Against the Taxpayer Protection and Government Accountability Act Initiative
By Ned Resnikoff
Note: The text below is from an internal memo I drafted for California YIMBY CEO Brian Hanlon and COO Melissa Breach regarding the proposed Taxpayer Protection and Government Accountability Act Initiative. Melissa had asked me to conduct an analysis of the initiative, concluding with a recommendation regarding how California YIMBY should approach it.
As you’ll see below, I concluded that the initiative is potentially extremely dangerous, both to the fiscal health of California and to California YIMBY’s particular policy priorities. I’m publishing the memo in full (with some light edits to make it more blog-friendly) to explain our opposition and to provide a window into how we sometimes think through policy questions when discussing them internally.
Analysis of the Taxpayer Protection and Government Accountability Act Initiative
Summary
A proposed constitutional amendment threatens to upend California’s budget and damage the state’s ability to meet the major challenges of the next few decades. The Taxpayer Protection and Government Accountability Act initiative would substantially limit state and local governments’ ability to collect revenue from new taxes and fees at a time when increased spending is necessary to address the housing crisis and climate crisis.
Below, I summarize relative background on budgeting issues facing California, including a description of California’s current revenue system and some of California YIMBY’s spending priorities for the state. Then I describe the initiative itself, along with its likely impact. Given the harm this proposal would likely do to both state revenues and California YIMBY policy priorities, I conclude by recommending that California YIMBY oppose the initiative.
California’s Taxing and Spending Rules
California significantly limited property tax revenues in 1978. In 1978, California voters approved Proposition 13, which sharply reduced the amount of revenue that local governments could expect to collect in property taxes. In the year following Proposition 13’s passage, statewide property tax revenues plummeted by 60 percent. A recent attempt to modify Prop 13 by removing the cap on commercial property taxes failed at the ballot box.
While some cities responded to the passage of Prop 13 by developing strategies to bring in more sales tax revenue, local governments still mostly rely on property taxes. However, many local governments have responded to Prop 13 by attempting to diversify their revenue base. Some have become more reliant on sales tax revenue, while others have levied fines and fees to replace lost property tax income.
The state is highly dependent on personal income tax revenues. Over two-thirds of the state’s General Fund revenue comes from the personal income tax. In contrast to property tax revenue, income tax revenue is very volatile; while property values tend to rise consistently over time, income fluctuates depending on the health of the economy and various related factors. The incomes of wealthier Californians are especially volatile because a large share of their money comes from capital gains, which can rise or fall sharply depending on stock market performance.
Local governments are heavily dependent on fines and fees. More than 90 percent of state revenues (excluding federal transfer payments) come from taxes, with the remainder coming from fines and fees. In contrast, cities, counties, and special districts receive much of their revenue from fees. Approximately 40 percent of city revenues, 15 percent of county revenues, and 89 percent of water district revenues come from such fees. The bulk of city fee-based revenue comes from utility fees.
The state constitution pre-commits a significant amount of state revenues to education spending. The greatest portion of California’s General Fund spending — $78 billion out of $234 billion in the most recent budget — goes to K-12 education. That is partly because of Proposition 98, a 1988 constitutional amendment that established a funding formula for education. This formula, which is too complex to describe here, has contributed to an above-average degree of volatility in California’s education funding levels compared to other states, while also limiting the state’s budget flexibility. In most budget years, California is prevented from even modestly reducing education spending compared to the prior budget year.
The state constitution caps state appropriations. In addition to limiting property tax revenue and setting a floor on education spending, the California constitution caps state appropriations at 1978-79 levels, adjusted for economic growth and population growth. This cap is commonly referred to as the Gann Limit. Any revenue in excess of the Gann Limit must be rebated to the voters, unless it is spent on certain excludable categories (such as capital outlay and debt service).
The state legislature requires a two-thirds majority to pass most types of tax increases. In addition to capping property taxes, Proposition 13 imposed a requirement that any new special taxes be approved by a two-thirds majority of the legislature (or city council or board of supervisors, depending on the level of government). Proposition 218 subsequently imposed a voter approval requirement on local taxes, and Proposition 26 applied the two-thirds requirement to include various fines and fees. Combined with the cap on state appropriations and the floor on education spending, these requirements impose very narrow guardrails on California’s budget flexibility.
The state currently faces a significant budget deficit. After two budget cycles that saw rapid revenue growth, the Legislative Analyst’s Office projects that California will face a $24 billion deficit in the 2023-24 budget year, followed by smaller operating deficits in following years. Closing these operating deficits without painful cuts may require that the state find new sources of revenue.
Some of California YIMBY’s major policy priorities will require new state revenue streams. While current spending already exceeds revenue, California will likely need to dramatically increase spending in some domains if the state is going to achieve California YIMBY’s policy priorities. For example, developing affordable housing for unhoused and extremely low-income Californians will require significant subsidies; so will building green transportation infrastructure. The state will need to find new sources of revenue in order to appropriately fund these priorities.
Another Tax Revolt in the Making
The Taxpayer Protection and Government Accountability Act initiative would amend the Constitution to do the following:
- Expand the definition of a tax to include many fees.
- Make new state and local taxes subject to both a two-thirds vote in the relevant legislative body and a majority vote from the relevant electorate.
- Require the relevant legislative body to approve new fees or fee changes instead of delegating that authority to administrative agencies.
- Limit some fees so they only cover the cost of the service provided.
A Major Threat to Critical Program Funds
Proposal would have a major impact on the state and local government revenues. This bill would make it significantly more challenging for all levels of California government to create new revenue sources or augment existing ones. As a result, it would likely create downward pressure on state, county and local revenues over the long term. When revenues from a particular tax or fee decline, government would be limited in its ability to supplement with higher taxes or a new revenue source.
Proposal would likely result in cuts to existing programs and impede the creation of new ones. Because tax and fee increases would be subject to voter approval — but spending cuts would only require a legislative majority vote — this proposal would create a strong incentive for governments to cut spending when faced with a budget shortfall. As a result, this proposal would likely shrink the size of all levels of government over time as legislatures respond to budget pressures by eliminating programs instead of bringing in more revenue.
Stakeholders with state spending priorities would need to devote significant resources to ballot measure campaigns. This proposal would de facto turn any bill with a revenue-raising component into a bill and a ballot measure. As a result, the proposal would require much larger investments from any advocacy group or coalition that intends to raise revenue for its spending priorities. This would also likely complicate other ballot measure efforts — both by crowding the ballot and by straining advocacy groups’ resources.
Proposal would make state budgeting more volatile and unpredictable. Even when it leads to the creation of new revenue streams, budgeting via plebiscite is a bad way to manage state and local finances. This proposal would introduce a great deal of uncertainty into the budgeting process; each election would have the potential to cause unexpected swings in revenue outlook at all levels of government, making responsible budgeting far more challenging.
Proposal may reduce local governments’ ability to impose impact fees on new developments. Because the proposal would redefine many fees as taxes and limit local governments’ ability to impose new fees, it could create some downward pressure on impact fees for new developments. This, in turn, may modestly improve the likelihood that some proposals for new housing will pencil out.
Recommendation: Oppose
This initiative could cause severe damage to the fiscal health of both the state and its constituent entities. More to the point, it would throw up significant obstacles to any new spending at a time when the state urgently needs to invest in affordable housing, green infrastructure, public transportation, and active transportation infrastructure. If passed, this initiative would significantly complicate any effort on California YIMBY’s behalf to pass legislation authorizing these investments.
As noted above, the one silver lining of this legislation is that it could lead to modest reductions in development impact fees. But these reductions would not follow the best practices of impact fee reform: instead of simply bringing fees in line with the actual impact of a proposed development, it would place arbitrary constraints on a city’s ability to levy or adjust fees. And because of the initiative’s impact on a city’s ability to find new revenue sources, it would likely result in greater local government opposition to impact fee rationalization and standardization.
For all of the above reasons, I recommend that California YIMBY oppose this initiative.