State and Local Fiscal Policy

State and Local Fiscal Policy

Thinking Outside the Box?

Studies in Fiscal Federalism and State–local Finance series

Edited by Sally Wallace

In this broad and illuminating work, experts on public finance discuss innovations in state and local tax policy that have been implemented or considered over the course of the last three decades. The authors provide original work that analyzes whether state and local governments have ‘gone outside the box’ to deal with the strains of current public finances or have gotten along by adhering to the status quo. This book provides researchers, students and policy makers with evaluations and analyses by well-known scholars in the area of state and local public finance of actual practices and analysis of potential policy changes for the future.

Chapter 5: California’s State and Local Revenue Structure After Proposition 13: Is Denial the Appropriate Way to Cope?

Robert W Wassmer

Subjects: economics and finance, public finance, public sector economics, politics and public policy, public policy


Robert W. Wassmer INTRODUCTION California’s path on a state and local government revenue structure that is different from that observed in most of the United States began with its citizens’ 1978 approval of the Proposition 13 ballot initiative in 1978. This initiative placed in California’s Constitution the requirement that the ad valorem rate of property taxation anywhere in the state should not exceed 1 percent of a property’s acquisition value. Acquisition value is set at the time of an arm’s-length sale and increases annually from the time of sale at a rate that cannot exceed the higher of 2 percent or inflation. The result of Proposition 13’s nearly 60 percent cut in California’s local property taxes is illustrated in Figure 5.1. In 1977–78, the last fiscal year before the imposition of Proposition 13, nearly 28 percent of state and local general revenue generated in the state came from property taxation. California’s property tax reliance was 26 percent greater than the reliance exhibited in all states in 1977–78.1 By 2005–06, the most recent fiscal year for which data are available, California’s reliance on property taxation as a source of state and local general revenue had fallen to less than 13 percent. This was 24 percent below the property tax reliance occurring throughout the rest of the United States in 2005–06. The purpose of this chapter is to describe how California has coped with its choice to reduce its reliance on property taxation. As the title implies, much...

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