Opinion and Economic Analysis

HICKS: What happened in California could happen here

July 27, 2009

California is a trendy place, with a communal sense of fashion that extends to such things as taxing and spending.

Last fall, several economists from Indiana attended an academic conference largely dedicated to the 30th anniversary of California’s Proposition 13. For those of you not of a certain age, Proposition 13 was the first statewide property-tax cap passed by referendum.

The Indiana delegation was especially welcomed at this conference because our state was the most recent to pass similar legislation—the tax reform of 2008.

The months since the anniversary have been far more instructive than anything the past 30 years has provided. For you see, California state government is dead broke. Its debt alone is twice the annual expenditure of Indiana, and its bond rating now hovers at the same level as Guatemala’s.

California can no longer sustain its government. Workdays at state government agencies have been trimmed by 10 percent with unpaid furloughs in every branch. All university staff face a 10-percent pay cut, and the greatest public university system in the world is about to shed talent at an unrecoverable rate.

Why is this happening, and what lessons does it hold for Indiana?

Proposition 13, which limited property taxes to 1 percent of residential value, was passed in the wake of huge tax increases. The lure of California caused a real estate boom accompanied by big bumps in school spending. The Legislature as well as local governments did a poor job of internalizing this lesson. Over the next three decades, other taxes spiked. Sales and especially income taxes were increased to meet the demands of a government unwilling to constrain spending.

Californians responded. The state permits a broad referendum process. Voters have rebelled, limiting discretionary tax increases to less than 40 percent of total revenues. In other words, elected leaders have repeatedly failed to heed the warning of voters on taxes. Voters have responded by repeatedly limiting the powers of elected leaders to raise taxes. The result is a government unaccustomed to the rigors of fiscal debate.

This is the lesson for Indiana. What has happened in California can also happen here. The next few years are equally critical in crafting local governments in particular that are responsive to voter needs. The unseemly scramble for extra revenue sources does not portend well for this process.

It is important to note also that my comments here are not a blanket call for low taxes. In the two years before moving to Indiana, I twice supported referendums to increase my property taxes, which were already higher than in any Indiana community at any time in history.

Now, as then, I am untroubled to be taxed, perhaps heavily, to receive high-quality public services. But I have to trust that the spending will be wise. My hope is that the debate turns from tax rates to how we spend those tax dollars.•
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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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