June 6 marks the 25th anniversary of California’s Proposition
13, the landmark victory of the 1970s tax revolt. Proposition 13
enjoyed immediate success, slashing property taxes and imposing
some much needed discipline on state and local spending.
Twenty-five years later, however, California’s fiscal situation has
changed dramatically. State expenditures have soared and the
legislature is considering large tax increases to compensate for
California’s $35 billion shortfall. Indeed, California’s changing
fiscal fortunes provide valuable insights for those seeking to
limit government in California and elsewhere.
Proposition 13 should be analyzed in two separate ways, first as
a tax cut, secondly as a tax limit. As a tax cut Proposition 13 was
a tremendous short term success, reducing taxes by a staggering $6
billion. The impact of this tax reduction, however, went far beyond
providing relief to beleaguered California taxpayers. The economic
boom that followed Proposition 13 gave credence to the idea that
tax cuts were economically beneficial. Furthermore, Proposition 13
generated nationwide momentum for tax reductions. In the following
months, a number of states either enacted tax cuts or tax limits.
Even President Carter and the Democrat controlled Congress were
motivated to reduce capital gains taxes in the wake of Proposition
13.
However, as a long term tax limit, Proposition 13 has had a
legacy that is decidedly mixed. Though it reduced property taxes,
Proposition 13 did not place limits on other forms of taxation.
Indeed, after California’s expenditure limit was raised in the
early 1990s, spending soared, nearly doubling between 1990 and
2001. As a result, California has had to raise the income tax, the
sales tax, and taxes on beer, wine, gasoline, and cigarettes to
keep pace with these rising expenditures. In fact, during the early
1990s, Governor Pete Wilson even proposed hiking taxes on snack
foods. This cycle of spending and taxing is the root cause of
California’s current fiscal problems.
Indeed, California’s recent fiscal history clearly demonstrates
that low taxes can only be preserved when spending is restrained.
In fact, during the past 25 years fiscal conservatives in
California and elsewhere have attempted to enforce fiscal
discipline by enacting Tax and Expenditure Limitations (TELs),
which establish limits on expenditure growth. Many studies find
TELs to be ineffective. However, in the early 1990s two states,
Colorado and Washington, were able to restrain spending by enacting
TELs with especially low limits.
The success of Colorado’s TEL, the Taxpayer Bill of Rights
(TABOR), is probably the most dramatic. TABOR was unique because in
addition to setting a low expenditure limit, it mandated immediate
taxpayer refunds of surplus revenues. Shortly after TABOR was
enacted, revenue began to exceed the limit. As a result, Colorado
taxpayers received a tax rebate every year between 1997 and 2002.
During this time, Colorado reduced taxes more than any other state,
issuing tax rebates that have totaled more than $3.2 billion.
Additionally, TABOR has also forced Colorado residents to see
the costs inherent in government programs. In other states,
residents often support higher spending because they can see the
benefits of a particular program, but remain blissfully unaware of
the costs that they and other taxpayers will be forced to bear.
However, in Colorado the annual tax rebates brings these
tradeoffs clearly into focus. In every year from 1993 to 1999 there
was a proposal on the ballot to either raise taxes or increase
spending in excess of the TABOR limit. Knowing these initiatives
would markedly reduce the size of their annual tax rebate, voters
soundly defeated each of these measures. Now, in 2001, an
initiative to increase spending for Colorado schools did pass.
However, Colorado taxpayers still received tax rebates totaling
more than $900 million from fiscal 2001 revenues.
Overall, Proposition 13 enjoyed a great deal of success at
lowering taxes, both in California and across the country. However,
it has been less successful at keeping taxes low. Indeed, soaring
expenditures over the last 25 years have resulted in sharp tax
increases in the Golden State. Still, one important lesson from the
1990s is that well designed expenditure limits can both effectively
restrain spending and provide tax relief. Indeed, spending limits
modeled after Colorado’s Taxpayer Bill of Rights may well be the
best strategy for those seeking to reduce the size of government
over the next 25 years.
