How did California get in such trouble?
EDITOR’S NOTE – States from coast to coast are dealing with the worst budget crisis in decades. This is the latest installment in “Tough Times-Tough Choices,” a series by The Associated Press examining the consequences of the decisions being made by state leaders.SACRAMENTO, Calif. (AP) – When a new job delivered Eunice McTyre and her husband from cold, gray Michigan to the sunny suburbs of Los Angeles, they built a custom house to stand for the ages. It was 1970. Their property taxes were less than $1,000 a year. Today, McTyre’s house is worth more than a half-million dollars, and her property taxes are just $1,050. By comparison, in New York, a similar-price house would carry taxes of around $7,000.
The reason McTyre pays less: Proposition 13, the 1978 tax-revolt measure. But now all of California is paying the price.
While New York and many other states are struggling with serious financial problems, California’s difficulties can be blamed in part on something unique.
Voter-approved Proposition 13 gave millions of Californians property tax relief but also forced a shift toward greater reliance on personal income taxes – a strategy that proved disastrous when the stock market went into a slide in 2000. Now California is trying to close a $38.2 billion budget deficit, the biggest in the nation.
“I guess we got too caught up in our own invulnerability,” says state Sen. John Vasconcellos, a Democrat who represents Silicon Valley. “Someone wrote a book saying the Dow would go to 35,000 two years ago and everyone thought it was going to go on. And we got caught in that. The dot-com thing got overextended and it crashed.”
In Eunice McTyre’s case, her Chatsworth house had skyrocketed in value amid a blast of 1970s inflation. By 1978, her property taxes had tripled to $3,000 a year and rumors abounded they would double again. “I remember, oh God, thinking we’re going to be paying $6,000,” McTyre says.
That June, McTyre and 4.2 million Californians struck back. They voted for Prop. 13, which froze property taxes at 1 percent of 1976 values and limited increases to 2 percent a year. It also required two-thirds majority votes for most new local taxes and bonds meant for specific purposes. It also said the state Legislature needs a two-thirds majority to raise statewide taxes.
Peter Schrag, a Californian and author of the 1999 book “Paradise Lost, California’s Experience, America’s Future,” calls Prop. 13 a “self-inflicted blow” that twisted up the state’s financial system and set the stage for today’s budget deficit.
Prop. 13, while popular, started a chain reaction in which the state first funneled money to local governments to ease the loss of property taxes, then began grabbing their property taxes for itself.
In addition, Prop. 13 led California to rely more on personal income taxes for its revenue. Income taxes increased from 18 percent of the state’s general fund in 1962 to 48 percent by 2002.
That was just fine during the 1990s boom on Wall Street and in Silicon Valley, as the Dow soared and countless millionaires were created through dot-com startups, stock options and bonuses.
In 2000 alone, California’s wealthiest residents pulled in $200 billion in stock options and capital gains – an eight-fold rise from 1994. In that best of years, the state captured $45 billion in income taxes. Eighty percent came from the 11 percent of California taxpayers earning more than $100,000 a year.
“We have an income tax known in parlance as hyper progressive,” says Bill Leonard, a 24-year Republican legislator now sitting on an elected board that oversees the state tax system. “The wealthy pay an unbelievably large share of the income taxes.”
California’s revenue from personal income taxes climbed from $28 billion in 1997 to $45 billion in 2000. But then it plunged to $34 billion in 2001 and has since hovered at about $33 billion a year.
The problems on Wall Street and in Silicon Valley were bad enough, but lawmakers in Sacramento – like their counterparts in statehouses across the country – had spent the 1990s slashing taxes and boosting spending as voters cheered them on.
“This was a time bomb waiting to explode,” says New York Comptroller Alan Hevesi.
California cut taxes $23 billion in the 1990s. Democratic Gov. Gray Davis initially warned liberal majorities in California’s Assembly and Senate that the surplus should go to one-time infrastructure projects. But within a year he turned less cautious, pumping more money into education, prisons and aid for the poor.
The widening budget gap sent Sacramento’s lawmakers into a panic, three consecutive years of late budgets, a spree of midyear budget cutting and endless partisan finger-pointing. This week, California lawmakers finally voted to cut billions in spending and borrow billions more to narrow the deficit without raising taxes.
New York, until it slashed spending and raised taxes earlier this year, had the nation’s second-worst deficit, $11.5 billion, for many of the same reasons, including the downturn on Wall Street and heavy reliance on income taxes. Income taxes in New York increased from 42 percent of the state’s general fund in 1962 to about 60 percent by 2002.
But Californians can look back to the decision they made 25 years ago and count on one thing: stable property taxes.
McTyre, 78, is proud of Prop. 13 for stifling government’s “greed” for her money. And she McTyre rejects any suggestion that Proposition 13 contributed to California’s financial problems. She blames the same people who she says created the need for Prop. 13 in the first place: politicians.
“They’re just looking for more money,” McTyre says. “They have screwed this thing up.”
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Associated Press writer Joel Stashenko contributed to this story.
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On the Net:
Read more about the California budget at the state Department of Finance at http://www.dof.ca.gov and the California Legislative Analyst at http://www.lao.ca.gov.
Read more about the New York State budget http://www.state.ny.us/