While the property tax shifts played an important role in resolving the state's budget imbalances of the early 1990s, the property tax shifts have:
This policy brief provides an overview of the property tax shifts of 1992-93 and 1993-94--and examines four alternatives for reversing them. These proposals provide varying levels of relief to local agencies, and they also have different impacts on school spending and state taxation.
Our review indicates that the concept of allocating additional property taxes to local agencies has merit. Accordingly, we recommend that the Legislature consider mechanisms for reversing all or a portion of the tax shifts as it evaluates the state's budget priorities and proposals for changing state taxation.
Should the Legislature wish to restore property taxes to local agencies, we recommend that the Legislature provide this fiscal relief in a manner consistent with its objectives for local government, the economy, and the state-local relationship.
In 1992-93 and 1993-94, in response to severe state budget deficits, the Legislature and administration shifted about $4 billion of property taxes from cities, counties, special districts, and redevelopment agencies to schools. These increased school property taxes, in turn, decreased the state's General Fund (GF) obligation for funding schools. The overall level of school financing was not affected by this replacement of state GF revenues with local property tax revenues.
The property tax shifts have caused nonschool local agencies to reduce a wide variety of local programs. The shifts have also reduced local agency incentives to maintain the property tax collection system and to promote new business and residential land developments in their communities.
Currently, there is considerable legislative interest in "reversing" the property tax shifts in order to mitigate their ill effects. This policy brief provides an overview of the property tax shifts, and discusses alternatives for reducing the amount of tax revenues shifted from cities, counties, and special districts.
Property Tax Allocation Law. In each county, the auditor allocates property tax revenues to schools, cities, special districts, redevelopment agencies, and the county itself. The method of distributing property taxes among local agencies is set by state law, as required by Article XIII A of the California Constitution (Proposition 13).
School Funding Law. Under Proposition 98, constitutionally mandated levels of K-14 spending are financed with local property taxes and state GF monies. Specifically, the state provides GF revenues to school districts sufficient to close any gap between the amount of local property taxes distributed to K-14 schools and the mandated level of school spending.
Reducing State Costs. In order to reduce state GF costs for schools in 1992-93 and 1993-94, the Legislature and administration changed the laws regarding the allocation of property taxes. Specifically, the state required auditors to deposit some of the property taxes that previously had been allocated to nonschool local agencies into a newly created county-wide fund for schools, the "Educational Revenue Augmentation Fund" (ERAF). Property taxes from the ERAF are distributed to schools thereby offsetting the need for state school aid. As shown in Figure 2, the property tax shift shrank the nonschool local agency share of the property tax "pie" and expanded the school share. The overall level of school funding was not affected.
What Is the Current Value of the Property Tax Shift?
|1992-93 Shift||1993-94 Shift|| 1995-96 Value
Ongoing Shifts a
|Less legislation and disaster relief||--||--||-43|
|a These amounts are not the sum of the previous two columns for various reasons (see text).|
Why the 1995-96 Shift Is Lower Than Previous Years Combined. Our estimate of the ongoing value of the shifts in 1995-96 is less than the combination of the 1992-93 and 1993-94 shifts for several reasons:
Partially offsetting these actions, on the other hand, is a small amount of growth in the property tax base. Under current law, the amount of the property tax shift increases with growth in assessed value.
Allocating the Property Tax Shifts a
(Shift Amounts in Millions)
|Shift||1992-93 Basis||Shift||1993-94 Basis|
|$525||Each county shift specified in statute. Shift amounts developed by county agreement and are largely proportionate to county shares of AB 8 benefits.||$1,998||Shift amount allocated in proportion to two factors:
|$60||One-time shift of $1.92 per resident.||$25||Permanent shift of 78 cents per resident.|
|$200||Shift set at 9 percent of city 1991-92 property tax revenues.||$288||Shifts amounts based on remaining AB 8 benefits. Maximum shift set at $19.31 per resident.|
|$40||One-time shift of $1.65 per resident.||$25||Permanent shift of 99 cents per resident.|
|Special Districts b|
|$375||Shift amount set at: ||$244||Shift allocated to reflect AB 8 benefits.|
|$200||Agencies lost 15 percent of gross property taxes. Shift sunset in 1993-94.||$65||Shift amounts allocated in proportion to agency property taxes, net of taxes passed through to other agencies. Shift sunset in 1994-95.|
|a All shifts are ongoing, unless otherwise indicated.|
|b Actual shift was $146 million less that proposed.|
Because each agency's share of the 1992-93 and 1993-94 property tax shifts largely reflected its relative share of AB 8 benefits, there is considerable variation in the distribution of the property tax shift amounts. Nearly one in five cities, for example, received virtually no property tax shift in 1993-94 because these cities were formed after 1978, and did not receive any AB 8 benefits. Conversely, many older cities lost significant amounts because they benefited disproportionately from AB 8. Similarly, while we estimate that the average county lost about 40 percent of its property taxes (about $50-$70 per capita), some counties lost considerably different amounts. For example, Los Angeles County lost about $100 per capita.
In addition, the Legislature increased vehicle license fee subventions to cities and counties, and provided relief from certain "state-mandates." The most significant mandate relief measure from a cost-reduction standpoint is Ch 72/93 (SB 1033). This measure authorizes counties to reduce general assistance grant levels by about 25 percent if the Commission on State Mandates approves a county claim that it is in "significant financial distress." Finally, the Legislature enacted bills which reduced or eliminated the property tax shifts for specific agencies, such as police protection and veterans' memorial special districts.
Despite the mitigation measures adopted by the Legislature, the property tax shifts have negatively affected nonschool local agencies in several ways.
The property tax shifts of 1992-93 and 1993-94 aggravated this situation, giving counties an even greater disincentive to invest in the property tax collection system because counties now receive about 22 percent of the tax proceeds, yet pay nearly three-quarters of the administration costs.
Since the property tax shifts, the Legislature has taken two actions to address this problem. In 1994-95, the Legislature appropriated $25 million to counties to augment their property tax collection efforts. In 1995-96, the Legislature authorized a three-year program to provide up to $60 million annually in off-budget, forgivable loans to counties to increase property tax collection efforts.
While these funds have helped, counties continue to face significant economic incentives to under-invest in the property tax collection system. If unaddressed, this failure to adequately maintain the property tax system not only translates into lower property tax revenues (and therefore higher state expenditures for schools) but, also undermines peoples' faith in the fairness of the property tax system.
Because the 1992-93 and 1993-94 shifts significantly decreased city and county shares of the property tax generated by new developments, local agencies now face a greater need to require developers to mitigate the fiscal impact of their projects. These increased fiscal and other requirements on developers serve as a disincentive to land developments.
Currently, there are several proposals for reversing the property tax shifts in order to mitigate the problems discussed above. These proposals are:
Impact of Property Tax Reversal Options on
| Estimated 1996-97|
|Does the Option Affect:|
|Overall Level of School Funding?|
Funding for Other State Programs?
|$72||No.||Yes. State share of school costs increases by full amount of local fiscal relief. This leaves fewer General Fund revenues available for nonschool programs.||No.|
|$905||Yes. Increases levels by roughly half the level of local relief.||Yes. State share of school costs increases by roughly half the amount of local fiscal relief. This leaves fewer General Fund revenues available for nonschool programs.||Yes. Reinstates top income brackets.|
|General Fund Growth|
|$562||No.||Yes. Same as "Freeze Shift."||No.|
|Citizens' Option for Public Safety (COPS)|
|$150||No.||Yes. Same as "Freeze Shift."||No.|
The Freeze Shift, GF Growth, and COPS options do not increase state taxation or the overall level of funding for schools. Each of these options, however, requires the state to increase its share of school funding by an amount equal to the fiscal relief provided to local agencies. This increased spending on schools would require the state to reduce spending on other programs.
While the property tax shifts played an important role to closing the state's serious budget gaps in the early 1990s, the shifts have:
As a result, we believe the concept of reversing the property tax shifts has merit. We recommend that the Legislature consider mechanisms for reversing all or part of the shifts as it evaluates short-term and long-term state budget priorities and proposals for changing state tax rates.
Should the Legislature wish to implement a reversal of the property tax shifts, we recommend that it provide the fiscal relief in a manner consistent with legislative objectives for local government, the economy, and the state-local relationship. Specifically, the Legislature need not reverse the property tax shift evenly across local agencies. Instead, the Legislature could provide the fiscal relief:
|This report was prepared by Marianne O'Malley with the assistance of
Matt Newman, under the supervision of Mac Taylor.
To request publications call (916) 445-2375.
This report and others are available on the LAO's World Wide Web page at http://www.lao.ca.gov.
The Legislative Analyst's Office is located at 925 L Street, Suite 1000, Sacramento, CA 95814.
Return to LAO Home Page