Proposition 13 and State Budget Limitations: Past Successes and Future Options

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June 2003 marks the 25th anniversary of thepassage of Proposition 13, a landmark tax limitationmeasure approved by California voters in1978. Proposition 13 triggered one of thenation's largest state and local tax reductions byimmediately cutting California property taxesby $5 billion. But Proposition 13's impact wentfar beyond tax relief in California. It launched awave of tax limitation efforts in other states andcreated momentum for the large federal tax cutspassed in 1981.

Although Proposition 13 limited propertytaxes, it failed to impose long-term discipline onstate and local budgets in California. Indeed,total state and local revenues (including federalaid) in California have risen from 19.4 percent ofpersonal income the year after Proposition 13passed to 24.6 percent today. Rapidly expandingspending since the mid-1990s has put the stateinto a fiscal crisis with record budget gaps currentlybeing reported.

Proposition 13's focus on property taxes wastoo narrow to limit overall state and local governmentbudgets in California. However, a number ofstates in the past decade have enacted broader taxand expenditure limitations (TELs) that attemptto control overall government growth. This paperdiscusses how well-designed TELs can restrainspending and provide tax relief. TELs combinedwith other mechanisms to terminate unneededgovernment programs should be pursued in allstate and local jurisdictions to close current budgetgaps and counteract the tendency of governmentsto collect ever-larger shares of Americans' income.

Michael J. New

Michael J. New is a postdoctoral fellow at the Harvard-MIT Data Center and an adjunct scholar at the Cato Institute.