Speaker's Commission on State / Local Government Finance

Property Tax Shift Grates

By Dan Walters, Capitol Alert (Published June 4, 1999)

Gov. Gray Davis and legislators of both parties are wrangling this month over how to spend -- or not spend -- a $4 billion-plus budget windfall.

The politics of affluence may be tricky, even bitterly divisive, as contending factions grab for pieces of the pie. But even at their worst, Capitol politicians prefer them to the alternative -- fighting over how to spread the pain from a shortfall. Those who went through tax-raising and budget-cutting in the early 1990s do not relish repeating the experience.

Ironically, however, this year's extra billions exist only because of one of the harshest decisions made in the early 1990s: grabbing billions of dollars in local property taxes to balance the state budget. And one of the decisions Davis and legislators face this year is whether to return some of those dollars to cities, counties and special districts.

When Davis' predecessor, Pete Wilson, was inaugurated in 1991, he was confronted by a recession-spawned fiscal crisis. State revenues were plummeting, and demands for health and welfare services from newly unemployed workers and their families were soaring.

The gap between income and outgo was pegged at an incredible $14 billion a year.

Over the next several years, Republican Wilson and a Democrat-controlled Legislature raised taxes and slashed spending, even for such seemingly sacrosanct categories as schools. And they also imposed some of the pain on local governments by shifting several billion dollars a year in property taxes from their coffers to schools, thereby allowing the state to reduce its school spending by an identical amount. It was called the Educational Revenue Augmentation Fund, or ERAF.

Eventually, about two-thirds of the revenue loss to local governments was offset by a special sales tax for law enforcement programs and direct state aid, but the net loss remains about $1.2 billion a year.

As the economy and the state's fiscal situation improved later in the decade, local governments began agitating for a reversal of the ERAF shift, or at least a cap on the annual amount of the shift so that they could receive taxes on increases in local property values, but neither Wilson nor legislators would agree. It was not only a significant financial issue but a tangible symbol of the contentious relationship between state and local governments, especially counties. Local officials want revenue streams that they can spend as they please for such popular programs as libraries and police protection, while state officials want to control the spigot.

he state treasury, meanwhile, benefited handsomely from the shift, which now totals $3.6 billion a year. Were it not for ERAF and a half-billion dollars from the national tobacco lawsuit settlement, in fact, the state's budget would be scarcely in balance. It certainly wouldn't have those extra billions that Davis and lawmakers are now divvying up.

So is it time to begin undoing ERAF? Davis, like Wilson, isn't interested. He's offering counties a little additional aid, but it's one-time money, not a stream of ongoing revenue. As with other major budget proposals, Davis clearly is averse to committing himself to any permanent spending programs that could backfire in another recession.

The state Senate's version of the budget would cap the shift, thus returning an estimated $234 million in property taxes to local governments, while the Assembly's budget is silent on the issue.

Everyone talks about a compromise, but there are more than dollars at stake. Whatever is decided this year on ERAF will set the tone for state-local relations during the entire Davis administration.

Copyright © The Sacramento Bee

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