The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
September 28, 1 979
------------.
_---_.
_------_.
_---
Spiritof 13
Sixteen months have elapsed since the landslide passage of Proposition 13 - the California property-tax-reduction amendment of
Messrs. Howard Jarvis and Paul Gann. To
voters, the Proposition became a clarion call
to send their message to government. The
concept, or spirit, of the proposition has mattered most, for its actual fiscal effect has been
modest compared with its role in the larger
tax-reduction movement. Measures to restrict
government have had varying success among
other states as well as California, and the
same spirit has been behind the continuing
effort to limit spending at the Federal level
through constitutional amendment.
Within California, many champions of government limitation believe that Proposition
13 has major loopholes, principally because
it has allowed state surplus revenues to be
channeled to the local level. Thus it has
reduced total government spending only
slightly. Accordingly, several bills to pare
government have sprouted within the state
legislature, and only last week several taxreduction measures were sent to the
governor. On a broader front, however,
Messrs. Jarvis and Gann each has proposed a
new initiative going beyond their joint Proposition 13 effort.
Mr. Jarvis has been busily collecting signatures for what has become known as "Jarvis
II," a plan to index state personal-income tax
rates to inflation and reduce them permanently to one-half of the 1 978 rate. At present
it appears that Jarvis II will easily gain the
needed signatures for inclusion on the June
1 980 ballot. However, Mr. Gann's competing proposal has already qualified and will
appear as Proposition 4 on the upcoming
November 6 ballot. This more comprehensive but less drastic "Limitation of Government Appropriations," often referred to as the
"Spirit of 1 3," received almost twice the required 554,000 signatures, and is presently
favored by a two-to-one margin, according to
a recent Field Institute poll. Like Proposition
1 3, it is a far-reaching proposal that is worth
examining in light of the changes already
imposed by its predecessor.
In the wake of 1 3
There is no doubt that Proposition 13 has
slowed the growth of government in California. But supporters of the amendment believe
that it hasn't achieved all that was intended or
desired. Admittedly,the amendment by itself
resulted in a $6.4 billion (57 percent) property-tax cut, and a temporary $1 -billion cut in
state income taxes was enacted in its aftermath. At the same time, the accumulated
surplus in the state budget totalled more than
$5.0 billion in fiscal 1978, and there was an
additional current surplus of $3.0 billion in
fiscal 1 979. Those funds provided $4.4 billion last year and $4.9 billion this year in
"bail-out" funds to local governments,
school districts, and special districts, in addition to some emergency loans. Thus the effective cut in government expenditures in
first two post-Proposition 13 years was far
smaller than the reduction in property taxes.
State-and-Iocal tax revenues have been rising
faster than Proposition-1 3 proponents had
anticipated. In view of the progressive nature
of state income taxes and the structure of state
sales taxes, these items have increased significantly faster than personal income. In addition, local property-tax assessmentsclimbed
9.5 percent last year on a statewide basis far in excess of the 2-percent ceiling in the
amendment - because of transfers of ownership, new construction, and reassessmentsof
properties to correct for underassessments in
the 1 975-76 base year. Furthermore, local
governments have increased and extended
fees for services.
The irony of Proposition 13 - perhaps its
redeeming feature - is that it neither drastically reduced the size of government (as
desi red by many proponents) nor led to state-
lC
-_._._---.-.-
_
•....
- -
._ _._-----------..•.•
- - - - -
wide economic chaos (as predicted by
staunch opponents). In fact, in its first year it
strongly stimulated the state's economy,
because taxpayers experienced a permanent
reduction in property taxes wh i Ie the state
government simultaneously was spending its
surplus.
taxes and a large short-term spending stimulus. In addition, we have experienced a substantial shiftoftax revenues from local to state
sources as well as some redistribution among
localities, plus a modest reduction in the size
of local government. As a consequence, pol itical power has shifted toward the state level.
During 1978, California's personal income
jumped 15 perceht
one of the highest
increases in the nation -whiletheCalifornia
unemployment rate dropped much more
rapidly than the national rate. Since enactment of Proposition 13, employment in local
government has declined by 100,000 workers, or 7 percent, with three-fourths of the
decline in education. (Only 17,000 workers
were actually laid off; other positions were
reduced through vacancies and attrition.) In
contrast, 552,000 new jobs were created in
California's private sector - partly because
of this fiscal stimulus, and partly because of
the nationwide business boom, both of which
may be largely temporary.
Reenter Mr. Gann
Advocates of smaller government, such as
Mr. Gann, believe that a modest reduction in
local government is not sufficient. His Proposition 4, if passed, would take effect in the
1980-81 fiscal year, and would limitthe
annual growth of government appropriations
to the 1978-79 fiscal-year level plus an
annual adjustment for consumer-price
increases and local population growth.
("Appropriations," which are legal authorizations for spending, are closely correlated
with expenditures over time, but not necessarily for individual years.) The appropriations ceiling would apply individuallyto the
state, every county, city, and school district,
and many special districts. The measure
essentially would limit each government
unit's appropriations to the 1978-79 real per
capita level (or per pupil level for school
districts). The new amendment specifically
addresses the issue of the state surplus, which
provided the bai I-out funds that took much of
the venom out of Proposition 13. Any generaI
state transfers to a local government (e.g.,
bail-out funds) would fall under the latter's
limits, while any state-mandated programs
would have to be funded by the state and
would fall within its own limit. Direct fees for
government services would not be subject to
the limitation, at least up to a point. To the
extent that a user charge of this type exceeded
the cost of providing the service, the excess
would be considered an appropriation subject to the limitation.
In the aftermath of Proposition 13, we are left
with some noteworthy effects, beginning of
course with a large reduction in property
Other sections of the initiative are designed to
assure its effective implementation while
preventing circumvention. Surplus revenues
are to be returned "by a revision of tax rates or
fee schedules" within the following two
2
-----------------_.
_---------_.
_. _--------------_.
years. Adjustments are to be made to account
for changes in governmental boundaries and
for transferral of functions from government
to private enterprise. Also, a government
could spend beyond its limitforemergencies,
so long as appropriations in the following
three years were reduced accordingly. More
importantly, any governing body could increase its appropriations limitwith a majority
vote of the electorate - but not for more than
four years without a reconfirmation vote by
the electorate. Thus, a "permanent" increase
in the appropriations ceiling would not be
allowed.
__ ------------------_
..
-
...
_-_.
An additional legal uncertainty surrounds the
determination of the 1 978-79 appropriations
base. According to a report of the Assembly
Revenue and Taxation Committee, the initiative does not spell out how existing budget
surpluses are to be treated. Indeed, the ceiling
for all future years is sharply affected by
whether or not these funds are treated as
appropriations subject to the ceiling in the
base year. This legal tangle would have to be
resolved in the courts.
Proposition 4 essentiallywould tighten the lid
first clamped on by Proposition 13. It would
effective1y contain California government
activities at the level set by 1 978-79 real per
capita expenditures, thus reducing the relative economic size of government as real per
capita expenditures rise in the private sector.
But in addition, it would continue the Proposition-1 3 policy of restraining the flexibility
and responsiveness of local government. It is
iron ic that the movement to-restrict government has been aimed foremost at local government - the level that in principle is the
most responsive to the people it serves.
Implications of 4
Despite the initiative's apparent thoroughness, it would pose some serious economic
and legal problems. Perhaps the greatest
economic problem hinges on the individual
application of the limit to each governmental
unit. When coupled with Proposition 13's
reduction in property taxes, it might seriously
restrict desired growth within many cities
(particularly outside dense urban areas). By
restricting property taxes, Proposition 13 has
already reduced local government's economic incentive to permit new home building, thereby giving local governments reason
to block growth. If these homes are also more
costly to service than existing homes (as
could·be the case in growing towns and suburbs), then Proposition 4 would provide
added incentive to restrict growth, since the
additional population must be supported
within the predetermined real per capita
appropriations limit.
Jack Beebe
Furthermore, Proposition 4 may force cities
to adopt restrictions leading to less than optimal growth patterns. Such growth patterns
may dictate that one town add shopping centers and office space, while the next town add
residences (population). Under the proposition, the latter's inflation-adjusted appropriations limit would rise while the former's
would not. Thus the limit may have some
effect on what kind of growth is allowed
within a city or county.
3
u018u!4s-eM.4l?ln• U08ClJO l?Pl?AClN
co
• 04l?PI
Hl?M-eH• -e!
UJoJ!Il?J.. l?UOZ!JVco l?)js-el'v
'J!i12:) 'OJlSP U12J U12S
:I
(;SL:'ON llWlBd
OIVd
:J9\flS Od 'S-n
llVW SSV1:)lS(ft1:)
jJ\ill mjJJt\2?<dI
BANKING DATA-TWELFTHfEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
Selected
Assetsandliabilities
large Commercial
8anks
Loans (gross, adjusted) and investments*
Loans (gross, adjusted) - total#
Commercial and industrial
Real estate
Loans to individuals
Securities loans
U.S. Treasury securities*
Other securities*
Demand deposits - total#
Demand deposits
adjusted
Savings deposits - total
Time deposits - total#
Individuals, part. & corp.
(Large negotiable CD's)
WeeklyAverages
of Daily Figures
MemberBani,Reserve
Position
Change
from
9/5/79
Amount
Outstanding
9/12/79
132,815
109,781
31,591
40,253
22,531
2,146
7,708
15,326
46,323
30,988
30,452
53,488
45,075
19,894
Weekended
9/12/79
Excess Reserves (+ )/Deficiency ( - )
Borrowings
Net free reserves (+ )/Net borrowed( -)
10
-
-
Change from
yearago@
Dollar
Percent
452
570
112
227
42
162
58
176
54
204
56
735
655
633
+ 18,556
+ 18,126
4,433
+
8,315
+
NA
NA
1,315
1,745
+
+ 4,053
11
16
+ 5,888
7,463
+
673
+
Weekended
9/5/79
-
1-
16.24
19.78
16.32
26.03
NA
NA
14.57
12.85
9.59
0.04
0.05
12.37
19.84
3.50
Comparable
year-ago period
70
23
142
119
52
11
41
+1,449
61
+1,932
292
+ 697
60
Federal
Funds Seven
large Banks
Net interbank transactions
[Purchases (+)/Sale's (-)]
Net, U.s. Securities dealer transactions
[Loans (+' )/Borrowings (-)]
-
154
* Excludes trading account securities.
# Includes items not shown separately.
@ Historical
dataarenot strictlycomparable to changes the reporting
due
in
panel;however,
adjustments
havebeenappliedto 1978datato remove muchaspossible effects thechanges coverage.
as
the
of
in
In
addition,for someitems,
historical
dataarenot available to definitional
due
changes.
Editorial
comments be addressed the editor(WilliamBurke) to theauthor.... Free
may
to
or
copies this
of
andotherFederal
Reserve
publications beobtained bycalling writingthePublic
can
or
Infonnation
Section,
Federal
Reserve
Bankof SanFrancisco, Box7702,SanFrancisco
P.O.
94120.
Phone
(415)
544-2184.
\\{I Jt\2?
@FedFRASER