Sharing the Pain: A League Symposium on State Finances

Speakers at a January forum agreed that state and local finance problems will require a bigger fix than the bond measures approved on the March 2 ballot can provide. The League of Women Voters of the Bay Area symposium focused on the ripples created by the state budget deficits, and panelists criticized the system from top to bottom. Keynote speaker Fred Keeley, a former Assemblymember and current Executive Director of the California Planning and Conservation League, set the tone by remarking that "the deficit is not something we can grow our way out of with improvements in the economy -- we need structural change."

Members of the first panel included John Russo, Oakland City Attorney, Keith Carson, Alameda Board of Supervisors, Loni Hancock, California State Assembly, and Betty Yee, Deputy to Board of Equalization member Carole Migden. While each represented a different type of government agency, they found common ground when describing the impacts of a state budget system which has been reactive rather than planned.

They were followed by a panel focused on the broader statewide picture, led by Peter Schrag, columnist for the Sacramento Bee, which included Anne Henderson, past Legislative Chair for the League of Women Voters of California, Fred Silva, Public Policy Institute and Lenny Goldberg, California Tax Reform Association. Throughout both panels, certain themes reappeared.

• The state has been balancing the budget at least partially with an ongoing "tax grab". As state budgets have become tighter, property taxes that used to fund local services have been allocated to other uses by the state. Local governments are seeing painful cuts, and hearing about them from constituents who don't understand that the real decisions are being made in distant Sacramento.
• "Ballot box budgeting" limits available funds. Initiatives which earmark revenues for certain uses, coupled with constitutional mandates, leave legislators fighting over approximately 2% of the budget.
• A majority vote can authorize a tax cut, but the 2/3 vote requirement for passing a state budget or raising taxes makes it easier to cut programs than increase revenues.
• Tax credits, also called tax expenditures, can be passed with a majority vote and are seldom re-examined, although they represent millions of dollars of potential revenue each year.
• California is well behind other states in taxing business services. Yee pointed out that labor charges for auto repairs are taxed by over half the states, but not in California.
• Property taxes on commercial and industrial property rise very slowly because of Proposition 13 limits, since this type of property changes hands less frequently than residential property and some transfers are invisible to the tax system.
• Spending isn't matching growth rates, putting the state behind the curve. Cutting programs when population is growing doubles the impact.
• The state is being affected by federal tax policies but not benefiting from them. Yee reported that California has 1/5 of US billionaires, with a net worth of almost $103 billion, and more millionaires than any other state, whose federal tax cuts will not help the state. According to Schrag, phasing out the federal estate tax is costing California $1.3 billion a year.

In the long run, the state will have to "raise taxes, make service cuts, borrow dollars," as Carson put it. Panelists generally agreed on some strategies.

• Increase the upper bracket income tax. This is a strategy that was used by Governor Pete Wilson with some success. The problem, said Hancock, is that close to $17 billion was cut in the boom years of the 1990s. "We don't even need new revenues," she said, "we need our old taxes back again."
• Review tax credits. Yee suggested creating a Tax Expenditure annual report, to allow tax credits to be scrutinized each year.
• Broaden sales tax to apply to selected business services.
• Restructure the general fund sources to make allocation of revenues from personal and property tax more logical and create a guaranteed revenue source for local government. Consider reinstating the "separation of sources" dedicating local property taxes to local uses, and/or replacing lost vehicle license fee revenue.
• Split the tax rolls to create different property tax rules for commercial/industrial property and residential property. Consider the cost of holding underutilized land off the market. Use incremental land values to fund infrastructure.
• Re-examine budget mandates created by statute and initiative.
• Talk about trade-offs and priorities in the budget.
• Eliminate 2/3 votes for budget and taxes, return to "majority rule" like most other states. Obviously, given the defeat of Proposition 56, this will not happen immediately.
• When raising taxes, show a good reason why the money is needed. What will it cost to have a good university system where every qualified student can attend?

Panel members pointed to Proposition 13 as the source of some of the structural problems, including the 2/3 vote, the inequalities in taxing commercial and industrial property like residential property, and the ability of the state to allocate property tax that used to go to local government. It seems possible that the state's dire financial situation may mean that Proposition 13 is no longer untouchable. Several speakers also alluded to new ballot measures circulating or already scheduled for the November election, including one sponsored by the League of California Cities. While the immediate questions about the March ballot have now been answered, the more distant future for state finances remains murky despite the best efforts of the collected experts present at the January forum.

This article was adapted from a longer report on the State of the Region symposium, which is available on the LWVBA Website at http://www.lwvba-ca.org.