.4

189.3

53.9

622.6

2,157.0

36.9

271.1

117.8

21.3

24.1

107.0

50.8

17.5

110.8

40.9

Association of State Budget

Association, Fiscal Survey of

Projected Surplus (percent of

1978 expenditures)

66.5

57.2

27.9

20.1

20.0

17.6

16.9

13.8

13.8

12.9

11.3

10.5

10.5

9.6

7.3

7.0

Officers and National

the States, Fall 1977,

as updated by the National Conference of State Legislatures.

_§_/ These figures represent Fall 1977 projections of what budget

positions would be several months later. As such, they differ from

actual outcomes. For example, the surplus shown for California is

substantially less than that currently reported by the state.

30
APPENDIX

APPENDIX TABLE. MATCHING AND MAINTENANCE OF EFFORT REQUIREMENTS FOR SELECTED LARGE FEDERAL GRANT PROGRAMS a/

CFDA

Reference

Number b_/

Agency

and

Program

California's

Share of 1977

Program (in

thousands

of dollars)

Requirement for State

and Local Match

Maintenance of Effort

Requirement

Department of Agriculture

10.418

10.500

10.561

10.555

10.557

Water & Waste

Disposal Grants

for Rural

Communities

Cooperative

Extension

Service

Administration

of Food Stamps

National School

Lunch

WIC—Special

Supplemental

Feeding for

Women, Infants

and Children

26,387 None

6,261 55 percent

33,629 50 percent

32,739 75 percent for paid-lunch program

except less in states with per

capita incomes below the national

average. Ten percent of matching

funds must come from state and

local revenues other than those

raised from student charges.

17,340 No; but state and local agencies

bear administrative costs in

excess of 20 percent of the total

grant•

None

None

None

State spending for administration must exceed fiscal year 1977 levels to

qualify for federal funding

of administrative costs.

None

(Continued)
APPENDIX TABLE (Continued)

CFDA

Reference

Number b/

Agency

and

Program

California's

Share of 1977

Program (in

thousands

of dollars)

Requirement for State

and Local Match

Maintenance of Effort

Requirement

Department of Health, Education, and Welfare

UJ

13.224

13.232

13.428

13.449

13.478

Community

Health

Centers

Maternal &

Child Health

Title I

Compensatory

Education

Education for

the Handicapped

School Assistance in

Federally

Affected Areas

(Impact Aid)

20,101

11,493

139,880

Yes; determined on a case-by-case

basis

Part A formula grants have a 50

percent match

None

18,609 None

98,546 None

None

None

Fixed Base; Combined fiscal effort per student or

aggregate expenditures for

preceding year must equal

95 percent of second preceding year. (Waivers

are allowed.)

Fixed Base; Level of expenditures for handicapped

from state and local

sources for application

year must equal preceding

year. (No waiver

allowed.)

None

'(Continued)
APPENDIX TABLE (Continued)

Ul

CFDA

Reference

Number b_/

(HEW, continued)

13.493

13.600

13.624

13.635

13.642

13.714

13.808

Agency

and

Program

Vocational

Education

Heads tart

Rehabilitation

Services and

Facilities —

Basic Support

Nutrition Programs for the

Elderly

Title XX

Social

Services

Medicaid

Aid to

Families

With Dependent Children

California's

Share of 1977

Program (in

thousands Requirement for State

of dollars) and Local Match

38,803 50 percent

32,042 20 percent; can be waived for lowincome communities and those hit

by natural disaster.

55,996 20 percent

17,725 10 percent

262,060 25 percent

1,217,425 Varies by state between 27 and 50

percent

1,005,944 Varies by state between 27 and 50

percent

Maintenance of Effort

Requirement

Fixed Base: Per pupil or

aggregate spending for

preceding year must equal

second preceding year.

General non-supplantation

requirement.

Fixed Base: State spending

must equal fiscal year 1972

level.

Fixed Base: Regulations

require continued support

at prior year levels.

Fixed Base: state and local

spending must equal fiscal

year 1973 or 1974 levels.

None

None

(Continued)
APPENDIX TABLE (Continued)

to

CFDA

Reference

Number b/

Agency

and

Program

California's

Share of 1977

Program (in

thousands

of dollars)

Requirement for State

and Local Match

Maintenance of Effort

Requirement

Department of Housing and Urban Development

14.146

14.218

and

14.219

Low-Income

Housing

Assistance

Community

Development

Block Grants

Department of Justice

16.502 Law Enforcement Assistance Block

Grants

Department of Labor

17.207 Grants for Employment Service

17.226 Work Incentives

Program (WIN)

30,659

308,898

34,951

67,210

36,922

None

None

50 percent for construction;

10 percent all other activity

None

10 percent

None

General non-supplantation

requirement.

General non-supplantation

requirement.

None

Public service employment

funded through WIN cannot

be used to displace regular

employees.

(Continued)
APPENDIX TABLE (Continued)

CFDA

Reference

Number b_/

Agency

and

Program

California's

Share of 1977

Program (in

thousands

of dollars)

Requirement for State

and Local Match

Maintenance of Effort

Requirement

(Labor, continued)

17.232 Comprehensive

Employment and

Training Grants

899,147 None

Department of Transportation

20.102 Airport Development Aid

20.205 Highway Aid

20.500 Urban Mass

and Transportation

20.507 Assistance

30,118

638,888

165,320

Varies between 10 percent and

25 percent depending on project.

Varies between 10 percent and

30 percent depending on project.

20 percent on capital projects;

50 percent if used for operating

expenses.

Community Services Administration

49.002 Community Action 30,945 30 to 40 percent depending on size

of program; can be waived.

Statute includes general

non-supplantation requirement. Regulations prohibit

public service employees

from remaining in jobs that

are substantially similar

to those from which regular

employees are laid off.

None

None

Operating subsidies must

equal the average of the

prior two years to qualify

for formula grant

component.

General non-supplantation

requirement

(Continued)
APPENDIX TABLE (Continued)

o oo

CFDA

Reference

Number b_/

Agency

and

Program

California's

Share of 1977

Program (in

thousands

of dollars)

Requirement for State

and Local Match

Maintenance of Effort

Requirement

Environmental Protection Administration

66.418 Construction of 791,171

Wastewater Treatment Facilities

25 percent

Department of the Treasury

No number

assigned

General Revenue

Sharing

709,018 None

None

If state government reduces

aid to local governments

below average of preceding

two years, part of state

government entitlement is

redistributed to local

governments.

SOURCE: Information on matching requirements from Office of Management and Budget, 1977 Catalogue of Federal

Domestic Assistance; information on obligations in California from Community Services Administration,

Geographic Distribution of Federal Funds in California, Fiscal Year 1977; information on maintenance of

effort requirements from unpublished General Accounting Office materials and other telephone contacts.

a/ Programs were selected if total obligations nationally reported in the Catalogue of Federal Domestic

Assistance were greater than $200 million in fiscal year 1977.

b/ Catalogue of Federal Domestic Assistance.