California v. Taxes: Proposition 13's Legacy
Ronald Reagan's hologram may not have shown up to the Republican convention last night to extoll the virtues of draconian government cuts, but the anti-tax movement that launched his political career continues to strangle California's government. That's because the movement has continued to define the state's finances with a decades-old proposition leading to yearly budget crises.
But despite government cutbacks driven by this dysfunction, California has pulled off a miracle. In contrast to every other year of the recovery, this year the state beat Texas to create the most jobs in the country, adding 365,000 new jobs to Texas’ 222,000, the most jobs that California's added since the dotcom bubble of the 2000s.
That's in spite of major challenges and caveats. California’s job growth has often been compared unfavorably with Texas’, but there are two sides to every coin. Both are enormous and important economies: on its own California would be the 9th largest economy in the world, Texas the 15th. Though Texas led the country in job growth and has an unemployment rate below the national average, California has lagged behind. The flip-side Texas has been in the business of creating low-wage, benefit-poor jobs, while California struggled to provide sufficient jobs that provided decent benefits and a higher minimum wage. Ten percent of Texans earn a minimum wage, above the country’s average and a fourth lack health insurance. Texas’ economic miracle may not be so miraculous after all.
Conservatives like to criticize California as a fiscal basket-case, a homegrown socialist nightmare. "Entrepreneurs and businesspeople around the world and here at home think that at some point America is going to become like Greece or like Spain or Italy," Mitt Romney quipped on the campaign trail. "Or like California - just kidding about that one, in some ways."
California’s chronic deficits aren’t the fault of out of control spending, as conservatives would have you believe. Quite the contrary, it’s inefficient and poorly planned taxation that produces frequent fiscal crises. Immediately prior to Reagan’s ascendance to the Presidency in 1980, the conservative antitax movement coalesced around the hugely popular Proposition 13. The proposition mandated that property taxes never rise above 1%. It also ensured that the state would be unable to raise taxes without the approval of a supermajority, two-thirds, of the legislature.
The result? Gridlock and frustrating governance.
California, which had built a university system and public infrastructure that was the envy of the world, has been hobbled ever since. The Economist on the implications:
California's budget problems begin with a tax system that is out of date. For most of the last century, sales taxes, which are relatively stable, were the state's main source of revenue, while more volatile income taxes were less important. But that was when California's economy was still based on making things. Today it is a service economy, and services are exempt from sales tax. So, over the past generation, income taxes, and especially capital-gains taxes, have grown in importance. This makes California's revenues unusually jumpy, with peaks during booms (in dotcoms or housing, say) and big falls during busts (again, in dotcoms or housing).
In the midst of recessions, when you need it most, government is forced to recede. That's why the recession has been more severe in California than the rest of the country, with the state ranked third to last in unemployment. Property taxes fund public schools. With Proposition 13 artifically deflating property tax values, the state's forced to make up the difference. And continously struggle to do so.
We’re only now beginning to see Proposition 13 bear its ugly fruit. Job growth stifled due to government cutbacks through the recovery, insufficient revenue to repair crumbling infrastructure, rising tuition at public universities, and three cities declared bankrupt this year. All of these setbacks hamper the state’s ability to mount a robust recovery and the added burden of Proposition 13 forces it to engage in austerity just when unemployment is the most severe. It's a recipe for disaster.
The state’s problems are a microcosm for the country’s. The federal government, much like California, has been forced to engage in reckless austerity in the wake of the Great Recession. How do you create jobs, balance your budget, and maintain a reasonable safety net in the face of self-imposed tax restrictions?
California is less what happens when socialists run a state than what happens when the antitax right gets its hands on budget. Given its structural impediment, it's a miracle that California beat Texas in job creation this year. But California is still mired at 10.7% unemployment. In the longterm, its clear that the hugely popular Proposition 13 is a source of California’s budget malaise. It needs to be overturned.
In the immediate, California voters will have an opportunity this November to enter this national debate when they decide whether they want to dramatically reduce public services or to raise taxes on the wealthy. Should they choose the former, job growth will suffer in the face of severe cutbacks in crucial state services. With the latter, the California recovery may live on.