Computing the Extent of Circumvention of Proposition 13: A Note

POORNA C. PAL [*] ABSTRACT. We analyze the own-source revenues of California state and local governments relative to the State's personal income in order to examine the extent to which the growth in non-tax revenues has circumvented the reduction in taxes produced by Proposition 13. Our results show that, while non-tax revenues have been the favored means to circumvent California's fiscal constitution, the circumvention has been only marginal. I Introduction THE GROWING POPULARITY OF BALLOT INITIATIVES, with some two hundred proposed in each two-year election cycle now, suggests that Americans increasingly believe in this form of direct democracy. Galles and Sexton (1998) seek to debunk this notion, however. Using impressively long and robust revenue and expenditure data for California and Massachusetts, they argue that the effect of lower taxes produced by Proposition 13 (1978) and Proposition 2 1/2 (1980) in these states, respectively, was temporary and was soon eroded by the increases in revenues from other local sources. But the data in their Table 1 yields comparable annual growth-rates [1] for property and non-property tax revenues of California state and local governments, and an appreciably slower growth of the latter, since the passage of Proposition 13. This is inconsistent with their conclusion and calls for a more rigorous examination of these data. We conduct such an examination here, using this empirical evidence, and show that the circumvention of the tax-limiting regime created by Proposition 13 and its sequels--Proposition 4 (1979), Proposition 62 (1986) and Proposition 218 (1996)--in California, is very incomplete. II The Trend in Constant Dollars OUR DATABASE is the same as that of Galles and Sexton, viz., Census Bureau's (U.S. Department of Commerce) annual reports on government (state and local) finances, and extends the time series from fiscal 1963-64 through fiscal 1994-95. Figure 1 summarizes these data in per capita figures in constant (1992) dollars, much like Galles and Sexton, so as to adjust for changes in population and inflation. In addition to property tax revenues, and excluding interest earnings, these own-source revenues of state and local governments in California comprise two subsets: * other taxes and fees--taxes on individual and corporate incomes, general sales, excise, vehicle and boat licensing, etc.; and * non-tax revenues--current charges on hospitals, highways, airports, water transport, housing and community development, natural resources and waste management, parks and recreation, and miscellaneous revenues from special assessments and property sales. The results in Figure 1 corroborate those obtained by Galles and Sexton and show that, during 1978-95, non-tax revenues grew more rapidly than the other revenue subsets. But they also yield annual growth rates of 2.52% for property tax revenues and 2.13% for non-property tax revenues (= other taxes and fees + non-tax revenues) during 1978-95, compared to the corresponding rates of 1.91% and 4.13%, respectively, during 1963-78-as if Proposition 13 accelerated the growth of property tax revenues while reducing that of non-property tax revenues! It is also curious that property tax revenues grew faster [2] than the Gann limit of 2% per year. III The Trend Relative to Personal Income THE PROBLEM LIES in not adjusting for changes in California's aggregate personal income. Recall, for instance, the arguments of Kadlec and Laffer (1979), who saw in Proposition 13 a "public policy application of the Laffer Curve." Figure 2 summarizes the growth in our three subsets of the own-source revenues of state and local governments in California relative to the State's aggregate personal income. For the 1978-95 period, property tax revenues now show an annually compounded growth rate of 1.2%, and 0.80% for non-property tax revenues. …