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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Reagan, Ronald: Gubernatorial Papers,
1966-74: Press Unit
Folder Title: Issues - Tax Reform
(5 of 5)
Box: P32
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
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Contact a reference archivist at: [email protected]
Citation Guidelines: https://reaganlibrary.gov/citing
National Archives Catalogue: https://catalog.archives.gov/
Tax Keterm
California
Council on
Intergovernmental
Relations
THE WATSON INITIATIVE
"What It Means for California"
The Watson Initiative, sponsored by the "Tax Limitation
Committee" and proposed by Philip E. Watson, Los Angeles
County Assessor, will appear on the November ballot. The
constitutional amendment is a very complex tax reorganization;
which, if approved, would have far reaching effects on the
State's system of taxation. It is designed to shift the
source of revenue for the support of government away from
property taxation to income tax, consumer taxes and corporation
taxes.
Opinions vary radically as to how feasible these changes
are. Different studies show that a funding deficit anywhere
from 0 to $1.2 billion may result. Thus, the Initiative is
not fully understood.
This report summarizes the basic components of the
Amendment and presents arguments both for and against the issue.
A STATE AGENCY FOR EFFECTIVE LOCAL/STATE ACTION - COMMUNICATION, COOPERATION, COORDINATION
SACRAMENTO, CALIFORNIA 95814 TELEPHONE (916) 445-7866
SUMMARY PROVISIONS OF THE WATSON AMENDMENT
The property tax shall be limited to 1.75% of market value
plus the payment of debts and liabilities.
All costs of social welfare services and a major portion of
the costs of education must be paid for from revenue sources
other than the property tax.
The State cannot levy a property tax unless no other funds or
taxes are available. In this case, the State may levy a
property tax sufficient to pay for bonding services only.
Tax limits:
County tax rate - $2.00 per $100 of assessed
value - does not include costs of servicing bonded
indebtedness. (1/2%)
City tax rate - $2.00 per $100 of assessed value
as above. (1/2%)
City and County tax rate (San Francisco) - $4.00 per
$100 as above. (1%)
Special districts tax rate - the total of all inter-
county special districts cannot exceed $.50 per $100
as above. (1/8%) The Legislature shall set up methods
of apportionment. The total of all intracounty
special districts cannot exceed $.50 per $100 as
above. (1/8%)
Schools (K-12) - each County shall levy a rate of
$2.00 per $100 for the support of schools within that
county. To be apportioned to schools in a manner
prescribed by the Legislature. (1/2%)
If any taxing agency is in excess of the stated limit
for 1971-72, the amount of taxes levied in 1971-72
for the specified services shall be the limit for
that agency for a period not to extend beyond the
1976-77 fiscal year.
Debts and liabilities, bonds, etc., shall be incurred only
on approval of a 2/3 majority of voters.
Debts or liabilities - bonds, notes, certain loans and
leasebacks, etc. Many financing loopholes are closed.
Assessed value - 25% of full cash value.
All new State programs, services and benefits enacted by the
Legislature must be funded from sources other than the
property tax.
Suggested sources of replacement revenue:
Sales and Use Tax - maximum 6%/State - 1%/local.
No sales tax on prescription medicine and food
products if exempt on 1/1/71.
Insurance Companies, Bank and Corporation Income
Tax - not less than 11%. Requires 2/3 vote to
increase over 11%.
Personal Income Tax - any increase over present
rate must be by 2/3 vote of Legislature.
Cigarette Tax - not less than $.01 per cigarette.
Repeal home office offset for Insurance Companies.
Mineral Severance Tax - same rate as sales tax.
Can offset a property tax against severance tax.
Distilled Spirits Tax - not less than $2.50 per
gallon.
A minimum of $825 ADA is guaranteed for the support of education.
This includes revenue from property tax.
Any future exemption or classification of property resulting
in a lower property tax must be approved by majority of the
voters.
The operative date of this initiative is the beginning of
the fiscal year immediately following approval by the voters.
-2-
HOW THE INITIATIVE WOULD OPERATE
Tax Rate Limitation
If the Watson Initiative succeeds, property tax will be
limited to 1.75% of Market Value or a maximum of $7.00 per $100
of assessed valuation, plus costs of bonding. Allocations to
local governments would be as follows: $2.00 county, $2.00 city,
$2.00 education, $.50 to intercounty special districts and $.50
to intracounty special districts. These rate limits relate only
to current operating expenses and do not apply to past or future
bond or long-term debt repayments. If local jurisdictions exceed
these limits during 1971-72, then they shall be frozen at that
level for a five year period, from 1972-73, and until 1976-77.
Thereafter, the tax rates shall be reduced to the maximum specified
in this measure.
Education
The measure requires the State to apportion $825 per ADA for
K-12, minus the amount that would be raised from a new $2.00
county school tax. These state apportionments would go to the
counties rather than individual school districts, and unless the
Legislature provides to the contrary, the Board of Supervisors
would then apportion these funds. It does not specify, however,
that each school district shall receive the same amount per ADA.
After the effective date of this measure, the school districts would
no longer have the power to impose a local property tax for
current operations. District property taxes could be levied only
for past and future bond repayments.
This measure also provides that the Legislature may increase
the $825 per ADA basic apportionment, but it shall annually adjust
this amount to reflect changes in the cost of living index.
A final change will be in financing community colleges.
Support would be shifted from local property taxes to the State;
an amount estimated to be $397 for 1972-73 by the Legislative
Analyst.
Social Welfare
The county costs for social welfare including all categorical
aids, general relief and local administration, would be shifted
to the State effective July 1, 1972. The Board of Equalization
estimates the amount to be $688 million in 1972-73.
Bond Issues
There would be no change in bonding limitations. Costs of
interest of bonds are exempt from property tax limitation. All
future bonds and lease agreements would be passed only by a 2/3
majority of electors voting for the issue at a statewide primary
or general election.
State Property Tax
Such a tax would be prohibited except to retire existing
debts or liabilities and thus only if the State Controller certifies
no other funds are available.
-2-
Special Assessment Districts
No restrictions on new special assessment districts; but,
they must come within present limitations and must be approved
during a statewide primary or general election.
Special Districts
There is some question about the funding of special districts.
The Legislative Analyst's Office has provided the clearest
explanation as to how the new system will work. They conclude that
"for intracounty special districts, the tax rate limit applies
to the total assessed valuation within the county and not just to
the portion covered by each district." In effect, this means
the county could impose a $.50 tax for all of these districts and
then this measure gives the Board of Supervisors the authority
(in the absence of legislation to the contrary) to apportion these
funds as they see fit.
"For intercounty special districts, the $.50 applies only
to the assessed valuation within such districts." A final
determination may be left up to the courts, as the wording in the
Initiative is not without controversy.
-3-
ARGUMENTS IN THE SUPPORT OF THE INITIATIVE
Rising Taxes
Property taxes have escalated so rapidly in California that
the desirability of owning property may be questioned by both
business investors and homeowners. There is always the fear that
industry will establish its facilities in another state, shipping
its products to California more economically than it can produce
them here. Moreover, the property tax is an extra burden on
both elderly and young families, and it has an adverse effect on
new housing starts. The Watson Initiative would clearly ease
these problems.
Lack of Legislation
The Legislature has had difficulty in finding an agreeable
tax relief package. While many proposals have been offered, no
comprehensive program has been implemented. The initiative
process may not be the best way to work out tax reform; but, at
the present, it seems to be the most practical.
Errors May Be Corrected
If there are errors or desirable improvements to the Watson
Amendment which become manifest in the future, these problems
can be solved by adjustment by the Legislature, the people, or
both.
-4-
Shift to Welfare Costs
The cost of welfare imposes a tremendous burden upon local
governments, which in turn, depends upon the local property tax-
payer. Newest thinking indicates that social welfare is a
responsibility that should be handled by the State if not the
Federal Government. The Watson Amendment would provide for welfare
to be solely state funded.
Major School Tax Shift
Taxation for schools is not only expensive for property
owners, but in light of the Serrano VS. Priest decision, it is
apparently illegal in its present form. The Watson Amendment,
which establishes uniform support of $2.00 on the property tax
rate for schools and establishes a State ADA of $825 per child per
year, would move the State toward a policy that may be acceptable
to the courts.
Substantial arguments have been raised as to whether the
proposal is in balance. Part of the argument is related to the
school pupil base amount of $825, which many claim should have
been a base amount established at a figure closer to $925. Watson
suggests that the opposition claim is based on average costs,
using the expenditure figures for rich and for poor districts,
while the $825 is based on the compiled costs of providing an
adequate educational operation. The consideration of Federal funds
also enters into the question of "balance," as well as the
projections of a declining school population.
-5-
Watson claims that any imbalance would not exceed $100 million
and suggests that it is offset by the bases where higher tax
rates for state taxes are applied to normal growth of the particu-
lar tax base.
Curbs the Use of Leasebacks
Passage of the Watson Amendment would curb leasebacks and
joint powers agreements by requiring that they be approved by a
2/3 vote at a general (not a special) election. The use of these
devices to avoid the necessity of gaining voter approval for
general obligation bonds has contributed greatly to the burden on
the property taxpayer.
Sets Reasonable Tax Limit
There is a growing body of opinion that a property tax rate
in excess of 2% of assessed value is a regressive tax. By setting
a ceiling of 1-3/4% of assessed value, plus providing for the
retirement of debt, the Watson Amendment arrives at 2% of assessed
value as the maximum property tax.
Renter Relief
Renters would benefit in the course of open-market competition.
While landlords probably would not uniformly reduce rates,
property tax pressure would be relieved, and when vacancies occur,
owners would be more likely to rent at a lower rate to insure
an occupancy.
-6-
Provides Relief to Both Large and Small Landlords
The charge is often made that the Amendment favors major
landlords and large property owners. The Assembly Revenue and
Taxation Committee states, "Business, paying 65% of the property
tax, is given $3.056 billion in relief and will pay only $743
million in new taxes." Included in this figure, however, are very
small landlords; the study combined the type of people renting
half of their duplex and living in the other half with large
corporations. Of California's 3,000,000 landlords, the California
Real Estate Association estimates that half of them own and rent
only a few apartments or a second home.
-7-
ARGUMENTS AGAINST THE INITIATIVE
No Real Relief
While the proposal is generally discussed as a "tax limita-
tion," it is well to remember it is really a tax shift, as other
taxes are increased. The homeowner may experience no savings
in the end.
Problems with School Funding
Alan Post indicated in his analysis of the Initiative that
it will, "drastically change the methods of supporting local
schools." Under the Initiative, the State is required to apportion
$825 per ADA for grades K-12, minus the amount that would be
raised from a new $2.00 county school tax.
Currently, State and local expenditures per ADA average
$916 for K-12. In other words, Mr. Watson's measure provides about
$91 less per ADA than the present financing system will provide:
a decrease of $25 million according to Mr. Post.
Moreover, the Initiative provides that the State apportion-
ments will go to the counties rather than the school districts;
and unless the Legislature provides to the contrary, Board of
Supervisors shall apportion these funds. The Watson Amendment
does not specify any criteria or guidelines for apportioning these
funds. (Chart on next page.)
-8-
Shift in the Support of Local Schools
K-12 and Special Programs
1972-73 Data in Millions
Source of
Existing
Watson
Funding
Law
Initiative
Change
State Support
$ 1,499
$ 2,698
+ $ 1,249
Local Property Taxes
2,871
1,197
- 1,674
Federal & Other Funds
322
322
0
$ 4,642
$ 4,217
- $ 425
Source: Legislative Analyst
Special Districts
Special districts will face grave questions. The Initiative
provides that all intracounty special districts are limited in
the aggragate to a $.50 rate. That is, the total of all rates
levied by all districts would be limited to $.50. This will pre-
clude many districts from levying more than a token tax rate and
will make it impossible for many districts providing essential
functions such as fire protection services to continue to function.
For unincorporated areas, this is a crippling blow, because
virtually no other government units could provide services to
these areas under the rate limits.
No Renter Relief
Many analyses of the Initiative point to the lack of a
provision which would insure that renters receive tax relief.
Although renters will be called on to pay their share of the new
taxes required by the program, there is little evidence they will
experience other benefits.
-9-
Limits State Power to Respond in Crisis
By writing this proposal into the constitution, the State
is limited, in its power, to respond to changing conditions. The
tax rates would be set by constitutional amendment, and should
sudden or unforeseen circumstances arise, there would be very few
options open to the State.
Changes Property Classifications
The Amendment deprives the Legislature of its existing power
to classify personal property for taxation or exempt it from
taxation. Moreover, it is uncertain whether existing classifica-
tions will be wiped out or allowed to stand. The language is
unclear, and much interpretation will be needed before new tax
categories are achieved.
Home Rule Dimished
Opponents of the measure indicate that the Initiative will
foretell the end of independent local government and home rule.
As wage and cost pressures exceed the growth rate of city and
county revenues, the State and Federal governments will be com-
pelled to shoulder more and more of the fiscal burden of local
government. The Initiative perils local government as it now
exists, but it fails to replace it with a structure capable of
providing services of a level and quality acceptable to individual
communities.
Although the Watson proposal limits property tax for schools
and counties, at the same time, it relieves those entities of
-10-
heavy obligations. Cities receive no such relief. Many of our
large cities and counties exceed the tax rates set by the
Initiative and would be subject to the freeze. The measure makes
no mention of how these governments, which are above the limits,
shall meet their revenue needs during the freeze period, or
thereafter, when the tax rates would be reduced to $2.00.
Mr. Watson has said that the $2.00 maximum rate was selected
as sufficient for an average city with average needs. But, this
assumes, of course, there are "average cities" and "average needs.' "
Such an assumption seems far to vague and impractical to be used
as the basis of the State's fiscal structure.
New Transportation Funds Lost
The new gasoline sales tax, provided by SB 325, which would
make at least $138 million available for local transportation
development, is canceled out. By setting the local sales tax rate
at 1%, the additional 1/4% local sales tax provided in the bill
for transportation is lost. The new sales tax on gasoline would
still be imposed beginning July 1, 1972 however.
Too Complex for the Ballot
The measure is far too complex a matter to have details of
its major elements written into a law that can be changed only
by submitting it to all of the voters of the State. The right of
the Initiative can be abused. Is it fair for a group with a
specialized interest to present to the electorate a measure so
complex that fewer than 10,000 persons in the whole state will
understand in full?
-11-
SUMMARY
The most important question to ask of the Watson Amendment
is will it meet the fiscal needs of the State while offering
property tax relief. Many of the analyses of the Initiative
indicate that it is underfunded. Alan Post shows a deficit of
$696 million and the Assembly Committee on Revenue and Taxation
reports the Amendment is underfunded by $1.272 billion. The Los
Angeles Area Chamber of Commerce, which supports the Initiative,
disputes these claims. "Mr Post's office is not telling the
whole story. The $700 million loss, in the first place, assumes
that the Federal Government will not continue its aid to impacted
areas program. There is no basis for this assumption. If, at
any time the Federal Government were to discontinue this program,
the impact of California, as a whole, would be a $370 million
revenue loss as a direct support to education. Under Watson, or
under current law, were the Federal Government to stop the flow
of this $370 million, the State would somehow have to find a way
to take up the slack. Since the argument proceeds from a point of
political impracticality, $370 million should be subtracted from
the Post figure of $700 million, leaving a net deficit of $330
million." No one can say, with any degree of certainty, what
the Amendment's exact effects will be on the State's fiscal
structure. Funding for state and city services, special districts
and schools is in question, and these "uncertainties" may lead to
years of litigation.
Table 1
State Revenue and Costs Estimates of
The Watson Initiative
(In Millions)
1972-73 Ongoing Effects
I. State Costs
1.
Education
K-12
$1,249
Community Colleges
397
Sub-total
$1,646
2. Social Welfare
$ 688
3. Homeowner's exemption payments
- 111
4. Business inventory payments
-
6
5. Senior citizen reimbursements
-
5
Total State Costs
$2,212
II. State Revenues
1. Increase state sales tax rate from
4 to 6 percent
$1,000
2. Increase state cigarette tax from
10 to 20 cents per pack
128*
3. Increase distilled spirits tax from
$2 to $2.50 per gallon
25
4. Increase bank and corporation tax
rate from 7 to 11 percent
320
5. Eliminate gross premiums tax on
insurance companies, and their
principal office decutions, and
impose a 11 percent net income tax
-
147
6. Impose a 7 percent serance tax on
all minerals
105
7. Interaction
85
Total State Revenue
$1,516
Unfunded State Costs
- 696
*Only the state portion of the revenue increase.
Source: Legislative Analyst
-13-
Impact of the Watson Initiative on Various Economic Units
Property tax
Sales Tax
Cigaretee
Distilled
Bank and
Income
Income
rate reduction
4 - 6c
tax
spirits
corporation
Insurance
Severance
tax -
tax -
1.75% limit
+ lc city
10 - 20c
$2 - $2.50
tax 7 - 11%
tax
tax
State
Federal
Renters
(-)
+
+
+
(+)
(-)
(+)
-
-
Senior citizens
-
+
+
+
(+)
(-)
(+)
+
+
Homeowners
-
+
+
+
(+)
(-)
(+)
+
+
Farmers
In open space
-
+
+
+
(+)
(-)
(+)
+
+
Not in open space
-
+
+
+
(+)
(-)
(+)
+
+
Landholders
-
N
N
N
+
(-)
N
+
+
Corporations
With real estate
-
+
N
N
+
(-)
N
N
+
Without real estate
N
+
N
N
+
(-)
N
N
-
Insurance companies
-
+
N
N
+
-
N
N
N
Banks
-
+
N
N
-
(-)
N
N
-
Dil Companies
-
+
N
N
+
(-)
+
+
+
Exempt properties
N
+
N
N
N
(-)
N
N
N
Timber
-
+
I
N
+
(-)
N
+
+
+ Indicates a direct increase in taxes.
(+) Indicates an indirect increase in taxes.
- Indicates a direct reduction in taxes.
(-) Indicates an indirect reduction in taxes.
N Indicates neutral or negligible.
Board of Equalization
Appendix I
INITIATIVE MEASURE 10 BE SUBMITTED DIRECTLY 10 THE PIECTORS
The Attorney General has preparal 1 title and summary of the chief purposes and purnis of the proposed measure, RB follows
TAXATION. INITIATIVE CONSTIUTIONAL AMENDMENT Establishes several property (as rate limitations
Prescribes tax rates for sales, use. cigarettes, distribut spirits, banks, corporations, and insurance companies:
Limits total Ad valorem on on property to I 79% of market value for all purposes except payment of designated
types of delies and liabilities. Eliminates property tax for welfare purposes. limits property cas for education, and
requires RIGIC funding of these from other laxes. Requires severance LOX on extraction of minerals and hydro
carbona Requires worthirds vote of Legislature forncrease designated taxes. Restricts exemptions from property
the to those approved by election. If the proposed initiative IN adopted undefined additional Imancing from state
sources in the approximate annual amount of neven hundred million dollars ($700,000,000.00) will be required.
STATE OF CALIFORNIA,
COUNTY (or City and County) of
To the Honorable Secretary of state of the Viate of California:
We, the undersigned, registered, qualified electors of the State of California, residents of
County (or City and County), present to the Secretary of State this pelition and hereby propose an amendment to the Constitution
of the State of California, by adding Article XIIIA, amending Section 16 of Article XIII and repealing Section 14 4/5 of Article
XIII, hereinafter set forth in full, and petition that the same be submitted to the electors of the State of California for their
adoption or rejection, at the next succeeding general election or at any special election called by the Governor of the State
of California prior to such general election or as provided by law. The proposed constitutional amendment reads as follows:
The People of the State of a/1/ornia do ender as follows:
First, that ARTICLE XIIIA is added to the Constitution to read:
ARTICLE XIIIA
Tax Limitation
Section 1. It is the intent of this Article that:
(a) The property tax shall be limited to 1.75% of market value for all purposes other than for the payment of debts or
liabilities;
(b) All of the costs of education, except as hereinafter provided, and all of the costs of social welfare services through-
out the State of California shall be funded by the State and shall be paid from revenues derived from sources other than ad
valorem property taxes; and
(c) Other tax reforms and Immitations shall be established,
Section 2. From and after the effective date of this Article, the State shall not levy on ad valorem property tax for any
purpose whatsoever: provided. however, that in each year that the State Controller certifies that no other SOUTCE of funds or
method of taxation is available, the State may levy a statewide ad volorem property Tax sufficient to service and retire debts
or liabilities of the State authorized or outstanding on the effective date of this Article: and provided, further, no subordinate
taxing agency shall levy an ad valorem property tax for the purpose of paying the costs ot social welfare services.
Section 3. From and after the effective date of this Article, for all purposes, except as provided in Sections 4 and 5 hereof,
subordinate taxing agencies may levy ad valorem property takes only within the following limitations:
(a) The tax levied by each county shall not exceed TWO DOLLARS ($2.00) per ONE HUNDRED DOLLARS ($100) of
assessed valuation of taxable property within such county.
(b) The tax levied by any consolidated city and county shall not exceed FOUR DOLLARS ($4.00) per ONE HUNDRED
DOLLARS ($100) of assessed valuation of taxable property within such city and county.
(c) The tax levied by each city shall not exceed TWO DOLLARS ($2.00) per ONE HUNDRED DOLLARS ($100) of
assessed valuation of taxable property within such city.
(d) The tax levied by or on behalf of all intra-county taxing agencies, the boundaries of which are wholly within one
county, or one city and county, shall not exceed in the aggregate FIFTY CENTS ($0.50) per ONE HUNDRED DOLLARS
($100) of assessed valuation of Taxable properly within each such county, or city and county. In the event the hudgets of all
such agencies would require an aggregate tox in excess of the maximum permitted by this Section, and unless the Legisloture
provides a uniform procedure for allocation, the Boord of Supervisors for each county and city and county shall opportion the
said maximum tax rate.
(e) The tax levied by inter-county taxing agencies, the boundaries of which include all or portions of two or more
counties, shall not in the aggregate exceed FIFTY CENTS ($0.50) per ONE HUNDRED DOLLARS ($100) of assessed valu-
ation of taxable property within all such inter-county agencies. The assessed valuation of taxable property shall be determined
without duplication of the value of taxable property lying in whole or in part within the boundaries of more than one inter-county
taxing agency. In the event the aggregate budgets of all such agencies would require a tax in excess of the maximum permitted
by this Section, the Legislature shall apportion the said maximum tax rate among such agencies in accordance with procedures
established for that purpose.
(f) To the extent that the limits established for subordinate taxing agencies by paragraphs (a), (b). (c), (d) and (e) of
this Section 3 have been exceeded for the fiscal year 1971-1972, the rate of property taxes levied in the fiscal year 1971-1972,
exclusive of the rate or rates attributable to the costs of education, the costs of social welfare services, and payments on
account of debts or liabilities, shall be the limit for a period of time not to extend beyond the 1976-1977 fiscal year. Commenc-
ing in the 1977-1978 fiscal year, the tax limits set forth in said paragraphs (a), (b), (c), (d) and (e) shall be the limits for all
such subordinate taxing agencies without exception.
Section 4. For the support of public schools, grades kindergarten through 12, each county or city and county shall levy an
additional ad valorem property tax of TWO DOLLARS ($2.00) per ONE HUNDRED DOLLARS ($100) of assessed valuation of
taxable property within each such county or city and county. The State from its General Fund shall allocate and upportion to
each county or city and county in each fiscal year. a total base amount of EIGHT HUNDRED TWENTY-FIVE DOLLARS ($825)
per pupil in average daily attendance in all of the schools within each county or city and county, grades kindergarten through
12, during the preceding fiscal year as certified by the Superintendent of Public Instruction. less the sum per pupil III average
daily attendance to be derived from the ad valorem property tax to be levied in accordance with this Section. The base amount
may he changed from time to time by the Legislature: provided, further, that the base amount shall be adjusted annually to
reflect changes in the cost of living index in 0 manner to be established by the Legislature. Unless the Legislature provides
otherwise, the aggregate amount herein made available for the support of public schools, grades kindergarten through 12, shall
be apportioned among the school districts within each county or city and county by the Board of Supervisors of each county or
city and county.
Section 5. From and after the effective date of this Section, subordinate taxing agencies may levy od valorem property
taxes for the payment of debts or liabilities provided the proposition for incurring each debt or liability of each subordinate
taxing agency shall have been approved by a two-thirds' majority of the votes cost on such 0 proposition within the subordi-
nate taxing agency at a statewide primary or general election. OF if the subordinate taxing agency IS uninhabited, by 0 petition
approved by a two-thirds' majority of property owners within such agency. This Section shall not limit the levy of ad valorem
taxes to pay debts or hobilities authorized or outstanding on the effective date hereof, nor be construed to invalidate debts or
liabilities outstanding on the effective date hereof. No subordinate taxing agency shall create, incur, or become liable for, any
debts or liabilities for payment of operating and maintenance expenses, it being the intent hereot that debts or liabilities shall
Section 6. For the purpose of this Article:
(a) "Ad valorem property texes" means taxes, assessments, levies, service charges, of charges of any nature levied by
the State or any subordinate taxing agency in respect of and determined according to the value of property. The term "ad
valorem property taxes" does not mean or include such other taxes and (see imposed pursuant to Parts 1 through 14 of Division
2 of the Revenue and Taxation Code as the same exists on the effective date hereaf or as the same may be heregiter modified
or amended.
(b) "Assessed valuation" means twenty-live per cent (25%) of the full cash value of taxable property, or twenty five per
cent (25%) of the value of taxable property OR to which a different standard of value 15 required under the Constitution.
"Assessed valuation of taxable property means the value of property after the deduction of the value of all exemptions.
(c) "Coal of education" means: (i) all costs and expenses incurred In connection with the acquisition, construction,
maintenance, expansion, operation and administration of all kindergarten schools elementory schools high schools and tech.
nical schools and all public bighes education 1% defined on January 1, 1921, 111 Section 22500 of the Education Code: (ii) all
costs of every kind and charge meaned of expended for any other adventional purpor author ced by the Constitution and
the Education Code as of the effective date of this Article and (iii) the cost of establishing and conducting my new educa
tional program, If the costs of much programs are, in whole OF in part, to be borne by the expenditure of public lunds. The term
"costs of education" does not mean or include costs Incurred by public agencies other than school districts to provide public
library services.
(d) "Costs of social welfare services" means all costs of programs and services authorized by Division 9 of the Wel-
fore and Institutions Code as it reads on January 1, 1971, and any other existing or subsequent statutory provisions relating to
the same or similar subject matter, including, without limitation, all costs and expenses incurred in the maintenance, operation
and administration of such programs and services, as well as the costs of acquiring capital assets or making capital improve-
ments.
(e) "Debts or liabilities" means indebtedness, the term of which is two (2) years or more, evidenced by (i) bonds, (ii)
notes, (iii) loans, (iv) other indeb' duess incurred for the purpose of acquiring capital assets or making capital improvements,
to the extent the ways and means for the payment thereof shall be from ad valorem property taxes. The term "debts or liabili-
ties" also includes (v) aggregate unpoid rent under lease agreements between subordinate taxing agencies, or between the
State and subordinate taxing agencies, the term of which, including options, is two (2) years or more, (vi) obligations arising
from terms and conditions of annexation of territory to subordinate taxing agencies, ond (vii) obligations arising from contracts
between subordinate taxing agencies and other subordinate taxing ogencies, the State or Federal Government or departments of
agencies of either, all to the extent the ways and means for the payment thereof shall be from ad valorem property taxes.
(f) "Intra-county taxing agency" or "inter-county taxing agency" means any subordinate taxing agency except counties,
cities, city and counties, and school districts,
(q) "School districts" means all Elementary School Districts, High School Districts, and Unitied School Districts
(serving grades kindergarten through 12) authorized by the statutes of this State.
(h) "Statewide primary or general election," for the purpose of this Article, shall be considered to include any local
election which is consolidated with and held at the same time as an election held throughout the State.
(i) "Subordinate taxing agency" means any department or subdivision of the State or any public entity therein, including,
without limitation, each county, city and county, city, school district, district, authority, or other public corporation or entity,
and any taxing zone, district, or other area therein, which 15 supported in whole or in part by ad valorem property taxes or
which has the power to levy ad valorem property taxes.
Section 7. The rate of State sales and use taxes imposed pursuant to Part 1 of Division 2 of the Revenue and Taxation
Code shall be Six Per Cent (6%). The rate of local sules and use taxes imposed pursuant to Part 1.5 of Division 2 of the
Revenue and Taxation Code shall he One Per Cent USA Said rates may be increased by (11) Act passed by not less than two-
thirds' vote of all members elected to each of the two houses of the Legislature, or may be decreased by an Act passed by not
less than a majority of all members elected to each of the two houses of the Legislature. No tax shall be imposed on the retail
sale of any prescription medicine or food products which were exempt from such taxation on January 1, 1971. The Legislature
may provide for the administration and collection of sales and use taxes at the county level. To the extent not inconsistent
herewith and unless otherwise modified or amended by the Legislature, the provisions of Part 1 and 1.5 of Division 2 of the
Revenue and Taxation Code shall continue in full force and effect.
Section 8. From and after the effective date of this Article, any changes in the Personal Income Tax Law enacted for the
purpose of increasing revenues collected pursuant thereto, whether by virtue of increased rates, changes in methods of comput-
ing taxable income, changes in deductions, exclusions or credits, or otherwise, must be imposed by an Act passed by not less
than two-thirds' vote of all members elected to each of the two houses of the Legislature.
Section 9. From and after the effective date of this Article:
(a) The aggregate tax imposed by the State on the distribution of cigarettes shall be not less than ONE CENT ($0.01)
per cigarette.
(b) The excise tax imposed by the State on the distribution of distilled spirits shall be not less than TWO DOLLARS
FIFTY CENTS ($2.50) per wine gollon on all distilled spirits of proof strength, OF less, and FIVE DOLLARS ($5.00) per wine
gallon on all distilled spirits in excess of proof strength and at σ proportionate rate for any quantity.
(c) A severance tax sholl be imposed by the State on every person severing or extracting hydrocarbon substances and
other minerals, other than water and steam, from the earth and the territorial seas and waters of this State, measured by the
full cash value of the product severed or extracted, at 0 rate equal to the combined rate for state and local sales and use
toxes. Any person paying such severance toxes may deduct from the severance taxes 50 paid the amount of ad valorem
property tax paid in the preceding fiscal year on the taxable mining or mineral right in the product or in the property from
which the product taxed under this Section has been produced or extracted. This Section shall not be deemed to preclude
cities from levying a license tax on the business or activity of extracting or producing such substances, whether measured by
value, by quantity or otherwise.
Section 10. From and after the effective date of this Article, the exemption of property, in whole or in part, from ad valorem
property tax, or the classification of property resulting in a reduced tax on such property, must be approved by a majority of
the votes cast on such a proposition at a statewide primary or general election.
Section 11. From and after the effective date of this Article, household furnishings and personal effects shall be exempt
from taxation
Second, that Section 16 of ARTICLE XIII be amended to read:
The Legislature shall provide by law for the uniform taxation of corporations, including insurance companies and State and
National bunking associations, their franchises, or any other franchises, by any form of taxation not prohibited by this Consti-
tution or the Constitution or laws of the United States. To the extent not inconsistent herewith and unless otherwise modified
or amended by the Legislature, the provisions of Part 11 of Division 2 of the Revenue and Taxation Code shall continue in full
force and effect. Taxes according to or measured by net income imposed pursuant to Part 11 of Division 2 of the Revenue and
Taxation Code shall be computed, except as herein provided, commencing January 1, 1972. at a uniform rate of Eleven Per
Cent (11%). The net income of insurance companies shall be the taxable income described for such companies in the Internal
Revenue Code, as amended, allocated to this State by the ratio of premiums received in this State 10 all premiums received.
Taxes according to or measured by net income imposed on insurance companies shall be computed commercing January 1,
1973, at a uniform rate of Eleven Per Cent (11%). The rates herein provided may be changed by an Act passed by not less than
two-thirds' vote of all members elected to each of the two houses of the Legislature.
Third, that Section 14 4/5 of ARTICLE XIII is repealed.
Fourth, that this Article shall be liberally construed to carry out its purposes, and the Legislature shall pass
all laws necessary to carry out its provisions. To the extent that the Legislature shall fail to enact such laws, the appropriate
officers of the State and each subordinate taxing agency therein are authorized and directed to proceed to carry out the provi-
sions of this Article, and the action of such officers may be compelled by any citizens of this State by mundamus. If any
section, part, clause, or phrase hereof is for any reason held to be invalid, it is intended that all the remainder shall continue
to be fully effective.
Fifth, that except as herein provided, the effective date of this Article shall be the beginning of the fiscal
year immediately following approval by CI majority of the votes cast therefor. For the 1972-1973 unsecured property tax roll
only, the effective date of this Article shall be one year from the beginning of the fiscol year immediately following approval
by 1972 C majority of the votes cast therefor. Section 14 4/5 of ARTICLE XIII shall be repealed at 11:59 p.m. on December 31,
STATE TAX RELIEF (In Millions)
Property Tax Relief
1968-69
1969-70
1970-71
1971-72
1972-73
Total
Homeowner's Property
Tax Relief Program
$174.7 1
$200.1
$218.0
$232.5
$254.81
2
$1,080.1
Business Inventory³
Property Tax Relief
Program
-0-
48.9
90.6
131.4
143.5
$414.4
Senior Citizens' Prop-
erty Tax Assistance
Program
7.8
7.8
8.6
8.8
55.2
$88.2
Income Tax Rebate
(10% credit and
20% forgiveness)
-0-
82.14
-0-
235.05
-0-
$317.1
Open-Space Program
-0-
-0-
-0-
-0-
13.0
$13.0
Double Standard Deduction
45.0
47.0
49.0
51.0
53.0
$245.0
TOTAL TAX RELIEF
$227.5
$385.9
$366.2
$658.7
$519.5
$2,157.8
Note: Costs for Homeowners, Business Inventory, and Senior Citizens' Programs reflect
original Controller's Reports and subsequent prior year adjustments.
1 (Proposition 1A)
2 Includes cooperative housing units per SB7, 1972 RS, amounting to $2.5 million
3
Includes movie and wine state subventions
4
10% special credit on 1969 income
5
20% forgiveness credit on 1971 income
Tab Retorm
(morett,
Proposal)
Is Sales Tax Regressive?
2 to 1 Against Moscone!
"It is necessary to change government's reliance on static
regressive taxes (and that includes sales taxes) to a more elastic
base with a high capacity for growth and equity."
State Sen. George Moscone, D-San Francisco
Chamber of Commerce Legislative Tax
Conference, Sacramento, California
March 9, 1971
"(Assembly Speaker Bob)
Moretti argues that the
California sales tax is not as regressive as Democrats used to
believe because it exempts food, utility services, housing and
prescription drugs."
Los Angeles Times, May 28, 1972
(Article on Moretti Tax Proposal)
"Although it is traditionally described as a 'soak the
poor' tax, our studies have shown that, in California, the
sales tax can be considered a proportional tax if a person's
net resources are used as the criterion of ability to pay. The
basic necessities of life--food, shelter, and medical services
and drugs--are exempt from the sales tax in this State. With
these items removed from the tax base, this revenue source
loses much of its regressive character
By using the
sales tax to substitute for a portion of the property tax, we
can improve California's entire revenue system."
Former Assembly Speaker Jesse Unruh
San Diego Open Forum, San Diego, Calif.
January 8, 1967
Los Angeles Times, May 28, 1972
It is a big bite, particularly In the
The Moretti Proposal--
middle and high income brackets.
But Moretti argues the income tax
payer in California has it casy. Of 38
states which levy an income tax, he
to include definite school finance
says, the couple with a taxable in-
Early Effort
features. Lacking this, he savs. he
come of $17,500 pays a tax that
will tie it to a separate school finance
ranks 27th in the nation. At the $7,-
measure.
500 income level, the California-tax
But to date he has no specific plan.
The Moretti bill now raises more
bite ranks 37th.
for a Massive
than $500 million a year for school
Corporation taxes would be -in-
purposes which, if nothing further is
creased from the present 7.6% rate
done, apparently would simply be
on Dec. 31, 1972, to 9% under the
allocated to school districts on the
Moretti bill. The tax on banks and
basis of existing and out-of-date for-
other financial institutions would be
mulae.
raised from 11.6% to 13%
The Moretti bill would increase
This combination of boosts would
Tax Shift
state revenues by substantial raises,
increase state revenues by $40 mil-
in three basic state taxes-the sales
lion in fiscal 1972-73. $130 million in
The sales tax. now 3.75% at the
1073-74 and $135 million in 1974-75.
state level plus another 1.25% for lo-
Moretti argues that the impact of
this tax increase on the business
cal government, would be raised an-
HE TAX reform effort of the
community is greatly reduced by
T
the fact that it is deductible from the
1972 Legislature is directed at
federal income tax. Studies indicate;
a massive tax shift that would
he said, that the effective rate is less
increase sales, personal income and
than half of the nominal rate.
business taxes in California nearly
$1.4 billion by 1974-75.
property tax relief would
Assembly Speaker Bob Moretti (D-
be provided by increasing the pre-
North Hollywood) is the principal
sent $750 homeowner's assessment
author of the proposal but it basical-
exemption to $2,000 plus 10% of the
ly is a program put together by the
remaining assessed value. This
County Supervisors Assn. of Califor-
would cut property taxes by -S708
nia.
million in 1972-73. $174 million in
In return for the huge increase in
1973-74 and by $759 million by
state taxes-the immediate tax rise
1974-75.
would be $734 million in fiscal 1972-
The Moretti plan contains no limi-
73-the Moretti bill promises more
tations or ceilings other than exist-
than $700 million in immediate di-
ing ones on any local agency's tax le-
rect property tax relief to homeown-
vving authority. Moretti insists that
ers.
his program is balanced and pro-
It offers more than $200 million in
vides actual dollar tax reductions,
income tax credits to persons who
overall, for most Californians. Hy-
rent their homes and another $25
pothetical tax impact tables bear
million to counties and school dis-
this out. At the $10,000 annual ad-
tricts for revenues lost through open
justed gross income level, for exam-
space agreements.
ple. a married homeowner with two
And it would provide $500 million
children and a $20,000 market value
in new state revenues during fiscal
home would pay S40 more in person-
1973-74, still one year away, for
Speaker Bob Moretti
al income taxes, $39 more in sales
school finance reforms under the
Times drawing
taxes and receive a S191 a year re-
Serrano VS. Priest decision.
duction in his property taxes for a
The Moretti package passed the
other 1 cent on the dollar as of May
net savings of $112.
Assembly on a 56-16 vote on May
1, 1973.
The reduction conceivably could
18 and rests now in the Senate Rev-
This would produce S34 million in
increase if the $500 million in school
enue and Taxation Committee. But
new state revenue in fiscal 1972-73:
aid money were used to further re-
the bill, as passed by the Assembly,
S601 million in its first full year of
duce school district property taxes.
was really nothing more than a ske-
operation, fiscal 1973-74, and an esti-
Some net tax savings would con-
leton of what it has to be if it is to be
mated $643 million by 1974-75.
tinue, according to the tables, at least
written into law.
Moretti argues that the California
through the $20,000 adjusted gross
In the first place, only the tax le-
sales tax is not as regressive as
income level. At about $25,000 level
vies are in the bill as it stands today.
Democrats used to believe because it
the family would experience a 534-a-
Property tax relief provisions-the
exempts food, utility services, hous-
year net increase in tax payments.
way the new money is to be spent-
ing and prescription drugs.
At $50,000 the net tax increase
were taken out to get around a con-
Personal income taxes would be
would be $788 a year.
stitutional prohibition against pas-
increased by narrowing present $3.-
Moretti points out that 89% of the
sage of any appropriation bills until
000 tax bracket for married couples
married homeowners in California
after the pending budget becomes
to $2,400 and the $1,500 bracket for
have family incomes below $20,000.
law.
singles to $1,200. In addition, new
Secondly, there is no provision in
brackets would be put on top of the
the Moretti bill-and there has
scale to increase the maximum tax
never been one-that spells out how
from 11% to 15%
the more than $500 million in so-
A 12% tax would hit a single per-
called school equalization money is
son with a taxable income of $14.250
to be allocated.
or more. The same person would
Moretti originally intended that
have to pay 15% if his income rose
this decision be put over until the
to more than $17,850.
1973 legislative session. But interest
The same rates would apply for
in trying to solve the dilemma raised
married taxpayers at double the in-
by Serrano vs. Priest has mounted
come levels.
both in the Legislature and in the
The income tax provisions of the
Reagan Administration. (Reagan,
Moretti bill would become effective
too, initially talked about waiting
for the 1972 income year. They
for another year to tackle the school
would increase revenues to the state
finance issue.)
by $860 million in fiscal 1972-73;
Now Morett1 says he will amend
drop them to $720 million in 1973-74
his bill, in the Senate or in a later
when the renter's relief bite would
conference between the two houses,
he fell for the first time, and build
tax, the personal income tax and the
them back up to $825 million in
bank and corporation tax,
1074-75.
While discussing a massive income tax increase,
Moretti neglects to mention that California's total tax
burden now is third in the nation. It was second when
Governor Reagan took office, but has dropped back a
notch as a result of the efficiencies and economies
introduced by Governor Reagan.
Los Angeles Times, May 28, 1972
The sales tax would be increased 1
The Reagan Proposal
cent on the dollar on May 1, 1973,
and would produce. according to
Reagan's estimates, $585 million in
fiscal 1973-74.
Angeles school district would get
The bank and corporation tax
One Package
$107 million in state money and
would be increased from its present
would be required to reduce the In-
7.6% to 9% on Jan. 1, 1973, and
cal tax rate by $1.02 per $100 of
would yield, in 1973-74, an estimated
assessed value. The district would
get no state money to enrich its edu-
$125 million in new revenue.
cational program.)
Reagan would add 5 cents to the
to
Tackle
Many districts alreadv tax them-
existing 10 cents per pack tax on.ci-
selves at more than $1.80 per $100 of
garets as of Dec. 1, 1972. for an esti-
assessed value at the elementary
mated vield of $118 million in new
level and provide a richer program
money in 1973-74.
than the $687 the Reagan proposal
Taxes on distilled spirits would be
would guarantee.
Two Issues
increased 50 cents a gallon on July 1,
They could contimue to do so. But
1973, and would yield an estimated
they would be required to roll back
S26 million revenue increase during
their tax rates by an amount equi-
1973-74.
valent to any state aid they received.
Finally, the governor would in-
School district tax rates would be
crease the so-called motor vehicle in-
OV. REAGAN was a late
frozen at existing or mandate levels
lieu tax from its present 2% rate to
G
starter in this year's legisia-
2.85% beginning in 1973. to add $103
tive "tax reform" scramble.
million to the new revenue pot.
The money each year is returned
His program, to be presented to
to cities and counties on a pro rata
the Legislation in bill form this
basis. School districts now get noth-
week, was delayed, he said,
ing.
because he wanted to tackle both
Reagan proposes to give one-third
property tax relief and Serrano vs.
of the money produced by the in-
crease-about $34 million-to the
Priest school financing (see article
above) in the same package.
school districts. This would not hap-
Critics in the education establish-
pen, however. until fiscal 1973-74
when major school benefits called
ment and in the Legislature say he
for in the program also would take
doesn't succeed in either area. But
effect.
his proposal is, nevertheless, the
first concrete effort to solve the two
issues in a single package.
REAGAN does propose to give an
And, like every other "tax reform"
plan that has come before the Legis-
immediate $232 million in direct
lature in recent years, it would ac-
property tax relief to homeowners
complish its goals by shifting huge
during fiscal 1972-73. This money
sums of money from one tax base to
would come from the few months of
another.
revenues collected during 1972-73
The Serrano VS. Priest school fi-
from the sales, business and cigaret
nancing requirements would be ap-
tax increases plus the first $100 mil-
proached by providing $650 million
lion in surplus.
in state funds to replace the same
Gov. Reagan
Property tax relief would be ac-
Times drawing
amount now collected from local
complished by an immediate in-
crease in the existing $750 home-
school district property taxes. At the
under the program for two years. At
same time, the Reagan plan would
owner's assessment exemption to
the end of that time they could be
$1.250.
add $210 million in new state fund-
increased, but only by a vote of the
This direct relief would increase to
ing for poor school districts.
people in the district.
$242 million in 1973-74 and to $298
This $S60 million total is expected,
Other local taxing agencies-
million by 1975-76 by adding $100 to
as tax vields increase, to grow to
counties, cities and special districts
the exemption each year through
$995 million by fiscal 1975-76.
-also would have to get voter ap-
1975-76.
The Reagan plan would use the
proval of any increase in property
A $6 million cut in personal in-
funds to guarantee to any elementa-
tax rates above the 1972-73 level.
come taxes for singles and heads of
ry school district that levies a local
But they would not have to wait for
households also would become effec-
property tax rate of $1.88 per $100 of
two years.
tive in 1972-73 through some minor
assessed value enough money to
The tax base shift in Reagan's
changes in tax status. This cut
spend at least $745 per pupil per
proposal adds up to about $1.3 bil-
would increase to $13 million in fis-
year. If the local tax did not raise
lion in 1973-74, its first full year of
cal 1973-74. its first full year, and to
that much the state would provide
operation, and climbs to just over
an estimated $15 million by 1975-76.
the difference.
$1.5 billion by 1975-76.
The Reagan plan also would give
Any high school district that levies
But only $957 million of it would
some tax relief to those who rent
a local property tax rate of $1.11 per
come from new tax levies. The ba-
their homes by providing a sliding
$100 of assessed value would be
lance would be taken, if Congress
scale of credit on income tax pay-
guaranteed enough to spend at least
obliges him, from a combination of
ments of up to $40 for singles and
$930 per pupil.
federal revenue sharing ($240 mil-
$50 for married couples.
Any unified school district with a
lion) and expected continuing sur-
The Reagan plan has one other
combined tax rate of $2.99 per $100
pluses from existing state taxes
feature. It would place on the
of assessed value would be guar-
($100 million).
November election ballot a proposal
anteed $745 per elementary pupil
Should Congress not pass the
that would make voting require-
and $930. per high school pupil.
pending revenue sharing legislation,
ments in the Legislature the same
The state presently gives all school
Reagan proposes to use on-going
for all tax changes.
districts-rich and poor-at the ele-
state surpluses for that $240 million,
Currently the state Constitution
mentary level. for example, $125 per
too.
requires a two-thirds vote of both
pupil in basic state aid each year.
And if Congress does pass revenue
houses to raise or lower bank and
Under the Reagan plan, wealthy
sharing, his bill contains provision
corporation taxes. A simple majority
chool districts that can raise
for a $240 million cut in state per-
can change any other tax law.
enough money at the specified local
sonal income taxes beginning in fis-
The Reagan ballot proposal would
property tax rate to provide the full
cal 1973-74.
give the voters a choice of either re-
guaranteed amount per pupil would
Reagan's plan relies on increases
ducing the bank and corporation if.
get no state aid, not even this basic
in sales, business, motor vehicle and
quirement to a simple majority or
amount.
so-called "sin" taxes to raise its $957
making the two-thirds rule apply to
(A Reagan spokesman said the Los
million in needed new revenues.
all tax levies,
Please discard previ
outdated copy.
Tax Reform
Analysis of Governor Reagan's Responsible
Tax Reform and School Finance Plan
VS.
Speaker Moretti's Irresponsible
Guaranteed Tax Increase Program
Governor Ronald Reagan's responsible tax reform and
school finance program accomplishes goals which the State has
been seeking for years: comprehensive, guaranteed and permanent
simplified way of providing equal educational opportunity for
our schools, meeting the major requirements of the Seranno
court decision to equalize the school tax burden. It achieves
a 50-50 state-local sharing of basic school costs. It does all
this without raising income taxes.
Speaker Moretti's rival program is nothing but a massive
tax increase in the guise of "tax relief, the same deceptive
sham that has been introduced before. Moretti's program contains
no spending controls and thus, there is no guarantee that anyone
will get a cent of tax relief. Even worse, Moretti's plan
increases income taxes $840 million, by adding higher maximum
tax rates and narrowing tax brackets to squeeze more millions
from the income tax-- step that hits every taxpayer!
Furthermore, it does nothing to solve the school financing
problem in California. It merely sets aside a "floating $500
million" to be used later, but does not specify how this is to
be spent. It is totally irresponsible to raise taxes without a
specific plan on how those revenues are to be used. The danger
here is that the Legislature, dominated by spending blocs, could
simply use up this revenue for other programs, including welfare,
and leave the school finance problem to be dealt with later--at
a price of even higher taxes than his $1.5 billion program would
impose right now.
Governor Reagan's program is the responsible, realistic
way of providing tax relief and equal educational opportunity.
-1-
Governor Reagan's Plan
Speaker Moretti's Plan
Property Tax Relief
Guaranteed homeowner tax
Alleged increase of
relief of $650 million;
exemption to $2,000 plus
homeowner exemption raised
10% of assessed value.
from $750 to $1,250 in 1972;
But because there are no
$1,350 in 1973; $1,450 in 1974;
spending or local tax rate
$1,550 in 1975.
controls, NOT A CENT OF
TAX RELIEF is guaranteed!
Total Property Tax Relief
$892 million, Guaranteed.
$708 million (No guarantees)
School Finance Solution
Governor Reagan's program
No specific program to
increases state aid to 50%
meet Serrano decision
of current basic school costs,
implications; sets aside
plus cost of living factor.
a "floating $500 million"
Achieves 50-50 sharing ratio
In short, raises taxes,
of basic school costs sought for
but doesn't specify how
years, but never achieved during
money is to be spent.
previous administration.
Ignores 50-50 goal.
Renter Tax Relief
Up to $60 state income tax
Up to $80 income tax
credit for renters; tax
credit, rebates for non-
relief for taxpayers.
taxpayers. But this could
be offset by higher personal
income taxes on all brackets.
-2-.
Spending Controls
RR's Program
Moretti's Program
Freezes local non-school
None! Any alleged tax
72-73 property tax rates;
"relief" could be wiped
taxes could not thereafter
out by higher local tax
be raised without a vote of
rates, starting immediately.
the people! This is to
assure that the benefit of the
state program would go to tax-
payers, not to finance other
spending.
Rolls back school taxes a total of
$650 million.
Requires State to pay for any
No requirements. Even the
new or increased state-mandated
$500 million supposedly
programs.
earmarked for solving
school finance could be
wiped out by increased
state spending.
Constitutional Amendment to
No controls. Leaves 2/3
let people decide if 2/3 or a
requirement for raising
majority vote of Legislature
bank and corporation taxes,
should be required for raising
but only a simple majority
income and sales taxes as well
for increasing individual
as bank and corporation tax.
income taxes, sales tax,
etc.
-3-
School Aid Distribution
RR's Program
Moretti's Program
Simplifies complex state aid
Leaves present complex
formula to guarantee:
school financing formula
$745 minimum aid for every
as is, an inequity to
elementary school child (ADA) ;
poor districts. No
$930 for every high school
specific plan for solving
student in California
Serrano.
95% of California's school
Preserves all the inequities,
children would have more state support
complexities of present out-
to finance basic education program;
moded system which discrim-
only 5% in wealthiest districts
inates against poor districts;
would get less. Wealthy districts
favors wealthy districts,
now enjoy expensive programs at low
which have low tax rate,
tax rate.
but expensive school program.
Simplified Tax Returns
Allows taxpayers to simply
Preserves. separate return
attach carbon of federal tax
requirement for state
return in paying state income
income taxes; leaves the
taxes; eliminates separate
double return.
return. (Constitutional Amend-
ment to be voted on by People)
Other Benefits
Reserves $240 million in anticipated
None!
federal revenue sharing for
equalizing school aid;
any state general fund surplus
to be used for property tax relief.
If federal revenue sharing plan is
not adopted, State will rebate as
it did when Governor Reagan sponsored
a 10% state income tax credit in 1970
and a 20% income tax credit in 1972
when the State switched to withholding.
-4-
Replacement Revenue
RR's Plan
Moretti's Plan
Income Taxes
NO INCREASE:
Increase of $840 million
which hits low and middle
income taxpayers hard;
narrows individual and
married couples' tax
brackets; Lowers tax
brackets to squeeze more
millions from California
taxpayers; adds to present
11% maximum rate.
Sales Taxes
One cent increase
One cent increase
Bank and Corporation
Taxes
1.4% increase
1.4% increase
Other Revenues (Taxes)
Cigarettes 5 cents a pack
increase. Distilled Spirits,
50 cents a gallon increase.
Vehicle In-Lieu Property Tax
increase from 2.0 to 2.85%;
additional revenue goes
equally to cities, counties,
and school districts.
Note: The "tax reform" originally introduced by Speaker Moretti-
included a 5% telephone user's tax and an increase in the
inventory tax exemption from 30 to 50%. Both these items were
deleted from the program before it left the Assembly. The inven-
tory tax exemption would remain at 30% permanently under both
plans.
-5-
(from Management Bulletin
TAX REFORM
dated 7-27-72)
REALISTIC TAX REFORM AND SCHOOL FINANCE PROGRAM
Under Governor Ronald Reagan's strong leadership, a compromise
solution to tax reform and school finance is in sight. With
time running out in the 1972 legislative session, Governor Reagan's
administration and Assembly Speaker Robert Moretti reached tenta-
tive agreement on a concensus program which includes the key
reforms Governor Reagan insists must be part of any realistic
tax reform and school finance program.
These are:
- Guaranteed and permanent homeowner property tax relief (a total
of $719 million in the first year - $404 million through higher
homeowner exemptions and $315 million through the rollback in
school taxes).
--Increased state aid to schools along with a greatly simplified
assistance formula that guarantees every California school child
equal educational opportunity.
-- Tax rate limitations on local government to protect homeowners
against having their state-financed property tax relief eroded
through higher rates at the local level.
The School aid formula, endorsed by State School Superintendent
Wilson Riles, represents the most far-reaching reform ever pro-
posed in California's school financing program. If the program
is adopted the State will be guaranteeing an estimated $1.8
billion of additional state aid over the next three years.
-- Ninety per cent of California's school children would be
guaranteed additional state support.
-- The program focuses on the major implications of the Seranno
court opinion.
Reasons why the consensus tax reform/school finance package
should be passed:
1. Unless tax reform is adopted, the Watson amendment may
pass and force the State to consider massive increases
in income, sales and most other taxes. A doubling of
the state income tax could be required.
2. If the State's school financing system is not reformed,
court opinions may force a massive tax increase to meet
the requirements of potential court action.
3. The consensus program is realistic, has gained widespread
bi-partisan support, and CAN BE PASSED AT THIS session.
4. Most important, the program authorizes genuine, guaranteed
homeowner property tax relief while meeting the school
financing problem.
-1-
GUARANTEED PROPERTY TAX RELIEF
Under the program, the homeowner's property tax exemption would
be increased from the current $750 to $1,750 of assessed value
for the 1972-73 tax year. There would be a further increase to
$1,825 if revenue sharing is adopted. The exemption would be
$1,850 in 1974-75 and thereafter.
Combined with the increased school funding (which eliminates any
necessity for local tax rate increases), this amounts to a total
of $719 million in guaranteed property tax relief.
Example of Tax Relief: (with REVENUE SHARING--No Income Tax
changes)
A married homeowner with two children and an adjusted gross
income of $10,000 a year (average $20,000 home value) would
receive $210 in total property tax relief -- a $136 homeowner
tax reduction through the increased property tax exemption and
an additional $74 through the combined impact of the school tax
rollback and property tax limitations. Even with the sales,
vehicle in-lieu, and other tax adjustments, this $10,000 a year
homeowner would receive a NET TAX REDUCTION OF $158!
(Without Revenue Sharing)
A married homeowner with two children and an adjusted gross income
of $10,000 and a $20,000 value home would receive a total of $175
in property tax relief or a NET TAX REDUCTION of $98 even if
revenue sharing is not adopted by January 1, 1973.
Single homeowners and low to moderate income renters would have
proportionately lower total tax obligations.
LOCAL GOVERNMENT (TAX LIMITS)
The consensus program Governor Reagan supports would include a
freeze on property tax rates at the 1972-73 level, with adjust-
ments allowed if increases in the Consumer Price Index and
population exceed the growth of assessed value or for bond costs;
otherwise, it would require a majority vote of the people to
raise local tax rates. In addition to rolling back school prop-
erty taxes $315 million, the tax rate limitations would apply to
cities, counties, and special districts.
MORE INCOME TO LOCAL GOVERNMENT
To help make sure that local property tax rates stay down, the
State would assume the full cost of any new programs or executive
regulations which impose new or expanded costs on local govern-
ment. The State also will provide reimbursement for any sales
or property tax exemptions enacted in the future which reduce
local revenues.
Finally, the increased revenue (approximately $103 million in
1973-74) from raising the vehicle in-lieu property tax rate from
2 to 2.85% will be divided equally between cities and counties.
This will provide local government with additional revenue during
the transition period.
-2-
These three changes are designed to assure that the property
tax relief granted under the program will be permanent and
guaranteed.
SCHOOL FINANCE/NEW MONEY FOR SCHOOLS
The program meets Governor Reagan's requirement of increased
financial aid for schools, focusing on the major implications
of the Seranno court opinion on equalizing school tax burdens.
A total of $545 million for schools would be provided, including
$175 million for the lowest wealth school districts, a $30
million urban factor to assist schools with significant enroll-
ments of disadvantaged students (effective in 1972-73) and $25
million to help implement the Early Childhood Education program.
This $25 million would increase to $40 million in 1973-74.
SIMPLIFIED AID FORMULA
The revised Reagan/consensus program achieves what the Governor
has sought for years: a simplified school aid formula. Each
student would be guaranteed at least a $770 per student per
year educational program in the elementary grades and $955 at
the high school level, in virtually every district.
Under this plan, no youngster would lose any state aid; and
ninety (90) per cent of California's school children would
receive additional state support for their education!
RENTER TAX RELIEF
Starting with the 1973 calendar year, renters would receive a
refundable tax credit of $25 to $45, annually, depending on
their income and marital status. The renter relief would total
about $125 million in 1973-74.
If revenue sharing is not adopted and the 35-hundredths of one
per cent increased income tax goes into effect, the renter relief
would go up from $25 to $55 for single persons and from $25 to
$75 for married couples. This would help offset the increased
state income tax rates.
BUSINESS INVENTORY TAX EXEMPTION
The program increases the business inventory tax exemption from
30 to 40% in 1973-74 and to 45% in 1975-76 and thereafter. For
many years, there has been bi-partisan agreement that the inven-
tory tax places California business and agriculture at a disadvan-
tage with surrounding states which do not tax inventories. It
will help California's job market and overall economy by dis-
couraging the flight of warehouse jobs and facilities to nearby
states which do not tax inventories. The State will provide
reimbursement income to local government for revenues lost as a
result of the increased exemption.
-3-
OPEN SPACE REIMBURSEMENTS
An additional $7 million is provided under the program to more
fully reimburse local government for revenue losses resulting
from reduced tax assessments on agricultural and "open space"
lands.
PUBLIC ASSISTANCE ADJUSTMENT
Provides reimbursement of the sales tax increase for low or
no-income homeowners and renters dependent on public assistance.
HOW THE PROGRAM IS FINANCED
SALES TAX
One cent increase effective January 1, 1973. Provides $205
million in 1972-73 fiscal year and $600 million in 1973-74 --
the first full fiscal year.
BANK AND CORPORATION TAXES
Increases bank and corporation tax rate by 1.4%, to 9% for
corporations and 13% for banks.
REVENUE SHARING (INCOME TAX)
Earmarks the State's estimated $240 million share of Federal
Revenue Sharing funds to help pay for the property tax relief-
school finance program. If revenue sharing is adopted by Jan-
uary 1, 1973, there will be no increase in state income taxes.
The first $198 million of revenue sharing would go to finance
the overall program in place of income tax revenues, the next
$35 million would increase the urban factor school aid formula
to $65 million. Remaining funds would go to reduce taxes.
If revenue sharing is not adopted by January 1, 1973, state
personal income tax rates would be adjusted proportionately by
.35% (thirty-five hundredths of one per cent) in each bracket,
effective in the 1973-74 fiscal year. This slight increase in
rates will be eliminated if revenue sharing is adopted prior to
January 1, 1975. When revenue sharing goes into effect, the
income tax rates would be reduced downward by .35% (thirty-five
hundredths of one per cent).
VEHICLE IN LIEU
Increased the vehicle in-lieu tax rate from 2.0 to 2.85%, effec-
tive in the 1974 license year. This tax is in lieu of local
personal property taxes; current rate was established in 1948
and at that time, was higher than prevailing property tax rates.
All of the income from this adjustment will be divided equally
among cities and counties.
STATE SURPLUS
An anticipated state surplus from existing tax rates will be
used to make up any additional revenues necessary to provide a
financially balanced program. This amounts to an estimated $158
million in 1972-73 and $161 million in 1973-74.
-4-
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For your information:
Attached is the more
current (i.e. re-typed) version
of the background materials
on the Reagan Tax Initiative.
Since SB 90 is in conference,
it may not be necessary; but
you may want to keep this in your
files, just in case.
ART AZEVEDO
Summary
Pledges a basic minimum financial base for the education
of each child regardless of his place of residence.
Provides homeowner relief by increasing the present home-
owners' property tax exemption and reducing the school property
tax rate.
Homeowners receiving tax relief will be assured of retaining
that benefit because of a constitutional property tax rate
"freeze".
Renters will be eligible for a credit on their income tax
reflecting a property tax element contained in rent.
Requires a two-thirds vote to increase all taxes.
Increases the exemption of business inventories from property
taxation to reduce the impact of this discriminatory tax on
local businesses.
The present proportionate share of the tax burden paid by
individual and business will be maintained.
Requires state subventions to local government to protect
local independence and local control for the costs of future
property tax exemptions and state mandated additional local
spending.
Provides an ongoing across-the-board reduction in the state
income tax because of savings and cutbacks made in welfare and
Medi-Cal spending.
Sets property tax restraints on local government to prevent
future increases in the property tax.
Devises a system of revenue controls for local schools which
provides property tax relief and tends to equalize the wide-
wealth disparities between school districts.
-Provides funds for further reimbursement to local government
for open space land protection (Williamson Act).
Apportions the federal revenue-sharing funds received by the
State to the most urgent need--local schools.
--Proposes increases in the sales tax and the bank and corporation
tax to fund the portion of the program not funded by the savings
in government spending, surpluses, or federal revenue-sharing
funds received by the State.
Establishes a system of revenue controls for schools to
grant program improvement to low-spending schools, and to
achieve property tax rate reduction in other districts;
provides for an annual adjustment in state aid to eliminate
'slippage"; and eliminates the use of all permissive overrides,
except debt service. Retains the right of the electorate to
authorize an increase in tax rates for school support.
Beginning in the 1973 income year, and each year thereafter,
a 10% across-the-board reduction in net/tax income liability would
be required.
Requires that property be assessed for taxation at 25% of
full cash value (excludes personal property and open space
lands).
Provisions of the Reagan Tax Amendment
Increases the present homeowners' property tax exemption
from $750 to $1,500 of assessed value in the 1973-74 fiscal
year and each year thereafter.
Provides tax relief to renters by granting a $25-$45 renters'
income tax credit on their tax returns.
Allocates $454 million to schools in the 1973-74 fiscal year
for program improvement and/or property tax rate reductions by
providing a minimum foundation program for all schools of $765
per student for elementary schools, and $950 per student for
high schools, adjustable each year by a cost-of-living increase.
Federal revenue-sharing funds are required to be deposited
in the State School Fund for support of California's schools.
Increases from 30% to 45% the business inventory tax exemption
in the 1973-74 fiscal year and each year thereafter.
Requires a two-thirds vote of the Legislature to increase
taxes. A reduction in the rate of a tax would require a majority
vote.
Increases the bank and corporation tax rate by 1.0% to 8.6%
for corporations and 12.6% for banks and financial institutions
operative after July 1, 1973.
Proposes a 1c increase in the state sales tax, commencing
July 1, 1973.
Provides that the State will reimburse local government for
property tax exemptions which are enacted subsequent to the
effective date of the Amendment.
Requires that local government be reimbursed for increased
costs of additional services mandated by the State in an existing
program, or the costs of a new program mandated by the Legislature.
Imposes a property tax rate "freeze" on cities, counties, and
special districts; any increase in property tax rates in excess
of the 1972-73 rate requires a vote of the electorate; authorizes
the Legislature to make adjustments in local tax rates for popu-
lation increases, the cost-of-living, and emergencies or special
situations.
Provides the funds ($7 million) to more fully reimburse local
government, including schools, for losses under the Williamson
Land Conservation Act.
HOMEOWNERS' EXEMPTION
A. Proposal:
(1) Increases the present homeowner's property
tax exemption from $750 to $1500. The
exemption will be effective for the 1973-74
fiscal year.
Included in the exemption under present law
are:
a. All owner-occupied single family homes
b. All owner-occupied condominiums
C. Multiple dwelling units, such as a duplex:
The value of the portion of such structure
occupied by the owner
d. The proportionate value of the dwellings
of cooperative housing corporations, such
as Rossmoor, occupied by the owner.
(2) A statutory provision will require counties to
furnish homeowners who have their taxes paid
by financial institutions a copy of the tax
bill.
Existing law also requires that the tax bill
provide the taxpayer with understandable infor-
mation relating to assessed value and state
relief granted by the homeowners' exemption
(AB 1/Bagley, 1971, 1st Exec. Session).
B. Fiscal Implications:
73-74 74-75 75-76
(In millions)
Homeowner's exemption
285
289
292
Because this program provides substantial
new state revenues to schools, including an
inflation factor, and adopts maximum tax rate
limits for local government and school dis-
tricts, it is contemplated that the growth
in property tax rates will not be as steep as
would otherwise be anticipated. Decreases in
rates, and commensurate property tax relief,
would be granted to homeowners by the $250
million roll-back in school tax rates. This
would be in addition to this exemption.
C. Support:
(1) The defects of the property tax have been
known for many years. It is regressive,
inequitable, and impossible to administer
with precision. It does not respond to growth,
and community planning and land use decisions
are distorted by the property tax.
(2) To compound these inequities, government in
California relies heavily on this revenue
source. The property tax produces more tax
revenue than the sales tax or the state income
tax. For example, a family of four earning
$10,000 living in Los Angeles pays the
following taxes to state and local government:
Income tax
$ 64
Sales tax
$151
Property tax
$550
(3) Greater direct tax reductions for homeowners
can be achieved through the homeowners'
exemption. Used in combination with general
property tax reduction programs, it is an
effective tool to provide meaningful homeowner
relief. It is extremely visible.
(4) An increase in the exemption will reduce the
reliance on such a regressive tax on homes and
make the total tax structure more reflective
of the ability-to-pay concept of taxation.
(5) Homeowner tax relief will be long lasting
relief when combined with an effective "freeze'
in tax rates through maximum property tax
rates.
(6) By using a flat $1500 exemption, we can extend
more tax relief to lower valued homes than
wealthy homes. This is where the relief is
needed.
(7) Studies by the Board of Equalizati on and the
Legislative Analyst indicate that a $1500
exemption substantially reduces the regressivi
of the property tax to middle-income taxpayers,
but does not create the administrative problems
which accompany a higher exemption, or a removal
of homes from the property tax. Note the
following provided by the Legislative Analyst:
Property Taxes As a Percentage of
Adjusted Gross Income with Different
Values of Homeowners' Exemption*
AGI
Class
$750
$1,500
$7,500
(5.1) %
(3.9) %
10,000
(5.0)
(4.1)
15,000
(4.7)
(4.1)
20,000
(4.4)
(4.0)
30,000
(4.5)
(4.2)
40,000
(4.4)
(4.1)
50,000
(4.0)
(3.8)
100,000
(3.3)
(3.2)
* Property tax rate of $11.82 for 1972-73. Married couple with
two children.
BUSINESS INVENTORIES
A. Proposal:
Increases the property tax exemption for
business inventories to 45% in 1973-74.
B. Fiscal Implications:
1972-73
1973-74
1974-75
1975-76
(In millions)
--
$64
$63
$66
C. Present Law:
Present law provides for a 30% exemption
for business inventories.
Inventories are defined by present law to
include:
1. Goods intended for sale or resale in the
ordinary course of business.
2. Raw material and work in process with
respect to such goods.
3. Animals and crops held for sale or resale.
4. Animals used for the production of food
or fiber and feed for such animals.
D. Support:
(1) Business inventory taxation has long been
viewed as undesirable. Studies by the Assembly
Committee on Revenue and Taxation, National
Tax Association and recently by the Advisory
Commission on Intergovernmental Relations
have all condemned this tax.
(2) Inventory taxes place California at a
definite disadvantage in competing with
other states for new industries and jobs.
California needs both. Arizona, Nevada,
Oregon and Hawaii all give tax advantages
to inventories. California is isolated by
her neighbors.
(3) Inventory taxes cause an annual slow-down in
business activity prior to March 1 that causes
a loss in warehouse occupancy in California,
fewer goods available to consumers, loss
in business income and jobs, and loss in tax
revenue to state and local government.
(4) Inventory taxes are inequitable. They produce
serious tax inequities between businesses
requiring inventories and those that do not,
and even a disparity of tax burdens between
businesses requiring inventories due to
differences in turnover, seasonal fluctuations,
etc.
(5) Inventory taxes hinder the efficient operation
of free markets and reduce income from other
tax sources.
(6) Inventory taxes are regressive. They are
passed on to the consumer and are imposed on
such items as food, medicine, clothing, etc.
(7) This provision provides for a "balanced
program" granting some relief to the business
community and recognizing that they will pay
an increased bank and corporations tax rate,
part of the federal revenuing sharing and
surplus funds, and a portion of the sales tax
increase.
RENTER CREDIT
A. Proposal:
Beginning in 1973 (Calendar year),
renters will be provided an income tax credit
on a scale of $25-$45 for single and married
couples. The credit would apply to the net
tax imposed under the present law, less tax
credits. The credit cannot exceed the amount
of the renters' net tax liabilities. A
qualified renter is an individual who, on
March 1 of the taxable year, was a resident
of the state and who, rented and occupied
premises in this state constituting his
principal place of residence. The Legislature
is authorized to further define the scope of
the credit. The credit can be changed by
a two-thirds vote of the Legislature.
The amount of the credit allowed is in
accordance with the following schedule:
If adjusted gross income is:
The credit is:
Less than $5,000
$25
$5,000 - 5,999
$30
$6,000 - 6,999
$35
$7,000 - 7,999
$40
$8,000 - and up
$45
B.
Fiscal Implications
73-74
74-75
75-76
76-77
(Millions)
$80
85
90
97
C.
Present Law
Present law does not provide for such a tax
credit. A recent ballot proposition
(Propsoition 14) did not make allowance for
such a credit.
D.
Support
1.
It is accepted that renters do pay some
portion of the apartment house owner's
property tax liability in their rental payments
as taxes are a cost of doing business that
owners of rental property will attempt to
recover. However, other factors are also
important in determining rental charges; for
example, supply and demand conditions in
rental housing can determine how much rent can
be charged in a given area. Nevertheless, it
is generally agreed that renters do pay a
portion of the owner's property tax in their
rent.
2.
Renters should not be called upon to fund the
homeowners' exemption, or the reduction in
school tax rates. Therefore, this credit is
appropriate since part of the property tax reli
is funded by surpluses from withholding, or
from federal revenue-sharing funded by federal
income taxes paid by renters.
INCOME TAX CREDIT
A. Proposal:
The Amendment provides for an income
tax credit of 10% of the tax imposed on each
income taxpayer. This credit would be
computed on the taxpayer's net tax liability.
The credit would be granted beginning in the
1973 income year, and each year thereafter
unless reduced or eliminated by the Legislature
The Legislature is authorized to change the
credit by a two-thirds vote. However, the
Legislature cannot increase the income tax
rate schedules without first modifying the tax
credit. If the revenue from the tax schedule
increase exceeds the amount of revenue
rebated to the taxpayer by the credit, the
credit must be eliminated.
B.
Fiscal Implications:
The following amounts would be returned
to California's income taxpayers:
1973-74
1974-75
1975-76
(Millions)
$286
239
271
C. Support
1.
This income tax credit is a recognition that
savings made in the costs of government should
be returned to the taxpayers in the form of
tax reductions.
2.
These funds were derived from savings in
California's Welfare and Medi-Cal program.
In past years, these programs were financed
by California's income taxpayers. Therefore,
the income tax credit is an appropriate
vehicle of relief.
3.
The tax credit method of refunding excess
revenues is the most efficient and effective
method to return tax funds to the people.
The income tax has been substantially relied
upon as a revenue source during the past 10
years. A heavy burden has been placed on
California's taxpayers through the adoption
of a system of withholding. Therefore,
equity justifies the granting of this tax
credit.
OPEN SPACE REIMBURSEMENT
A. Proposal:
The Amendment provides an additional $7
million to more fully reimburse local govern-
ment for revenue losses attributable to
reduced assessments on agricultural and open
space lands. Statutory implementation would
be required.
Existing law, and proposed statutory changes
provide for the following reimbursement
mechanisms:
Schools
School districts where the assessed value per
ADA, adjusted by inflation, has declined,
receive reimbursement by computing:
--the difference between the adjusted assessed
value of land in the district prior to the
implementation of the Conservation Act and the
current assessed value in the District.
--and applying that portion of the tax rate in
the district in excess of the following rates
against the loss of assessed value of land in
the District:
Elementary
$2.23
High School
1.64
Community College
.25
Unified (K-12)
3.87
Counties
Counties are reimbursed on a per acre basis as
follows:
--50¢ for nonprime land of more than local
importance
--$2.00 for prime land
--$4.00 for prime land inside a city, within
3 miles of a city with more than 1500 voters,
or within one mile of a boundary of a city
of 1500 registered voters.
B. Fiscal Implications:
1973-74
1974-75
1975-76
(In millions)
$7
$7
$7
C. Support:
(1) County implementation of the Land Conservation
Act has resulted in a reduction of assessed
valuations in a number of counties. AB 1
(Bagley) of the First Extraordinary Session
reimbursed local jurisdictions for a portion of
the loss in tax revenues due to the Land
Conservation Act under formulas similar to the
ones above. The purpose was to provide an
incentive for counties to implement the Con-
servation Act. This proposal adds to the local
reimbursement and the incentive to provide tax
relief to farmers.
(2) Rural governmental entities, in particular
certain school districts, have suffered serious
revenue losses from an implementation of
the Act. This would help mitigate that
inequity.
BANK AND CORPORATION TAX
A.
Proposal:
Operative July 1, 1973, the corporate
franchise tax is increased from 7.6% to 8.6%
and the tax on banks and financial institutions
from 11.6% to 12.6%.
B. Fiscal Implications:
(In Millions)
1973-74
1974-75
1975-76
$75
$103
$112
Present Law:
AB 1 of the 1971 First Extraordinary Session
increased the bank and corporation tax rate
from 7% to 7.6%.
C. Support
1.
The impact of the state corporate tax is
greatly reduced because it's deductible from
the federal income tax. Studies indicate the
effective rate is less than half of the
nominal rate.
Although California does have a high corporate
tax rate, other major industrial state's have
corporate tax rates higher than California's:
Minnesota
11.5%
New York
9%
Pennsylvania
11%
2.
The business community will receive general
property tax relief from the tax rate
reductions from schools as well as more specifi
releif in the form of an increased business
inventory exemption. Therefore, it is
appropriate for the business community to
fund this increased relief from their corporate
SALES TAX INCREASE
A.
Proposal:
Increases the state sales and use tax from
3 3/4% to 4 3/4%, after July 1, 1973.
B. Fiscal Implications:
Revenue Increase:
(In Millions)
1973-74
1974-75
1975-76
$220
$650
$695
C.
Present Law:
The state sales tax under present law is
3 3/4% and the local sales tax is 1 1/4%.
D.
Support:
1.
Rate increase: although many object to the
rise of the sales tax on the grounds that it
is a regressive tax, the sales tax in
California exempts food, utility services,
housing and prescription drugs from taxation
and by doing so, becomes a nearly proportional
tax. Recent studies indicate that the
California sales tax has an index falling
somewhere between .81 and .98 (1.00 indicates
a proportional tax and less than 1.00 a
regressive tax.)
2.
The sales tax is a means of insuring that
tourists and those with a large amount of
income not subject to income taxes contribute
their share to the tax program.
3.
The sales tax strengthens California's economy
because imports are taxed but exported goods
are not.
4.
The impact of this tax increase on low income
people is minimal. The impact on renters who
pay some income tax is more than offset by
their income tax credit.
TAX RATE LIMITATION
A. Proposal:
For counties, cities and special districts, the
property tax rate limits are based on 1972-73
tax rates. The Legislature is authorized to
increase rates and Adjustments are allowed
by the Amendment if increases in the cost of
living and in population exceed the growth of
assessed value, or an emergency arises.
Property tax rates in excess of the rates
provided may be levied for the payment of bond
principal and interest. The rate may also be
changed by a majority vote of the voters in an
election.
The state will reimburse local entities for the
cost of bills or executive regulations which
impose new programs or increase the required
level of existing mandated services. In
addition, revenues lost due to property tax
exemptions which are enacted after the effectiv
date of this act, will be replaced by the state
B. Fiscal Implications:
The provision insures that the property
tax relief provided by the Legislature will be
meaningful and long-lasting by slowing the
growth in property tax rate increases.
C. Present Law: Currently, counties do not have tax rate limitation:
SUPPORT
1.
The tax rate limits imposed by this program
are designed to be flexible enough to allow
local governments to continue to provide
existing programs.
2.
Voters in each local jurisdiction will have a
more active role in the fiscal affairs of
local government.
3.
The state will guarantee the maintenance of the
existing tax base by fully funding the costs
of all future exemptions passed by the Legis-
lature and further will relieve the county of
paying for any new state-mandated programs.
4.
There is ample evidence of the need for some
rational means of limiting the rampant increase
in local property tax rates. It has been
demonstrated that the existing tax rate limits
are not a rational or effective means of limit-
ing the growth of property tax rates.
5.
Without the adoption of this constitutional
"freeze" in property tax rates, the homeowners'
exemption will continue to be rapidly eroded.
The tax rate limitations imposed in this
Amendment are a method of assuring the home-
owner that his property tax rates will cease to
increase at rampant rates.
SCHOOL FINANCE
PROPOSAL:
1.
The tax reform Amendment would provide $454
million for the school finance. The appor-
tionment program to be effective in 1973-74
is as follows:
Present
Proposed
Present
Proposed
Elementary
High School
Foundation Program / ADA
$355
$765
$488
$950
Computational Tax Rate/$100
$1.00
$2.23
$1.80
$1.64
Equalization Breading Points
$28,923
$50,609
(proposed)
2.
This foundation program support represents
an additional state cost over that provided
in the 1972-73 State Budget of:
$220 million program (primarily for education
program low-spending districts)
$234 million property tax rate reduction.
3.
The Amendment expresses an intent to establish
a system of revenue controls to achieve
property tax rate reductions. School districts
at or below the foundation program may increase
their program at a rate equal to the annual
inflation factor, while those with programs
in excess of the foundation program may
increase their program level by a more limited
factor.
Under SB 90 (1972 Regular Session), the
districts' spending program would increase each
year by an inflation factor jointly derived
by the Department of Finance, the Department of
Education, and the Legislative Analyst.
State of California
Tax Retorm
Memorandum
To
:
All Concerned with the
Date
:
November 29, 1972
Tax Reduction Task Force Conference
Subject: Briefing Memo
From : Governor's Office - Tax Reduction Task Force
We look forward to your participation Friday in our Tax Reduction Task Force
Conference in Los Angeles. The following information should prove useful in
anticipation of the Conference.
Our Task Force has enlisted the aid of some of the brightest thinkers on taxation
and government spending available in California and across the Nation. So that
you will be familiar with some of them, a partial list has been attached (Attach-
ment A).
We are at an approximate mid-point in the life of our Task Force in terms of data
collection, progress on research projects and development of proposals for tax
reduction. This is a propitious time to bring the key decision makers in the
Administration together with our resource people. Our objective is to provide
you with a perspective on the taxation/government spending problem and to
outline preliminary tax reduction plans, and alternatives, so that we may have
the benefit of your comments, criticisms, recommendations, etc. We are con-
vinced that only through this process will the recommendations and work product
of our Task Force be truly useful and effective.
Our Conference will begin Friday morning (see attached schedule - Attachment B)
and run through lunch to 2:30 p.m. The Governor will be with us from approx-
imately 12:00 to 3:00 p.m. The number of resource people who will participate
in this phase is being kept relatively small to facilitate discussion and general
exchange.
At 2:30 p.m., a Conference on taxation and government spending will commence
under the auspices of the Foundation for Research in Economics and Education.
As you can see from the Conference Agenda (Attachment C), many other facets of
our effort will be discussed or expanded upon. Following the Friday afternoon
session, there will be a cocktail hour and dinner. At the conclusion of dinner,
several of the top economists of the Economics Department at UCLA will address
the topic of government regulation of business. We urge you to participate
through the conclusion of the evening.
On Saturday, the Foundation's Conference continues in a general workshop
session. You are invited to remain for the Saturday portion, if your schedule
permits.
LEWIS Kenit Wiler K. UHLER
Special Assistart to the Governor
TAX REDUCTION TASK FORCE
CONFERENCE PARTICIPANTS
Milton Friedman, Ph.D., University of Chicago Department of Economics;
Peter Drucker, Ph.D., author and management consultant, now affiliated with
Claremont Graduate School;
James Buchanan, Ph.D., Chairman of the Center for the Study of Public Choice,
Virginia Polytechnic Institute, Blacksburg, Virginia;
Roger Freeman, Senior Fellow, Hoover Institution on War, Revolution and
Peace, Stanford;
J. Clayburn LaForce, Chairman of the Department of Economics, UCLA;
Norman Ture, consultant on taxes and tax policy to the U.S. Chamber of
Commerce, National Association of Manufacturers and many other organizations,
Washington, D.C.;
William A. Niskanen, Ph.D., Professor, Graduate School of Public Policy, Berkeley;
C. Lowell Harriss, President of the National Tax Association, Professor of Economics
at Columbia University, affiliated with The Tax Foundation, Inc., New York;
Harold Demsetz, Ph.D., Professor of Economics, UCLA;
Craig Stubblebine, Ph.D., Professor of Economics, Claremont Men's College;
Patrick M. Boarman, Ph. Director of Research, Center for International
Business (affiliate of Pepperdine);
Anthony Kennedy, Attorney, Professor of Constitutional Law, McGeorge School
of Law;
Procter Thomson, Ph.D., Lincoln Professor of Economics, Claremont Men's College;
Howard Marylander, Vice President of Haug Associates, Inc., market research
firm affiliated with the Elmo Roper organization;
Phoebus Dhrymes, Ph.D., Professor of Economics, UCLA;
Armen Alchian, Ph.D., Professor of Economics, UCLA;
Sam Pelzman, Ph.D., Professor of Economics, UCLA;
John M. Martin, Ph.D., Professor of Economics, California State University,
Hayward
TAX REDUCTION TASK FORCE
CONFERENCE AGENDA
FRIDAY, DECEMBER 1, 1972
CENTURY PLAZA HOTEL
LOS ANGELES, CALIFORNIA
9:30-10:00 a.m.
Registration; Continental Breakfast
(Brentwood Room)
10:00-10:20 a.m.
Welcome; Introductions; Background of Task Force
(LaForce, Walton, Uhler)
10:20-10:45 a.m.
Analysis of Government Spending Explosion
(Friedman - tape)
10:45-11:00 a.m.
Taxation/Government Spending Projections
(Dhrymes, Hobbs)
11:00-11:20 a.m.
Public Attitudes Toward Taxation/Government Spending
(Stubblebine, Marylander)
11:20-12:00 Noon
What Motivates Government Spending;
How Public Spending Decisions are Made;
What Must be Done to Curb Taxation/Government Spending
(Buchanan)
12:00- 1:00 p.m.
Luncheon Meeting Begins; Introduction of Governor to
(Westwood Room)
Participants; Commence Lunch (summarization of morning's
presentations for Governor during lunch)
1:00- 2:00 p.m.
Limitation Plan with Variations
(Friedman - phone, Drucker, Niskanen,
Harriss, Kennedy, Hobbs)
2:00- 2:30 p.m.
Implementation of Limitation Plan
(Walton, J. Hall, Kazen, Uhler)
CONFERENCE ON GOVERNMENTAL FINANCE
SPONSORED BY THE
FOUNDATION FOR RESEARCH IN
ECONOMICS AND EDUCATION (FREE)
DECEMBER 1-2, 1972
CENTURY PLAZA HOTEL
LOS ANGELES, CALIFORNIA
FRIDAY, DECEMBER 1
2:30- 2:50 p.m.
Registration; Coffee
(Bel Air Room)
2:50- 3:05 p.m.
Welcome; Opening Remarks
(Brentwood Room)
(LaForce, Governor Reagan, Walton, Uhler)
3:05- 3:35 p.m.
Government Spending and Taxation - Past, Present and Future
(Dhrymes, Hobbs)
3:35- 4:35 p.m.
Significant Considerations in Taxation
(Taxes on Business Entities; Taxes and Savings and
Investment/Economic Growth; Taxes and California's
Competitiveness Between the States and in the Pacific
Trade Area; Tax Neutrality and Visibility; Value Added Tax;
Consumption Taxes; Taxes on Real Property - Variations;
Tax Credits and Other Changes in Financing Education;
Federal Tax Reform)
(Harriss, Ture, Freeman, Boarman,
Thomson, Uhler)
4:35- 4:45 p.m.
Break
4:45- 5:30 p.m.
Changing the Incentives at Work in Government
(Why Government Continues to Grow; Techniques for Change
in the Bureaucracy; Decision-Table for Revising Incentives)
(Buchanan, Niskanen, Martin, Hobbs)
5:30- 6:00 p.m.
People's Perceptions of Taxation and Government Spending
(Stubblebine, Marylander, Uhler)
6:00- 7:00 p.m.
Free Time
7:00- 8:30 p.m.
Cocktails
(Bel Air Room)
8:30-p.m.
Dinner - followed by panel discussion: Government Regulation
(Brentwood Room)
of Business
(Alchian, Demsetz, Pelzman and other
members of the UCLA Economics Dept.
e11
SATURDAY, DECEMBER 2
9:30- 9:45 a.m.
Continental Breakfast
(Brentwood Room)
9:45-12:00 Noon
General Workshop Session (Group and individual discussions
and consultations expanding upon Friday discussion topics,
as well as other appropriate topics)
May 15, 1973
STATE TAX RELIEF DURING REAGAN ADMINISTRATION 1967-73*
(In Millions)
Total Tax
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
Relief
HOMEOWNERS' PROPERTY
$175.9
$199.9
$217.9
$232.2
$242.8
$647.3
$1,716.0
TAX EXEMPTION
Business Inventories1
---
48.9
106.7
122.2
133.0
208.0
618.8
Senior Citizens
7.8
7.9
8.6
8.3
60.0
62.0
154.6
Open Space
---
-------------------------
-------------------------
-
13.0
22.0
35.0
Reimbursements
RENTER RELIEF
----
-----
-
---
--
40.0
40.0
(Direct Payment)
Tax Credit
---
----
--------
---
---
70.0
70.0
(Double Standard Deduction)
45.0
47.0
49.0
51.0
53.0
55.0
300.0
School Tax Rate
---
---
---
-
---
234.0
234.0
(Add'l Homeowner Relief)
Income Tax Rebate
---
82.1
---
241.1
---
-----
323.2
(10% credit and 20%
forgiveness)
Grand Total
Tax Relief
TOTAL TAX RELIEF
$228.7
$385.8
$382.2
$654.8
$501.8
$1,338.3
$3,491.6
(Biln.)
* 1 Based on Controller's reports and budget estimates.
Including movies, wine and brandy and livestock exemptions.
Does not include 1973 surplus or Governor's long range tax limit plan
February 1974
STATE TAX RELIEF DURING REAGAN ADMINISTRATION 1968-69 THROUGH 1974-75*
(In Millions)
Total
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
1974-75
Tax Relief
Senior Citizens Property Tax
Assistance
$ 7.8
$ 7.9
$ 8.6
$ 8.3
$ 59.1
$ 62.0
$ 60.1
$ 213.8
Personal Property Tax Relief
---
48.9
106.7
121.7
134.1
221.9
261.5
894.8
Homeowners Property Tax Relief**
177.5
199.7
217.3
231.6
242.9
651.0
668.2
2,388.2
Subventions for Open Space
---
-----
------
13.0
13.0
20.0
51.0
Renters Tax Relief
Refunds
---
------
-------------------------
45.0
45.0
90.0
Tax Credits
------
------
65.0
75.0
140.0
Payments to Local Govt.
for Sales and Property
Tax Revenue Loss
--
----
---
----
-----
4.0
4.0
Income Tax Rebate
10% Credit
---
82.1
---
----
-----
------
82.1
20% Forgiveness
---
241.1
---
241.1
20-35% Special Credit
---
----
425.0
15.0
440.0
100% Credit-Low Income
---
5.0
5.0
10.0
Double Standard Deduction
45.0
47.0
49.0
51.0
53.0
55.0
57.0
357.0
Sales Tax Rate Reduction
----
355.0
355.0
School District Tax Rollback
---
---
---
----
---
229.0
265.0
494.0
TOTAL TAX RELIEF
$230.3
$385.6
$381.6
$653.7
$502.1
$2,131.9
$1,475.8
$5,761.0
*
Based on Controllers Report and budget estimates.
**Excludes reimbursement to counties for administration.