Proposed Constitutional Amendment Takes Aim at State Budget Reform

School officials in the South Bay, still reeling from funding losses in the state budget signed by Gov. George Deukmejian last week, say they will take a close look at a proposed constitutional amendment aimed at ending the Legislature’s chaotic, 11th-hour method of adopting budgets each year.

The amendment, authored by Assemblyman Dave Elder (D-Long Beach), would radically alter the way taxes are allocated and restore local control over major revenue sources--a power that shifted to Sacramento when Proposition 13, the 1978 Jarvis-Gann Initiative, limited property taxes that had been a primary source of income for schools, cities and counties.

Instead of the Legislature dividing up the tax pie in an annual ritual of political maneuvering and intense lobbying, local agencies would be given a constitutional right to specified shares in income, property and sales taxes, according to Elder.

Predictable Financing

The result, he says, would be “permanent, predictable” financing for California’s 1,029 school districts, 545 cities, 58 counties and more than 4,000 special districts--not to mention hefty revenue increases for education and local government.

Elder’s measure, a product of five years of work by the Democratic lawmaker and his staff, will debut in the Legislature Monday in a hearing before the Assembly Revenue and Taxation Committee.

The idea of lifting Sacramento’s fingers from the budget purse has not inspired a lot of enthusiasm in the capital. “State government would lose a lot of money,” observed Pete Schaafsma of the Legislative Analyst’s office. He said his agency will not take a formal position until the proposed constitutional amendment advances further up the legislative ladder.

According to Elder, the net loss in the general fund would be about $900 million--compared to a total state budget of $40.5 billion this year, for example--but state government could carry on with its share of income, sales, banking and corporation taxes.

Administration May Be Wary

Jim Miller, an analyst in the state Department of Finance, said his agency hasn’t adopted an official position, either. But he said the Deukmejian Administration may be wary of incorporating budget decisions into the Constitution. “Our feeling has been that funding decisions should be made annually,” he said.

Elder, whose district includes Harbor City, San Pedro, Wilmington and Long Beach, said he was well aware that his proposal has virtually no chance of making it to the state ballot through the legislative process. But he predicted that many of the state’s most powerful constituencies will get behind an initiative drive as the potential benefits of his measure become better understood.

“The present system is not working,” he said. “In fact, it’s a total mess. I believe that people are in a mood to look at some radically different ways of using tax money to finance public services.”

School officials contacted in the South Bay and elsewhere expressed virtually unanimous enthusiasm for Elder’s idea of removing budget decisions from the political arena in Sacramento. Most said, however, that they had little detailed knowledge of how the plan would work and how their individual districts could be affected.

“If Elder can pull it off, his ideas may become a shining light for the schools,” said Ed King, business manager for the South Bay Union High School District. “We are in desperate need of a new approach that provides stable, long-term financing.”

Among changes that Elder’s measure would bring to California’s tax landscape:

- Elementary and secondary schools and community colleges would be given a constitutional right to 75% of personal income tax revenues and 47% (or 2.8 cents) of sales taxes. They would also continue to receive all of the state lottery’s profits. According to Elder’s calculations, that would increase funding for education by about $2.5 billion.

- Similarly, counties would have constitutional rights to 55% of property taxes, while cities would get the other 45%, and the state government would have no part in collecting or allocating the money. Instead, the allocations would be based primarily on population. The state would continue to collect sales taxes and keep 2 cents on the dollar, but the rest--after the 2.8 cents for education was deducted--would go right back to the cities and counties--again, on the basis of population.

The net effect would be a boost of $347 million in income for cities and $625 million for counties, according to Elder’s estimates for the last fiscal year ending July 1.

By basing allocations on population, rather than on collections from the various tax jurisdictions, the measure would particularly help urban areas and counties that are “rich in people and poor in taxable property and retail sales,” and thus continually looking to Sacramento for extra handouts, Elder said.

No Incentive for Housing

Under the present system, he said, “the perfect city has a shopping mall at its center, surrounded by auto dealers that do a high volume of business. It may reluctantly consider taking in a convalescent home, but it has little incentive to zone for additional housing since that brings in more people who require costly public services.”

Inglewood City Administrator Paul Eckles generally applauded Elder’s idea of funding predictability and getting Sacramento out of local budget making, but he expressed doubt about basing funding allocations solely on population.

“The needs of cities are radically different and somehow those differences have to be taken into account,” Eckles said.

Elder said he is open to suggestions on how to do that but he believes that the long-term effects of his plan would put all cities on a balanced course between commercial and industrial development and housing.

Honig Initiative

State Supt. of Public Instruction Bill Honig, smarting from the defeat of his efforts to get more money for education from kindergarten through the 12th grade next year, said he plans to push his own initiative for the November, 1988, ballot.

“Elder is on to something here,” Honig said, “but I think all of the revenues should be put into one pot and education should be guaranteed its share, like 39%.”

Elder said he wants to hear more about Honig’s approach. But he said giving education the lion’s share of personal income taxes would, for the first time, provide the schools with a financial incentive to turn out well-educated graduates able to earn higher incomes.

“As it is now,” he said, “there is no relationship between what the schools produce and the level of financing they receive.”

He said the amendment would simplify the state’s income tax system. State taxpayers would simply mail in a copy of their federal tax returns, along with a check for a percentage of what they paid to the Internal Revenue Service--35% in the current version of the measure.

Save State Costs

Elder said that approach would save the state $100 million a year in administrative costs, not to mention the time and money spent by taxpayers in preparing state returns. And taxpayers in lower-income brackets would get a break--including a $200 credit for couples earning less than $30,000--while increases for the more affluent would be modest--up to $256 for couples making $100,000 and renting their homes, Elder said.

Banks and corporations also would be relieved of the costly task of preparing state income tax returns, while paying an additional $2.3 billion in taxes. But to stave off opposition from that influential quarter, Elder said he probably would settle for a tax increase equal to the savings that businesses realized by doing it his way. He had no estimate on what that savings might be.

He said all real estate would continue to be assessed the 1% tax rate provided by Proposition 13, but in addition, owners of single-family homes would receive an exemption of $25,000, up from the current $7,000. Owners of mobile homes would get a new exemption of $12,500. Exemptions would increase 2% annually.

Proposition 60

Last year, Elder won an impressive 78% of the statewide vote for his Proposition 60, which allows homeowners 55 years of age and older to sell the family home and buy smaller quarters without losing their Proposition 13 tax rate. Elder said he expects the measure to open up more housing for younger families as “empty nesters” with grown children are given tax incentives to move on to condos or other smaller homes.

Renters, another major group of potential supporters for Elder’s constitutional amendment, are not overlooked. Credits for individuals would be boosted to $90, from the current $60 level, and couples would get a credit of $180 instead of $137.

Elder only smiles when told by doubters that state politicians will never give up any control over the public purse.

“Actually,” he said in an interview, “I think some of my colleagues will be glad to get rid of all the hassle and trouble we have with the budget. It’s just not workable for us to come up with a formula every year that adequately takes care of the needs of all these local agencies. We should focus our efforts more on functions that only the state government can handle, like what to do with California’s mushrooming prison population.”

Former Financial Planner

“I’ve been thinking about these ideas for 15 years,” said Elder, 45, a financial planner with the city of Long Beach and the Los Angeles Harbor Department for 10 years before his election to the Assembly in 1978. “Now I think we’re ready to go.”

He said he intends to use the legislative hearing process to fine-tune his proposals, “make sure all the numbers fall out right” and deal with the inevitable objections. “At this point, I want all the criticism I can get because that will help ensure that we have a well-drafted amendment when we go to the voters,” he said.

Elder said the effort to qualify an initiative could cost more than a million dollars, but he expects that the “big winners” will rally behind the measure when they realize what is at stake for them. Those winners, he said, range all over the voting map--public education, big cities and heavily populated counties, property owners, renters and a lot of taxpayers generally “who think there must be a better way to raise and spend public money.”

Cities that have gone in heavily for shopping malls, commercial strips and rows of auto agencies--”anything to boost their sales taxes”--will be among the losers until they adapt to the new tax system, Elder said.

But, Elder said, paraphrasing a comment attributed to Stalin when he was asked to do something to please the Pope: “How many voters do they have?”