LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Tax Relief (9100)

The state provides tax relief—both as subventions to local governments and as direct payments to eligible taxpayers—through a number of programs contained within this budget item. The budget proposes total 2005-06 tax relief of $539 million appropriated through the budget bill. This represents a sharp decline from the $668 million budgeted expenditures in the current year.

Prior to 2004-05, the largest component of tax relief was the vehicle license fee (VLF) backfill paid to local governments to compensate for their revenue losses due to the legislated reduction in the VLF. This fee was reduced from 2 percent of vehicle value to 0.65 percent beginning in 1998, with General Fund backfill compensating local governments for the revenue difference between the two rates. Beginning with the current year, local governments are receiving additional property taxes—which previously went to K-12 education—to make up for the loss in VLF revenues. This revenue "swap" will require additional annual school spending from the General Fund.

The largest tax relief program is now the homeowners' exemption ($440 million), which provides property tax relief to over 5 million homeowners. This program, which is required by the State Constitution, grants a $7,000 property tax exemption on the assessed value of owner-occupied dwellings and requires the state to reimburse local governments for the resulting reduction in property tax revenues. The exemption reduces the typical homeowner's taxes by about $75 annually. In order to accommodate the expected growth in the number of homeowners claiming the exemption, the Governor's budget proposes an increase of $6.8 million, or 1.6 percent, over the amount budgeted for 2004-05. Other tax relief programs include senior citizens' assistance programs and subventions to local governments for open space preservation.

Changes Proposed for Senior Citizens' Assistance

Given the risk to the General Fund that could result from an unexpected expansion of the property tax deferral program, we recommend that the Legislature direct the Department of Finance to document the likely additional participation in this tax relief program.

There are currently three tax assistance programs available for eligible senior citizens in the state. Each of the programs is tied—directly or indirectly—to property taxes paid by participants in the programs. The programs are:

Program Eligibility Was Expanded

In 1999-00 through 2001-02, the Legislature made several changes to the senior citizens' assistance programs. These changes included a one- time boost in benefits, a rise in the income level for eligibility, and a permanent increase in the level of benefits. Specifically, beginning in 1999-00, income eligibility was increased from about $13,000 annual household income to about $33,000. These amounts were also required to be indexed based on the cost of living. (Absent the proposed budget changes noted below, the household income threshold for these programs for 2005-06 would be about $38,000.) As part of the 2001-02 budget package, benefit payments were increased by about 45 percent on an ongoing basis. Combined, these tax assistance increases resulted in additional expenditures of about $160 million annually.

Proposed Changes in Seniors' Tax Assistance

The administration has proposed significant changes in the senior citizens' assistance programs. The change which results in the greatest budget savings is the proposal to roll back income eligibility for the Senior Citizen Renters' Tax Assistance Program to $13,200, or about where it was in 1998. This would result in savings in 2005-06 of slightly in excess of $100 million. The proposal assumes that, as a result of this change, the number of participants in the program would decline by 25 percent or about 125,000.

In addition, the administration proposes to eliminate in its entirety the Senior Citizens' Property Tax Assistance Program. It has also proposed raising the income threshold for the Senior Citizens' Property Tax Deferral Program to $39,700 from about $38,500. The net budget impact of these two program alterations is a General Fund savings of about $35 million.

The $4.7 million increase proposed for the deferral program is presumed to account for program expansion due to the rise in the income eligibility threshold discussed above and additional participation from those currently in the property tax assistance program. However, the proposed increase in funding does not appear to adequately account for this latter factor. While it is difficult to estimate this behavioral effect, even a small percentage increase in participation in the deferral program would have significant budgetary implications. For instance, assuming only 5 percent (7,826) of those participating in the Senior Citizen Property Tax Assistance Program chose to participate in the deferral program, there would be additional costs of over $10 million. In this situation, the tax relief item would be underbudgeted. Given the risk to the General Fund that could result from an unexpected expansion of the property tax deferral program, we recommend that the Legislature direct the Department of Finance to document the likely additional participation in this tax relief program.

Considerations for the Legislature

In previous publications, we have presented as an option reducing spending for the Senior Citizens' Property Tax Assistance Program (see Options for Addressing the State's Fiscal Problem, February 2002, page 94). The passage of Proposition 13 provided a significant amount of property tax relief, particularly among homeowners who tend to remain in the same residence—such as senior citizens. As a result, the Legislature may feel that it can reduce the tax subsidies provided under this item without undue harm to seniors. Nevertheless, the administration's proposed budget change would represent a substantial reduction of benefits for elderly and disabled residents in the state. As such, the Legislature may wish to consider other alternatives to the Governor's proposals. For instance, the Legislature could consider phasing down the benefits in a more gradual manner or raising the income limits on the deferral program even higher than that proposed by the Governor.

Newly Identified Mandate Review

Chapter 1124, Statutes of 2002 (AB 3000, Budget Committee), requires the Legislative Analyst's Office to review each mandate included in the Commission on State Mandates' (CSM's) annual report of newly identified mandates. In compliance with this requirement, this analysis reviews the mandate entitled "Redevelopment Agencies—Tax Disbursement Reporting."

County Auditor Redevelopment Tax Report Mandate

State law requires redevelopment agencies to deposit 20 percent of their tax increment revenues into Low and Moderate Income Housing Funds and use these monies to develop affordable housing. In 1997, the Legislature's Task Force on Redevelopment Agencies' Affordable Housing Reports concluded that it was difficult for private and public agencies to monitor redevelopment agency compliance with this state law because data regarding tax increment revenues were not readily available. To address this problem, the Legislature enacted Chapter 39, Statutes of 1998 (SB 258, Kopp), requiring county auditors to prepare annual tax disbursement statements for each redevelopment agency project area.

In November 2002, the CSM determined that county auditor work to prepare these tax statements was a state-reimbursable mandate and estimated the statewide cost of this mandate to be $65,300 (for costs through 2004-05).

Reporting Mandate No Longer Needed

Because other sources of data regarding redevelopment tax increment revenues have become readily available in recent years, we recommend the Legislature repeal this mandate by deleting the requirement that auditors prepare these reports.

The State Controller's Office (SCO) annually publishes detailed reports on the financial transactions of redevelopment agencies, including all information that Chapter 39 requires county auditors to report. In 1997 (when the Task Force undertook its review), these SCO reports frequently were delayed for prolonged periods. Recent SCO reports, however, have been released and posted on the Internet on a timely basis (within ten months of the end of the fiscal year, as specified in state law).

In addition to the SCO reports, state laws require redevelopment agencies to obtain independent annual audits that (1) detail all financial transactions and (2) include an auditor's opinion of the agency's compliance with applicable state laws and regulations. While this audit requirement existed in 1997, guidelines for preparing these audits have been clarified and expanded in recent years.

Because of the availability of these alternative sources of data, Chapter 39's requirement that county auditors prepare annual tax disbursement reports for redevelopment agencies has become redundant. We note, for example, that the state agency responsible for monitoring redevelopment agency housing law compliance (the Department of Housing and Community Development) does not use these county auditor reports for its work. Accordingly, we recommend the Legislature repeal this mandate.

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