Speaker's Commission on State / Local Government Finance

Connell's Plan Doesn't Do It
By Dan Walters (Published Aug. 23, 1999)

If you listen to -- and believe -- state Controller Kathleen Connell, solving the problems of local government in California would be a snap.

The state would simply adopt the recommendations of an advisory panel she appointed, chiefly:

Imposing a "soft cap" on the property tax money that has been diverted from local governments to schools, originally decreed by the state eight years ago to cope with a state budget crisis;

Gradually shifting the local share of the sales tax (1 percent of taxable transactions) from being distributed by the point of sale to a population-based formula; and

Requiring the state to honor a long-standing legal obligation to pay local governments for the costs imposed on them.

As Connell describes it, while the sales tax change would take money away from some counties with high levels of taxable sales and give it to poorer counties, the shift of property taxes would more than make up the difference.

"This is a formula that works for every county in California," Connell insisted as she unveiled her scheme last week.

The controller also opined that moving away from point-of-sale distribution of sales taxes would diminish the incentive for local governments to favor tax-producing retail projects, such as auto malls and shopping centers, over housing and jobs.

Connell is trudging down a well-trodden trail. Academics, politicians and bureaucrats have struggled with local government financing in California for more than two decades, since Proposition 13 took a big bite out of property taxes and indirectly made local governments dependent on the state.

But her proposal is no better than any of the other remedies floated through the years and in some respects is laughably unrealistic.

It is, first of all, based on an assumption that the governor and state legislators would be willing to give local governments a much bigger share -- about $450 million more per year -- of the property tax, taking that money from schools and forcing the state to make up the difference. If they were willing to do that, there wouldn't be a problem in the first place. And the current governor, Gray Davis, is particularly reluctant to make any long-term commitments of state funds, fearing that a future economic downturn would force him to make deep slashes in spending or raise taxes.

By the same token, governors and legislators have ignored the local mandate obligation for decades. What makes Connell believe they'll have a sudden change of heart?

Finally, the Connell commission tends to lump local governments together, all but ignoring the immense differences between the responsibilities and financing of cities and counties, as well as sharp distinctions between individual cities and individual counties.

The property tax shift to schools that the state first imposed in 1991 had a much larger impact on counties than it did cities, while cities have a much greater interest in local sales taxes than counties because most commercial transactions occur within city boundaries.

Thus, while the Connell commission's shift of property and sales taxes might balance out on an overall county-by-county basis, if you believe its numbers, there would be enormously different impacts within counties. The big losers would be cities that have especially high levels of taxable sales, such as San Francisco, Beverly Hills or Roseville, site of a huge auto mall.

As Connell said, local governments do need financial stability. But first, they need some redefinition of their roles in providing public services. Without that, any financing scheme is doomed to failure.

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