However, insufficient property tax revenue is not to blame for California’s current fiscal shortfall. Instead, the primary culprit is California’s rapid rate of expenditure growth. Between 1980 and 2000, state and local expenditures in California doubled in real terms. And, since 1995, the state budget has increased by 58 percent. As a result, if California residents are serious about preventing fiscal crises in the future, they should focus their efforts on curbing state spending.
These sharp spending increases are unfortunate because they have eroded the fiscal gains that accompanied the passage of Proposition 13. When Proposition 13 was enacted in June 1978, it enjoyed tremendous short‐term success as a tax cut. It immediately triggered a $6 billion reduction in property taxes and launched a nationwide tax protest. Even President Carter and the Democrat‐controlled Congress were motivated to reduce capital gains taxes in the wake of Proposition 13.
As a long‐term tax limit, however, Proposition 13 has had a legacy that is decidedly mixed. Though it reduced property taxes, Proposition 13 did not place a limit on other forms of taxation. During the past 25 years, the sales tax, the income tax and taxes on beer, wine, gasoline and cigarettes were all raised to keep pace with rising expenditures. In fact, in the 1990s, Gov. Pete Wilson even tried raising taxes on snack foods. This cycle of spending and taxing is the root cause of California’s current fiscal problems.
Indeed, California’s experience over the past 25 years demonstrates that low taxes can only be preserved when spending is restrained. In fact, since the tax revolt many fiscal conservatives have attempted to enforce fiscal discipline by enacting Tax and Expenditure Limitations, or TELs, which establish limits on expenditure growth. Most studies find TELs to be ineffective. However, in the early 1990s two states, Colorado and Washington, enacted TELs that set especially low limits for expenditure growth. The experiences of those two states are instructive.
First, in both cases, state spending was restrained. Between 1993 and 2000, Colorado and Washington ranked 42nd and 48th respectively in per capita state and local expenditure growth, according to the U.S. Census Bureau. Second, residents in both states enjoyed a considerable amount of tax relief. Colorado’s TEL was unique because it mandated immediate refunds of surplus revenues. As a result, between 1997 and 2002, Colorado residents received tax rebates every year, totaling over $3.2 billion.
In Washington, the situation was similar. Since spending was kept in check, surpluses began to materialize. These surpluses were used to first lower and then abolish the car tax, saving residents more than $1.3 billion. Not surprisingly, Colorado and Washington ranked first and second in terms of aggregate tax reductions during the late 1990s.
It should be noted that there was a serious effort to place a cap on state spending in California. In 1979, California residents enacted Proposition 4, known as the Gann Amendment, which limited appropriations increases. During the 1980s, Proposition 4 enjoyed some success at limiting spending. In fact, when revenues exceeded the Gann limit in 1987, California taxpayers received tax rebates from the state government.
However, the Gann Amendment was effectively undermined in 1990 when California voters passed Proposition 111. Proposition 111 increased the Gann limit to pay for increases in education funding. As a result, the Gann limit ceased to be a meaningful constraint on the size of state government. Had expenditures grown at the rate of the Gann Amendment since 1990, spending would currently be $30 billion less. Those savings would go a long way in resolving California’s current fiscal shortfall.
During the past 25 years Proposition 13 has had a substantial impact on California’s fiscal policy. In its aftermath, state and local governments increasingly began to rely on revenue sources that are less stable and fluctuate with the condition of the economy. This partly explains why California routinely faces severe fiscal shortfalls during economic slowdowns.
However, increasing property taxes is not going to resolve the current or future fiscal crises. Indeed, those seeking to prevent budgetary shortfalls in the future should enact constitutional expenditure limits. Recent history from California and elsewhere indicates that this might be the best strategy for limiting the size of government during the next 25 years.