Fight to Fill Revenue Hole From Prop. 13 Continues After 26 Years

That squawking you’re hearing from inside the state Capitol is the Proposition 13 chickens coming home to roost.

Back in 1978, California voters slashed their property taxes by more than half, saving themselves $7.6 billion -- and taking the money mostly from cities, counties and schools. That was major money then, and the taxpayers’ savings have multiplied many times since.

But 26 years later, local entities and the state still are struggling to fill the revenue hole, often fighting each other. That is what’s at the heart of the current budget brawl between Gov. Arnold Schwarzenegger, the Legislature and local governments.

“They’re still fighting over the same issue,” notes David Doerr, chief consultant for the California Taxpayers Assn. “They’re still fighting over the bailout.”

Doerr has rare perspective. He was the lead Assembly consultant for legislation in 1978-79 that implemented Prop. 13 and bailed out local governments. He’s also the author of a 2000 book, “California’s Tax Machine -- A History of Taxing and Spending in the Golden State.”

The current brouhaha has been characterized by mayors and the media as a row over yet another state “raid” on local coffers. “We want an end to Sacramento’s ability to steal money from local governments,” L.A. Mayor James K. Hahn says.

Asserts Oakland Mayor Jerry Brown, who was governor when Prop. 13 passed and signed the bailout bills: “It would be a real tragedy if we became the [state’s] piggy bank.”

But there’s another way to look at this -- a flip side of the same coin -- that is closer to the truth. It is that the state is like a parent cutting back a child’s allowance in tough times.

No local tax collector is writing a check to Sacramento. No property tax revenue is crossing county lines.

Sacramento does gain by shifting money from local governments to schools, however. It works this way:

Counties collect property taxes. But the state, under Prop. 13, divvies up the pot among local entities. It can move the money around -- from cities and counties to schools, for example, as Schwarzenegger now proposes ($2.6 billion over two years). That reduces, by a like amount, the burden on Sacramento for funding schools with state income and sales taxes.

Call it a raid or call it an allowance cut, the result is the same: less bailout money from Sacramento.

Let’s back up a moment for a broader picture.

During the Prop. 13 campaign, opponents -- including Gov. Brown and most political leaders -- warned voters of “gloom and doom,” Doerr recalls in his book. School class sizes would double, cops would be pulled off the beat, firehouses would close and so would zoos.

Sponsors, led by anti-tax curmudgeon Howard Jarvis, pooh-poohed the dire predictions, pointing out that the state was harboring what Treasurer Jesse Unruh had called an “obscene surplus” of $6 billion.

Prop. 13 passed with 65% of the vote. Sacramento then had to decide whether to bail out local governments or let them fend for themselves.

“At a highly charged meeting” of Assembly Democrats, Doerr writes, “some members opposed implementation under a ‘Let the Blood Flow in the Streets’ theory to validate the arguments used by the opposition. Most, however, felt voters expected them to implement the measure in the best fashion possible.”

Politicians rushed to embrace Prop. 13, especially Gov. Brown, who was dubbed “Jerry Jarvis.”

This was the bailout: Sacramento emptied its budget surplus on the desperate local entities, especially schools. For counties, it took over many health and welfare costs. Much of the schools’ property tax money was shifted to counties, cities and special districts. The schools then got funded largely by the state.

“When the dust had settled,” Doerr writes, “public services were largely unaffected.”

Over time, the locals took the bailout for granted. But Sacramento ultimately ran out of cash during the early-’90s recession.

So Gov. Pete Wilson and the Legislature re-shifted a big chunk of property taxes from local governments back to schools to save the state money. (Today, this reduces the state’s school funding burden by $5 billion.)

Cities and schools are back to receiving virtually the same slice of the property tax pie as they did before Prop. 13, although it’s now a much smaller pie. Counties get a smaller share, but the state has taken over many of their costs, such as trial courts.

“Wilson eliminated a good part of the bailout,” notes Steven Sheffrin, who heads the Center for State and Local Taxation at UC Davis.

Local governments have plugged some -- but not nearly all -- of the Prop. 13 hole with utility taxes, higher fees and special assessments, Sheffrin notes.

Also, local governments receive the car tax, although the state collects it. Schwarzenegger cut the tax by $4 billion. But he’s still paying the locals $4 billion as if the tax were never cut. These days that’s called a “backfill,” not a bailout.

This is all a complex, barely workable web that should be pulled apart and rebuilt.

The locals do need a more stable funding source. But they should be given more ability to raise taxes themselves. (Prop. 13 requires two-thirds votes.) Cities should lean less on the sales tax, which encourages big-boxes and discourages urban housing.

That squawking by the Prop. 13 chickens should be a wake-up call, but the politicians seem to be just hitting the snooze button.

George Skelton writes Monday and Thursday. Reach him at george.skelton@latimes.com.