Speaker's Commission on State / Local Government Finance

Budget plan would shift power from Capitol to city hall

By Doug Willis, AP Political Writer
The Sacramento Bee (Published June 13, 1999)

SACRAMENTO (AP) -- Taxpayers can't dismiss $80 billion lightly. But the most significant thing in this year's state budget may not be the money.

The part of the proposed budget that would have an impact far into the future is a restructuring of state-local government finances that may start shifting power from the state Capitol to local government.

Every spring, representatives of school districts and other local governments flock to Sacramento seeking more money and more freedom from state control.

They usually get a little more money and a little less freedom, with the state dictating how they must spend every extra dollar it gives them.

The budget before the Legislature for a final vote this week contains more money for schools and local governments with fewer strings attached, and with a companion amendment to the state constitution to make that revenue shift permanent.

That would mean cities and counties wouldn't have to come back every spring begging for more money and taking what they can get with whatever conditions the Legislature imposes.

"The state does now control virtually all sources of local government revenue," Elizabeth Hill, the Legislature's nonpartisan chief fiscal adviser, said during one of the budget hearings last week.

"The presumption is that local governments are children of the state, treated like children with an allowance," added Senate Budget Committee Chairman Steve Peace, D-El Cajon, describing that as an "inherently unhealthy" situation for state and local governments.

Instead, Hill and other experts said, giving local governments more control over how they raise and spend taxes will make them more responsive and accountable to local taxpayers.

But just as important, the revenue shift proposed in this year's budget will start to reverse unintended incentives for cities and counties to pursue policies damaging to California's economic health.

Some of the problem can be traced back to Proposition 13, a tax cut initiative that voters, reacting to skyrocketing property tax bills, enacted in 1978.

Since Proposition 13 capped total property taxes below the total of all property taxes then being imposed, it forced the state to decide how the property tax should be divided among local governments.

The state also stepped in with bailout funds to replace some of the lost local revenue, and that shifted even more decisions from city halls to the Capitol.

Limiting property taxes also made the sales tax a more important revenue source for cities and counties, encouraging them to compete for auto malls and other big retail outlets and become less inclined to want manufacturing or research and development facilities.

Then, facing the biggest deficit in its history seven years ago, the state reduced support for school districts, at the same time giving more of the local property tax to schools and less to cities and counties.

That was described as an overdue end to what was supposed to be a temporary post-Proposition 13 bailout -- or as state theft of city and county funds. Either way, it made property taxes an even less attractive local government revenue source.

"In most cases, the services required by residential developments today exceed the revenues generated. The same applies to industrial parks and manufacturing," Hill noted.

The long-term effect, added Republican Sen. Jim Brulte of Rancho Cucamonga, was to create even more conflict between state and local government policies.

"The state goal is to build the manufacturing base, which produces more wealth and better paying jobs," Brulte said.

But the local incentive is for retail expansion, which creates sales taxes but also more low-paying jobs, he said.

"We have to change incentives," Brulte said.

The budget committee frequently broke away from its routine votes on budget provisions to hold philosophical and often extensive discussions on the economic and social impacts of state fiscal policy.

Many of those discussions, particularly during late night sessions, were scorned as a waste of time by many of the hundreds of lobbyists and state officials sitting through hours of budget hearings waiting for action on items affecting them.

But they were the foundation for a bipartisan attempt to craft a tax shift that balances immediate fiscal demands against long-term goals.

The result is not a silver bullet that will solve any of the problems with California's tax structure overnight. In fact, it is limited step -- reversing part of the 1992 property tax shift and converting some aid to school districts and other local governments into less restrictive block grants.

But as budget committee member George Runner, R-Palmdale, suggested, the state must do something to ease a growing fiscal crisis for local government, and one guideline should be to "at least make sure that what we do now doesn't make the long-term solutions harder."

The tax shifts in the new state budget probably meet that modest goal. And just doing that is a significant political achievement.

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EDITOR'S NOTE -- Doug Willis has covered California politics for The Associated Press for nearly 30 years.

Copyright (c) The Sacramento Bee

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