Legislative Analyst's Office, December 2000

California's Economy and Budget in Perspective

2000 Cal Facts State-Local Finances

State and Local Revenues Stem
Principally From Taxes

• Taxes account for over three-fourths of state revenues and over half of local revenues.
• Half of state revenues are from the personal income tax, while 30 percent are from sales and use taxes.
• The largest share of local taxes is from the property tax. Other local taxes include the business license tax, transient occupancy tax, motor vehicle license fee, and utility users' tax.

California's Governments Rely on a Variety of Taxes

State Taxes	Current Rate	Comments/Description
Personal Income	Marginal rates of 1% to 9.3% (7% AMTa)	Married couples with gross incomes of $21,798 or less need not file. The top rate applies to married couples' income in excess of $71,584.
Sales and Use	5.75%b	Applies to final purchase price of tangible items, with exemptions for food and certain other items.
Bank and Corporation General Corporations Financial Corporations	8.84%c (6.65% AMT) 10.84% (6.65% AMT plus adjustment factor)	Applies to net income earned by corporations doing business in California. For financial corporations, a portion of the tax is in lieu of certain local taxes.
Vehicle Fuel	18˘ per gallon of gasoline or diesel fuel	Tax is collected from fuel distributors or wholesalers with equivalent taxes levied on other types of vehicle fuels.
Alcohol and Cigarette Wine and beer Sparkling wine Spirits Cigarettes	20˘/gallon 30˘/gallon $3.30/ gallon 87˘/pack	Tax is collected from manufacturers or distributors. Equivalent taxes are collected on sale of other tobacco products.
Estated	0.8% to 16%	The estate tax is a "pick-up" tax to take advantage of the maximum state credit allowed against the federal estate tax, at no net cost to taxpayers.

Per Capita Revenues and Taxes--Some Upward Drift Over Time

Constant 1977-78 Dollars

• Real per capita state/local revenues and taxes dropped after Proposition 13, and hit a low in 1982-83.
• They then steadily increased throughout the remainder of the 1980s.
• The recession caused them to again decline in the early 1990s, but they recovered by the mid-1990s and have drifted upward since then--largely due to California's strong economy.

California's Tax Burden Is
About Average

Taxes Per $100 of Personal Income

• California's overall tax burden--a bit over $11 per $100 of personal income--is close to the average for other states.
• Compared to other western and industrial states, California's overall tax burden also is similar--although differences exist for individual types of taxes.
• Nontax collections add an additional $5 to the overall revenue burden in California per $100 of personal income--again similar to the average for other states.

Initiative Measures Have Had Major
State-Local Fiscal Implications

Measure/ Election	Major Provisions
Proposition 13/June 1978	Limits general property tax rates to 1 percent. Limits increases in assessed value after a property is bought or constructed. Makes Legislature responsible for dividing property tax among local entities. Requires two-thirds vote for Legislature to increase taxes, and two-thirds voter approval of new local special taxes.
Proposition 4/November 1979	Generally limits spending by the state and local entities to prior-year amount, adjusted for population growth and inflation (now per capita personal income growth). Requires state to reimburse local entities for mandated costs.
Proposition 6/June 1982	Prohibits state gift and inheritance taxes except for "pickup" tax qualifying for federal tax credit.
Proposition 7/June 1982	Requires indexing of state personal income tax brackets for inflation.
Proposition 37/November 1984	Establishes state lottery and dedicates revenue to education. Places prohibition of casino gambling in State Constitution.
Proposition 62/November 1986	Requires approval of new local general taxes by two-thirds of the governing body and a majority of local voters (excludes charter cities).
Proposition 98/November 1988	Establishes minimum state fund guarantee for K-12 schools and community colleges.

Measure/ Election	Major Provisions
Proposition 99/November 1988	Imposes a $ .25 per pack surtax on cigarettes and a comparable surtax on other tobacco products. Limits use of surtax revenue, primarily to augment health-related programs.
Proposition 162/November 1992	Limits the Legislature's authority over PERS and other public retirement systems, including their administrative costs and actuarial assumptions.
Proposition 163/November 1992	Repealed "snack tax" and prohibits any future sales tax on food items, including candy, snacks, and bottled water.
Proposition 172/November 1992	Imposes half-cent sales tax and dedicates the revenue to local public safety programs.
Proposition 218/November 1996	Limits authority of local governments to impose taxes and property-related assessments, fees, and charges. Requires majority of voters to approve increases in all general taxes, and reiterates that two-thirds must approve special taxes.
Proposition 10/November 1998	Imposes a $ .50 per pack surtax on cigarettes, and higher surtax on other tobacco products. Limits use of revenues, primarily to augment early childhood development programs.
Proposition 39/November 2000	Allows 55 percent of voters to approve local general obligation bonds for school facilities.

Approval Requirements for
State and Local Revenues

Californians Are Served by Over
6,000 Local Entities

• Most Californians are governed by several overlapping local governments: a city, county, school, and community college district, plus one or more special districts. Special districts provide specialized services, such as firefighting, water delivery, or flood control.
• About 60 percent of special districts have independently elected or appointed boards. Other special districts are governed by a board of supervisors or (less frequently) a city council.
• Measured on a per capita basis, California tends to have fewer cities, counties, and special districts than other states.

Property Taxes Are Distributed to
Many Entities Within a County

• Property taxes are collected by each county government. The revenues are then distributed to a variety of governments, including the county, cities, school districts, redevelopment agencies, and special districts.
• The property tax rate is limited to 1 percent by the Constitution, plus any additional rate necessary to pay for voter-approved debt. The average tax rate across the state in 1998-99 was 1.069 percent.
• Property tax revenues collected in a county can only be distributed to a governmental entity within that county.

Schools' Share of the Property Tax Has Changed Over the Years

• After passage of Proposition 13 in 1978, the state shifted property taxes from schools to other local governments--and backfilled schools' losses with increased state aid. This property tax shift to cities, counties, and special districts reduced local governments' revenue losses resulting from Proposition 13's limit on the property tax rate.
• Beginning in 1992, the state modified the formulas for allocating property taxes again. Specifically, the state shifted property taxes from cities, counties, and special districts to schools. This shift is commonly called "ERAF," after the name of the fund into which the taxes are deposited. In 2000-01, about $4.2 billion of property taxes are subject to this shift. About 76 percent of this amount is attributable to counties.
• The share of property taxes now allocated to schools is about the same as before Proposition 13.

How Much Property Taxes Do
Counties and Cities Receive?

1997-98

• Four factors explain the large differences among property tax receipts. Cities and counties tend to receive more property taxes if they:
• Have many valuable buildings, manufacturing plants, and other developed property within their borders.
• Received a large share of countywide property taxes before Proposition 13.
• Provide many municipal services, instead of relying upon other local governments to provide some services.
• Have few large redevelopment projects within their borders.

Major Changes in the State-County Relationship During Past Decade

Property Tax Shifts
1992 and 1993	Ongoing Revenue Shifts. State shifted property taxes from counties and other local entities to schools in order to reduce state costs. Subsequently, these reduced county revenues were in the aggregate mostly offset by various mechanisms, including funding for public safety (Proposition 172 sales tax revenues, COPS funding, and changes to trial court funding) and general assistance mandate relief.
Health and Social Services
1991	Realignment. Shifted authority from the state to counties, and increased counties' share of costs, for many health and social services programs. Provided new revenue sources to counties to offset increased county costs.
1997	Welfare Reform. Provided counties with more flexibility regarding (1) delivery of welfare-to-work services and (2) recipient participation requirements. Provided fiscal incentives for counties to assist recipients in getting jobs.
Trial Court Funding
1988	Brown-Presley Act. Increased state funding for county-operated trial courts through the establishment of block grants.
1991	Realignment. Increased state funding of trial courts as well as increased state revenues from court fines.
1997	Spending Cap. Placed cap on county expenditures for trial courts, resulting in future increases in state costs.
1998	Reduced County Share. Further reduced the required county contributions for trial court funding.
Transportation
2000	Traffic Congestion Relief Program. Authorized $6.9 billion in new funds over six years for congestion relief and local streets and roads.

Major County Programs--2000-01

An Overview of County Finance

1997-98

• About one quarter of counties' spending comes from tax revenues. These are the counties' discretionary general purpose revenue sources. State and federal aid represent the largest sources of county revenues.
• About half of county spending is on various health and social service programs. An additional 30 percent of county spending is for public protection, including police and fire services.

An Overview of City Finance

1997-98

• About one-third of city spending comes from discretionary general purpose revenues. The largest general purpose revenue for cities is the sales tax.
• About 40 percent of city revenues are from user charges (for electric, water, and other services) which offset the cost of providing these services.
• Cities spend about one-fourth of their revenues on public safety expenditures, such as police and fire services.

Continue to 2000 Cal Facts State Budget

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