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Send Them a Message!
'Taxes,' said Justice Holmes, 'are the
price we pay for civilized society.' If
that be true, Californians were in a
downright uncivilized mood this
week, for they voted overwhelmingly
for a ballot proposal (the Jarvis-Gann
initiative) which promises to reduce lo
cal property taxes 57 percent and to
curb future tax increases of either the
state or local variety.
over, five successful initiatives —anti
busing, anti-pay TV, political reform,
anti-open housing, and the death pen
alty —were totally or partially over
turned by the courts.
Specifically, the electorate voted to
limit taxes on all property —residential,
commercial, and industrial —to one
percent of the 1975-76 market value,
and to limit increases in assessments
generally to no more than two percent
annually. Property taxes now run
about two to three percent of market
value, so this means a reduction of
roughly $7 billion annually in local-gov
ernment revenues. The initiative
henceforth will require a two-thirds
vote of the legislature to increase state
taxes, and a two-thirds vote of the lo
cal electorate to raise local levies.
The same may happen in this case, be
cause legal questions have been raised
about the ambiguous wording of the
brief (389 word) initiative. One section
states that the lowered property taxes
would be distributed 'according to
law' within the counties —but as yet
there is no such law. Another section
limits annual increases in the 'fair mar
ket value' base to two percent on
property that does not change hands,
but it allows full reassessment of prop
erty when sold —which could violate
the equal-protection clause of the U.S.
Constitution. And another section
says that special taxes may be imposed
only by two-thirds of 'qualified elec
tors' —which is ambiguous because it
could mean those voting, those regis
tered to vote, or those of voting age.
Next step
What happens next? The winning side
expects the millennium, while the los
ing side predicts total chaos. The reali
ty, however, may be closer to the
purgatory long familiar to taxpayers,
expecially since legislators throughout
the state may now try to increase rev
enues from other sources in order to
maintain accustomed levels of gov
ernment services. One possibility is
that the initiative will never become
law, as has happened so frequently in
the past. Between 1960 and 1976
alone, 148 proposals were submitted
for the state ballot, but only 26 even
tually qualified and only seven of those
were approved by the voters. More
Opposing views
But assuming the legal challenges are
overcome, what will actually happen
next? According to University of
Southern California Professor Arthur
Laffer, the favorable vote on the initia
tive will go a long way toward revital
izing the California economy, by
reducing the heavy tax load on the
state's residents. Moreover, he claims
that harsh spending cuts are unlikely,
because of the state's ability to borrow
in capital markets and, in particular,
utilize its now towering surplus. As of
June 30, the surplus will approach $3.4
billion, and it could reach $4.8 billion at
the end of fiscal 1979 if no calls were
made upon it.
(continued on page 2)
Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.
Again, Laffer argues that revenues will
fall by considerably less than the wide
ly-quoted $7-billion figure, simply be
cause property values will rise,
encouraging more new construction
and an expanded tax base. Also, tax
revenues from other sources will ex
pand. With property taxes lower,
businesses will expand their activities
within the state. This expansion will
create more jobs, more investment,
and higher real wages, so that sales and
income taxes eventually will rise, cre
ating future opportunities for tax relief
or essential spending increases.
levels to make up for the missing prop
erty-tax revenues. The result might in
clude a mixture of spending cutbacks,
increases in fees for certain govern
ment services, increases in business
taxes, and hikes in sales and individual
income taxes. (But tax-increase pack
ages may be hard to put together, giv
en the Jarvis-Gann requirement of a
two-thirds majority to pass tax mea
sures.) Paradoxically, this result might
go against the views of those, like
Laffer, who argue that an optimal tax
structure includes higher taxes on
property than on income or sales.
State Director of Finance Roy Bell takes
a more skeptical view, arguing that
the economic stimulus gained from
lower property-tax rates will be con
siderably less than the $7-billion rev
enue loss. First, individuals will net only
$1.5 billion of that $7-billion figure, be
cause home-owners will receive only
one-third of the tax cut and will exper
ience higher federal and state income
taxes as a result of reduced deduc
tions. (According to a recent UCLA
study, the U.S. Treasury will benefit
from a $2.2-billion increase in Califor
nians' income taxes, as well as a $500million reduction in Federal payments
to California local governments for
jobs that will now be abolished.)
Again, Bell claims that wage-and-salary
losses associated with spending cuts
and layoffs will amount to about $6 bil
lion in 1979, leading to a potential re
duction in consumer incomes of $4.5
billion ($6 billion minus $1.5 billion.)
Why the message?
Californians rejected several earlier
(and milder) attempts to reduce their
tax and spending burdens, so why did
they vote so overwhelmingly this time
to 'send a message' to their govern
mental leaders? One reason may be
the growing size of the state's burden
of state-local taxation. California is
outranked only by New York in this re
gard, with a per capita tax burden 30
percent higher than the U.S. average.
One thing is certain - the next several
months will be rather chaotic for state
and local legislators, as they attempt to
change tax structures and spending2
2
The tax burden has actually worsened
because of the impact of several re
form measures passed during the last
decade. In 1966, the state legislature
moved to standardize assessment
practices by setting the assessment ra
tio at 25 percent of market value for
all property throughout the state, with
that goal to be reached by 1971. But
when the 1970's brought its unique
combination of several recessions,
several housing booms, and rampant
inflation, California experienced
skyrocketing increases in home values
but lagging increases in commercial
and industrial property values. Thus,
home-owners found themselves pay-
ing much higher property taxes, both
absolutely and in relation to other
property owners. They also found
themselves paying much higher state
income taxes, as inflation kept pushing
them into higher and more graduated
tax brackets, following 1971 tax legisla
tion (Library —1971 law?) designed to
make the income-tax structure more
progressive. Today every 10-percent
rise in personal income leads to at least
a 17-percent rise in state income-tax
revenues.
The initiative still might not have tri
umphed, however, if state and local
authorities had moved more expedi
tiously to return to the taxpayers the
surpluses amassed during the inflation
ary boom of the past several years.
Late in its last session, the legislature
passed and placed on the ballot a mea
sure (the Behr bill) to reduce home
owner and renter tax burdens. How
ever, this complex measure failed to
attract much support, in part because it
could be read as threatening sharp tax
increases in the future.
A national message
Jarvis-Gann has a message for more
than Californians, and not simply be
cause of California's role in setting na
tional trends. (Actually, Tennessee
voters approved a budget-limitation
measure earlier this spring, and other
states are also getting into the act.) The
broader message may be a growing
dissatisfaction with inflation and with
what the voters perceive as govern
ment's contribution to that problem.
Consumer prices have almost dou
bled over the past decade, and more
and more voters have come to be
lieve that the problem would be less
severe if federal, state and local gov-3
3
emments had demanded less of the
economy's resources.
Government spending has increased
more than ten-fold since 1950 —and
has grown more than two and a half
times in the past decade alone —to
reach a total of $621 billion in 1977.
Governments accounted for 21.4
percent of GNP in 1950, but their share
has now risen to 32.9 percent of the
total. Expenditures have soared at all
levels, but state-local government
spending has grown most rapidly of all,
and now accounts for 14.0 percent of
GNP —partly because more than onefourth of those funds now come from
federal grants.
Between 1950 and 1977, employee
compensation at the federal level
dropped from 12.0 to 10.7 percent of
total government spending, while fed
eral purchases of other goods and ser
vices dropped from 18.7 to 12.7
percent of the total (see chart). Mean
while, employee compensation at the
state and local level —especially for
teachers —jumped from 16.7 to 22.5
percent of total government spend
ing, while the state-local share of other
spending for goods and services also
increased. Most importantly, govern
ment transfer payments (primarily fed
eral) jumped from 23.6 to 31.9 percent
of total spending, to a total of $198 bil
lion in 1977. Voters in California and
elsewhere apparently are now
reacting unfavorably to these figures —
especially the rapid expansion of items
such as transfer payments and teach
ers' salaries. As time goes on, we are
likely to hear even more the question:
How much government spending is
enough?
William Burke
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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Loans (gross, adjusted) and investments*
Loans (gross, adjusted) —total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items) —total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits —total*
States and political subdivisions
Savings deposits
Other time deposits}
Large negotiable CD's
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess Reserves(+)/Deficiency (—
)
Borrowings
Net free(+)/Net borrowed (—
)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales(—
)
Transactions with U.S. security dealers
Net loans (+)/Net borrowings (—
)
Amount
Outstanding
5/24/78
Change
from
5/17/78
110,803
88,759
1,980
27,186
29,916
15,677
7,975
14,069
107,758
28,467
224
77,526
7,182
31,661
35,747
17,470
— 264
111
118
+
36
+ 163
+
96
132
21
+ 212
471
103
+ 1,037
+
50
+ 120
+ 862
+ 782
Week ended
5/24/78
+
Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+
+
+
+
+
+
Week ended
5/17/78
-
+
60
44
16
+
+
14,732
14,348
194
3,469
6,463
3,008
423
807
13,001
1,812
104
11,337
1,288
220
9,101
7,801
+
+
+
+
+
-
+
+
+
+
+
+
+
15.33
19.28
8.92
14.63
27.56
23.74
5.04
6.09
13.72
6.80
31.71
17.13
21.85
0.69
34.16
80.68
Comparable
year-ago period
-
8
50
58
+
62
18
44
509
+
367
-
197
26
+
120
-
143
+
♦Includes items not shown separately. {Individuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author____
Information on this and other publications can be obtained by calling or writing the Public Information
Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
@FedFRASER