What is the Most Significant Fiscal Reform You Would Recommend for California?

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Introduction

One of the most challenging governance issue facing California is the rapid changes in the general fund tax revenue. In the United States, this is the only state that experiences such volatility because all sectors are subjected to fiscal hardships. Although the volatility related to fiscal hardship is predictable, the consequences that come along can be avoided. It has taken a long time to fix the problem that threatens to cripple California’s economy. The economists and lawmakers must collaborate to ensure that revenues are well managed and thus stable funding for important public sectors such as community health, essential public services, public safety and social services. One of the proposed solutions to this fiscal volatility is the Proposition 13 of 1978. This was officially called the People’s Initiative to Limit Property Taxation and came as a result of constitutional amendment. This essay will discuss the most significant fiscal reform for California which is the Proposition 13, its implementation, effect on California’s fiscal structure as well as the advantages and disadvantages associated with it.

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Proposition 13 and Its Implementation

Proposition 13 is one of the most significant reforms to have ever happened in California’s fiscal system. More than 65 percent of the voters in California approved its implementation which had resulted from a tax revolt. The tax revolt started in the early 1970s where property taxes in California rose at alarming rates. This was majorly caused by the rising house prices as well as the reluctance of the local government officials to reduce property tax rates. The tax base in California was growing at an alarming rate and hence charging high taxes on property compel the low income earners in the state to sell their homes. In addition, the spending in some of the major facilities such as school and public hospital had changed dramatically and hence an immediate action was required. Therefore, Proposition 13 was considered to be both a property tax reform as well as a constraint upon the size of the California government. During its inception, it was written in a poor formation although the basic rules were forthright and any individual would clearly understand them. One of the basic rules stated that property could only be revalued in case its ownership changes. This meant that an individual owning a house in California would have to change the ownership of a house through a formal procedure for it to be revalued.

Another rule stated that the maximum property tax rate that could be charged was to remain 1% of the total value of a property. This would restrict local officials from charging irregular taxes leading to discrimination and oppression of those whose property was valued less. The 1975-76 property value level was set as the base value for all properties. However, due to inflation, this was altered and agreed that it would change depending on the prevailing rate of inflation although it could not exceed 2%. Another rule stated that no fresh ad Valorem taxes could be imposed among the property owners in California. In the case of special taxes, they could only be imposed if 2/3 of the voters supported it. The last rule indicated that the law had to be followed to the maximum when it came to the distribution of property taxes collected. Before the adoption of Prop 13, such laws did not exist and hence it was prudent to establish or create them. In addition, local officials established their unique property tax rates which allowed them to collect the proceeds for the taxes paid by property owners. The California government was later given the mandate to allocate tax proceeds obtained from local property.

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In order to take effect immediately, Proposition 13 had to be implemented before the start of a new fiscal year to ensure that people paid lower taxes. The most important part was SB 154 which controlled the tax rates on important sectors such school districts, public health and other local governments. In this case, the legislature augmented the role of the state whereby it could finance local services by providing block grants. The block grants were meant to cover up the lost revenues by the local government which was subjected to a predetermined tax rate on property. In addition, the local government bought different programs controlled by the state thereby reducing the costs incurred. SB 154 was also supposed to establish a specific formula that would control the distribution of surplus property taxes to the various local governments. Before the introduction of Prop 13, every individual who paid property taxes was charged a different rate. This meant that the higher the value of property owned, the higher would be the tax rate to be paid to the local government. Proposition 13 brought a dilemma in the allocation of resources and this led to the adoption of AB 8 to act as a long term solution to this problem. The AB 8 Bill covered complex issues such as deflator components, single year modifications and retirement contributions.

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  1. Positive Effects of Proposition 13 Implementation on California’s Fiscal State
  2. The implementation of Prop 13 had numerous positive results on the fiscal system of California.
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