Cities Can Get a Better Deal -- Without Killing Prop. 13

In a tidy, older neighborhood near where I live, one house out of every three has not traded hands in 25 years or more. This stability, so desirable in some ways, is a financial disaster for our city. Though the houses are now worth about $400,000 each, they are assessed under Proposition 13 at about $60,000, so their owners pay about $600 a year in property taxes. When that tax revenue is divvied up according to various laws, only about 15% comes to our city treasury. As a result, these longtime homeowners pay about $90 a year in property tax to our city.

At the Ventura County Hall of Administration, less than two miles away from the neighborhood, our sheriff and district attorney are at war over how much of the county’s budget the public safety agencies are entitled to. Over the last decade, the battle played out in a series of ballot measures, reversed decisions and the threatened closure of one of our jails. In the last year, it has been mired in an embarrassing intramural lawsuit that has, so far, cost the county more than $1 million in outside legal fees.

These kinds of stories are not unique to Ventura. They exemplify the daily grind of running local government and point up how crucial reform of the state’s taxation-spending system has become. That system has been at the center of the battle over the state budget, which has become nasty in the last three weeks. Sacramento exerts an unusually large amount of control over local revenues, and it is always tempting to close a state budget deficit with funds that would otherwise flow to counties and cities. Twenty-six years after Proposition 13, the locals are -- in fiscal terms, at least -- little more than vassals of state government. They have no choice but to play pressure-group politics in Sacramento.

In May, cities and counties threw their lot in with Gov. Arnold Schwarzenegger, who asked of them two more years of cuts in return for his promise to support a constitutional amendment to stop future ones. Democratic legislators appear to have scotched that deal, leaving open the prospect of more “raids” on local revenues. (The pending question in the budget debate is whether a supermajority of the Legislature could take funds from the locals in a budget crisis.)

It is a virtual certainty that whatever budget deal eventually emerges, it will amount to another Band-Aid on the current system. Different tax-revenue streams will be swapped, shifted, cut and, to even everything out, “backfilled” by a state general fund that is in perpetual deficit. Local governments will continue to steal each other’s retail stores and battle in court over how to divide up the crumbs.

Everybody agrees that this system is terminally ill, but real reform never emerges for fear that the cure will be worse than the disease. Yet such reform is possible -- and without touching Proposition 13. It simply involves owning up to the need to align “revenues with responsibilities,” as budget wonks like to say.

The responsibility part is pretty clear. School districts and counties are arms of the state when they execute their core missions of providing education, health, welfare and criminal justice services. Both counties and cities also provide local services mandated by state policy. And most of the activities individually undertaken by cities and special districts fall under “local optional” services.

The confusing part is the money, because tax revenue is rarely raised or distributed in a way that logically lines up with these responsibilities. School districts are funded by local property taxes augmented by state revenue. Counties are financed mostly by property taxes that are supplemented by the sales tax and such unrestricted state funds as the car tax. Cities are funded more or less evenly from sales and property taxes, with other sources such as the car tax also serving a critical role.

It is not too hard to see how revenues and responsibilities might line up better. Local agencies that perform direct state functions -- school districts and county governments -- ought to have secure revenue sources from the state. This could include state appropriations and a guaranteed share of the property tax. Cities and special districts ought to be given a secure revenue stream to perform mandated functions, and then have as many options as possible to raise money for services their residents desire.

Surprisingly, many of the components of this simple, straightforward system are in place. School districts are guaranteed a piece of the state revenue pie, though counties are not. Cities have many options for raising revenue -- utility taxes, hotel occupancy taxes, user fees and even sales tax increases -- though most require voter approval.

The key to reform involves sorting out the “big three” revenue streams. Property tax is levied locally but restricted by Proposition 13 and allocated in Sacramento, where it is often shifted from cities and counties to school districts to save the state money. Sales tax is levied at the state level but returned to cities and counties based on where stores are. And the vehicle license fee is an unpopular tax that the locals need but Sacramento controls.

There is little doubt that cities and counties would benefit from a greater share of the property tax, even if it meant giving up part of the other two revenue streams to the state. Property tax is stable and increases steadily, even under Proposition 13. By contrast, sales tax is volatile, and the car tax is always a political target. Many proposals in Sacramento call for this kind of shift, but unfortunately they usually make the system more complicated.

The critical step in moving toward reform is to create a firewall in Proposition 13 that separates property taxes for schools from property taxes for other local services. It is this reform that cities and counties fought to protect -- and that Democratic legislators maneuvered to avoid.

The firewall may not survive this year’s budget fight. But it is an idea that will be back. Without it, no real reform will move forward, and cities like Ventura will continue to scramble for reliable revenue.