Saturday, October 4, 2008

Brief history of the tax reform struggle (1978)

The Rodda Project: Prelude to Proposition 13, April 1978

The background to Sen. Rodda's paper

In 1978 the state of California was enjoying a burgeoning budget surplus. Actually, “enjoying” is the wrong word. Governor Jerry Brown was a tight-fisted Democrat under whom the state budget grew even more slowly than under the administration of his predecessor, Republican Ronald Reagan. The revenues pouring into state coffers were driven by sky-rocketing property taxes. The surplus, therefore, was simply the most visible aspect of a growing crisis, as well as stark evidence that the state's property owners were coughing up a lot more in taxes than the state had immediate use for.

The circumstances were ripe for an opportunist like Howard Jarvis, heretofore a fringe element in California politics. Now he would go mainstream. Jarvis was a southern California apartment complex owner who had unsuccessfully backed previous attempts to slash property taxes by the initiative process. Until 1978, the voters were unwilling to embrace proposals for such drastic cuts. Now it looked like they were ready.

Jarvis clothed his campaign in the guise of a people's rebellion, and there were enough anxious homeowners flocking to his banner to give Jarvis the cover he needed. In reality, however, he remained an anti-government extremist (a forerunner of the notorious Grover Norquist) who wanted to reduce California to a low-tax paradise and libertarian eden. Proposition 13 was designed to richly reward Jarvis and other owners of commercial property with provisions that called for property-value reassessments only upon transfer of title. Given that homes changed hands much more frequently than commercial properties, homeowners would see their property taxes inch upward at rates much greater than those of commercial properties. It strains credulity to imagine that Jarvis and his inner-circle supporters did not anticipate this result, as a consequence of which identical homes on the same block may now pay dramatically different property tax rates. Proposition 13 requires that you stay put to enjoy its fullest protection. (I am personally aware of this, owning a duplex whose halves I purchased 18 years apart. My taxes on the more recently acquired half-plex are 2.4 times those on longer-owned half.)

In 1978 Albert Rodda was chair of the Senate Finance Committee. Aware of the looming crisis and the closing window of opportunity to use the state surplus to achieve some genuine tax relief and reform, he threw himself into a vigorous effort to bring the factions together. The attempt foundered because of irreconcilable differences between two major factions in the Legislature, although in the spring of that year it appeared that a glimmer of hope remained. Sen. Rodda documented some of the details of the struggle over property tax reform in April 1978, hoping to clarify the situation and provide information to those who were working to secure passage of Proposition 8 on the June primary ballot, a measure whose enactment by the voters was necessary in order to implement the provisions of SB 1. The voters, however, turned against the legislative initiative, rejecting Proposition 8 and enacting the infamous Proposition 13. Since then, Californians have enjoyed varying measures of property-tax relief, although it has been at the price of reducing local government to penury and concentrating political power in the state capital.


Brief History of the Struggle by the Legislature to achieve Tax Relief-Reform in the 1978 Session

April 25, 1978

I believe that it is my responsibility to provide you, as a correspondent and a voter, with information relating to the history of the enactment of legislation to achieve tax relief and reform.

It may not be known to you that in order to resolve the confusion and conflict in the Legislature over the tax relief-reform, I was asked by the Governor and the Senate President pro Tempore, James Mills, to work with Senators Jerry Smith and John Holmdahl to implement a compromise concept referred to as the Democratic “Airport Plan,” so designated since the basic elements were agreed upon by the leadership of both Assembly and the Senate in a meeting held at the San Francisco Airport.

It was my conviction that the two houses of the Legislature should work together in order to reach a consensus and to avoid the most controversial provisions contained in SB 154, the tax relief-reform bill which twice had failed in the Senate in the closing days of the 1977 session of the Legislature.

The controversy which emerged over SB 154 centered upon its inclusion of the “circuit breaker” concept, a means of providing property tax relief on the basis of a formula which utilized two factors—the personal income of the homeowner and the assessed value of the residence. Under the formula, low-income owners of high assessed value homes would receive the greatest tax relief benefit. On September 15th, 1977, the bill failed of passage in the Senate by a 21 aye to 15 no vote, 27 aye votes of the total membership being necessary for enactment. The “circuit breaker” distribution formula incurred opposition because it constituted a means of redistributing income through the property tax. Under its provisions, 33% of the homeowners would have received no tax relief and about 50% would have received $65 or less. A very few would have received as much as $1,500, since their incomes were below $5,000 and their houses were assessed at $80,000 or above.

Ideologically, this proposal was unacceptable to many of the Senators, but there were other controversial provisions in the bill and they related primarily to a number of tax reform elements, specifically heavier taxation of small oil producers and corporate preferential income, heavier taxation of intermediate and long-term capital gains, an increase in the corporate profits tax to 10-1/4%, an increase in the motor vehicle license fee, a change in the property tax lien date for partially completed structures, and restrictions relative to the speculative purchase and sale of residential property.

It was the general consensus among legislators who reflected upon the defeat of SB 154 that a tax bill containing too many controversial features, especially the “circuit breaker,” could not obtain the necessary 2/3rds vote for enactment, a requirement made necessary if a bill in the regular session were to become effective immediately and if the buyout of the business inventory tax were included in the legislation.

It was consistently my opinion, after the failure of the two conference committee reports on SB 154, that the business inventory buyout should be included in the tax relief-reform legislation but that the “circuit breaker” should be eliminated and most controversial. tax reform provisions also excluded. By means of this approach to the problem, I thought that it would be possible to achieve a reasonable compromise and I sought, therefore, to convince the leadership to introduce such a compromise into the original Petris bill, SB 154, by means of the submission of a third conference committee report. to both houses of the Legislature. I opposed, therefore, a special session, which was called by the Governor as a means of expediting enactment of tax relief legislation. A bill enacted in a special session with a simple majority vote may become law within 90 days of the termination of the session. It seemed politically practical, therefore, to utilize the special session as a political strategy to avoid the 2/3rds vote requirement. The majority vote rule did not apply, however, to the business inventory tax buyout since such a change in law, because of constitutional issues, requires a 2/3rds vote even in a special session.

My negative view of the special session on the tax relief- reform was predicated on two factors. I foresaw the introduction of many tax relief bills and the consideration of the two issues, homeowner-renter relief and the business inventory buyout, in separate bills rather than in one.

My predictions were fulfilled and we failed to “bite the bullet,” as it were, and make a responsible decision in a third conference committee on SB 154. And so time was wasted and controversy developed which reduced the ability of the leadership to exercise speed and direction in the development of tax relief legislation so that the achievement of the Legislature could be included in the ballot argument against Proposition No. 13. Once the special session was called, the liberals renewed their demand for a “circuit breaker” approach to tax relief and for the inclusion of tax-reform elements to finance the business inventory buyout. This position was, also, vigorously advocated by the California Tax Reform Association, a citizen's organization engaged in a lobbying effort on behalf of a “share the wealth” or “circuit breaker” approach to property tax reform-relief and dedicated to funding the business inventory buyout with revenues generated from an increase in the corporate profits tax, the tax on capital gains, and the closing of several tax loopholes. That organization consistently opposed the legislation which I developed in cooperation with Senators Smith and Holmdahl and which was originally embodied in the package, SB 6 (1st Ex.) and SB 7 (1st Ex.)—both introduced in the special session.

Enclosed is a press conference release made by this group. It was because of its opposition, I am confident, that the compromise or “Airport Plan” was not approved by the Senate Revenue and Taxation Committee.

After weeks of disagreement and denial of approval of the Rodda-Smith package by the Senate Revenue and Taxation Committee, I undertook to create a coalition to support a homeowner-renter tax relief and business inventory tax buyout bill. Its provisions were introduced into AB 107, Chel, with the author's consent and support, when it was under consideration in the Senate Finance Committee. The Senate coalition of leaders supportive of that action consisted of Senators Dennis Carpenter and William Campbell, both Republicans, and Senators Jerry Smith, John Holmdahl and myself, Democrats. The compromise was designed to enact a tax bill which would provide for homeowner and renter tax relief and for the repeal of the business inventory tax.

After the Chel bill, AB 107, was so amended, the Senate Finance Committee voted the bill to the Floor. Assemblyman Chel, in agreeing to accept the amendments, demonstrated a great deal of courage since he knew that the Assembly Speaker was opposed to that course of action. The Speaker not only opposed that course of action but also opposed the utilization for that purpose of the Lockyer bill, AB 7 (1st Ex.), to provide a buyout of the business inventory tax, which also was in the Senate Finance Committee. Five Democrats and four Republicans voted for the Chel bill, as amended into a comprehensive tax relief-reform bill. Two Democrats voted “no,” one abstained and one Senator, Peter Behr, was not present.

The homeowner-renter provisions of AB 107, as amended, were essentially those in SB 6 (1st Ex.), Rodda, and the business inventory buyout provisions were similar to those in SB 7 (1st Ex.), Smith. The legislation consisted of a buyout of the cost of Medi-Cal, AFDC, and 551 and General Assistance and an increase in the homeowner's exemption from the current $1,750 level to $2,500 and then finally to $3,500. It provided renter relief in the amount of $75, later increased to $87, and improved the senior citizen-totally disabled homeowner and renter relief benefits for those whose income is $13,000 or less. There were also limits placed on local government and state expenditures in the form of revenue limits. The business inventory buyout was to be phased in over four years, and it was to be financed by a graduated increase in the corporate profits tax to 10%. There was no provision for the closing of controversial tax loopholes and no change in the long-term capital gains tax provisions of current law. A portion of the buyout would, as a consequence, have to be derived from the state's ongoing surplus.

The Lockyer bill, AB 7 (1st Ex.), contained a number of controversial provisions as sent to the Senate Finance Committee—a 10-1/4% bank and corporate profits tax, taxation of 75% of intermediate and long-term capital gains, and several loophole-closing elements. In that form I advised the author to develop amendments to make it conform more to the Chel provisions in AB 107. Subsequently, after several weeks of negotiation, the author, Assemblyman Lockyer, amended the bill in a manner which was acceptable to the Senate Finance Committee, and on April 10 the measure was heard in committee and voted to the Senate Floor.

During the time that the tax relief-reform controversy was taking place, Senator Behr achieved some progress in his efforts to enact SB 1, although there was considerable opposition to it in its original form, since it provided for a 20% personal income surtax and a 5% residential housing transfer tax as a means of generating revenues to pay for its very substantial tax relief benefits.

On January 30th, the last day for action on SB 1, it was amended on the Floor and the 20% personal income tax feature was deleted. In its amended form, the homeowner tax reduction was estimated at 50% of the property tax. The bill also provided for a buyout of SSI-SSP, Medi-Cal, and AFDC costs and granted special tax relief benefits for senior citizens, homeowners and renters, and for an across-the-board benefit of $75 for each renter instead of the current $37. The bill contained no provisions for a buyout of the business inventory tax.

Despite these provisions, there developed considerable opposition to SB 1 because of the 5% transfer tax. This feature was finally understood by the members of the Legislature, especially the Assembly, to have considerable controversial implications and after several hearings in the Assembly Revenue and Taxation Committee the transfer tax was modified and became a capital gains tax or a tax on the profit from the sale of property.

It is important to note that several of the major provisions of the Behr legislation, as finally amended on the Floor of the Senate, had been taken from the “Airport Plan” concept and which, as stated above, had been embodied in the bill which I had authored, SB 6 (1st Ex.) and which the liberal Democrats on the Senate Revenue and Taxation Committee had failed to approve after two hearings. The committee had also refused to approve the Smith bill, SB 7 (1st Ex.), to repeal the business inventory tax, apart of the “Airport Plan” concept. But it approved the Lockyer bill, AB 7 (1st Ex.), to accomplish this goal and to fund the repeal, as I indicated above, through an increase in the corporate profit tax to 10-1/4% and the taxation of intermediate and long-term capital gains, and the elimination of a number of tax loopholes—several of which would have adversely affected small oil companies and other businesses.

The committee also approved a special session version of SB 1, Behr, which contained basically the same provisions as SB 6 (1st Ex.), Rodda, but contained the 5% capital gains tax on the sale of owner- occupied homes and provided a 40% tax reduction to homeowners.

Because of the approval by the Senate Finance Committee of AB 107, as amended to provide homeowner-renter relief and the business inventory buyout, the Senate gained the political leverage that it needed in its effort to advance the progress of tax relief legislation. Within a few days the Assembly Speaker reached an agreement with Senator Behr to delete the 5% capital gains tax from SB 1. As a consequence, SB 1 was no longer controversial and there was no prospect that the consensus bill, AB 107, as developed by the Senate Finance Committee, could be enacted. The Speaker was totally opposed to it and promised to “bury” it if it were sent to the Assembly for concurrence in Senate amendments. His support was given to SB 1. As a condition to that support the Speaker indicated that annual budget augmentations and appropriation bills would have to be reduced in amount from $300 million to $170 million. This emphasis on expenditure limitations was predicated upon the estimated cost impact of SB 1 and the state's future revenues and expenditures.

The Behr bill, as amended, has an estimated cost, beginning in 1983-84, which is about $150 million greater than that of AB 107 and that cost increases each year at a significantly more rapid rate than does the estimated cost increase of AB 107. It will be uncertain, therefore, if current fiscal estimates are accurate, whether the state will be confronted with the necessity of a state tax increase if a future deficit is to be avoided.

AB 107, as amended on the Senate Floor to increase the relief to renters from $75 to $87, had an estimated first-year cost of $1.285 billion and a 1981-82 cost of $1.83 billion. In 1983-84, the estimated cost is $1.935 billion and in 1984-85, $1.985 billion.

SB 1, Behr, has an estimated first-year cost of $1.4 billion and a 1981-82 cost of $1.7 billion. In 1983-84, the estimated cost is $2.075 [billion] and in 1984-85, $2.295 [billion].

Essential Provisions of SB 1, Behr

All of the provisions of SB 6 (1st Ex.) and SB 7 (1st Ex.) plus the following:
  1. A 30% across-the-board tax reduction
  2. Homeowner exemption retained at $1,750 level
  3. Renter relief at $75
  4. No buyout of General Assistance
  5. No buyout of business inventory tax
  6. No extension of senior citizen benefit to totally physically disabled

Essential Provisions of Rodda-Smith Legislation
  1. Approximately a 30% average reduction in the property tax on residential homes, although not on a flat percentage basis
  2. Homeowner's exemption, $3,500
  3. Renter's relief, $87
  4. Improvement in senior citizen homeowner and renter relief
  5. Buyout of AFDC, SSI-SSP, and Medi-Cal costs to local government
  6. Extension of senior citizen benefit to surviving unemployed spouses and the totally physically disabled
  7. Buyout of General Assistance costs to local government
  8. Buyout over four years of business inventory tax to be paid for in part by the surplus and an increase in the corporate profits tax to 10%
  9. Responsible limit on local government expenditures

Aspects of SB 1 which were of concern to some of its supporters and its opponents:
  1. Escalation of costs over time because of 30% tax reduction element
  2. The inadequacy of the renter relief benefit and no adjustment for inflation in renter relief payment
  3. Absence of provisions for the extension of senior citizen benefit to the totally disabled
  4. The greater degree of regressivity introduced into the property tax, the exact opposite of the effect desired by those who advocated the “circuit breaker” but opposed SB 6 (1st Ex.) and SB 7 (1st Ex.) and AB 107
  5. The failure to include a buyout of General Assistance, which is a very inequitable program for the provision of assistance to the needy

Aspects of AB 107 which were of concern to some of its supporters and its opponents:
  1. The flat, across-the-board tax relief benefit as provided in the homeowner's exemption increase from the current $1,750 level to $3,500 and the absence of an annual cost-of-living increase in the exemption
  2. The absence of tax reform elements to raise funds necessary to compensate government for the loss of revenue because of the buyout of the business inventory tax
  3. The absence of a “circuit breaker” approach to tax relief

On April 17, the Senate failed to approve AB 7x, Lockyer-Smith, as amended in the Senate Finance Committee. The Republicans attempted to amend the inventory repeal legislation when it was under consideration in the Senate for a final vote by eliminating the language which makes implementation of the legislation contingent upon the defeat of Proposition #13. Other amendments were also offered. They were defeated and a final vote was taken. The measure was denied approval by a vote of 25 to 0. All the Democrats present voted for the measure and the Republicans refused to vote. Reconsideration was granted.

On Thursday, April 20, the bill was presented to the Senate and approved 30-2. It was signed by the Governor on the same day.

I contemplated offering an amendment to make implementation of the business inventory repeal legislation contingent upon implementation of voter approval of Proposition #8, the amendment to provide for a split roll. Because of the controversy which developed on the Floor, I determined not to submit the amendment. There was a serious possibility that such action would jeopardize enactment of the business inventory tax legislation, which had been an integral part of the tax relief-reform legislation.

The major provisions of the Lockyer-Smith bill, AB 7x, are as follows:
  1. Phase-out of the business inventory tax over five years
  2. Phase-in of an increase in the bank and corporate profits tax to 10%
  3. An increase in the minimum tax of 2-1/2% on corporate preferential income to 5%
It is expected that the inventory tax buyout will cost the state a nominal amount from the general fund; its principal costs will be borne by the tax increase imposed upon corporate business.





Labor, senior, neighborhood, and public interest organizations today announced formation of a coalition to support property tax relief legislation that would be based on the following principles:

1. Enactment of substantial property tax relief for middle and low income homeowners and renters, targeted on an ability to pay basis. According to John F. Henning, Executive Secretary-Treasurer of the California Labor Federation, AFL-CIO, “the only way overburdened working families will get significant property tax relief is by targeting relief to them on an ability to pay basis.”

2. Local revenue limits, if considered, must be accompanied by a substantial state revenue sharing program with cities, counties, and other local agencies to cover the costs of vital public safety, health, and transportation services which are now dependent on property tax revenues. “Otherwise revenue limits are a prescription for social chaos in our already deteriorating urban centers,” Henning said.

“Working families are against unfair taxes on their homes, not against the essential services those revenues provide,” he concluded.

The coalition's first target is defeat of the Rodda-Smith bill, SB 6X. This bill provides only token relief for middle income homeowners, seniors, renters, and unemployed and disabled workers suffering under the burden of excessive taxes.

SB 6X is slated for hearing today in the Senate Revenue and Taxation committee.

The newly-formed coalition held its first meeting Tuesday at the Woodlake Inn. Principal spokespersons for the coalition include:

John F. Henning, Executive Secretary-Treasurer, California Labor Federation, AFL-CIO;
Tom Hayden, California Campaign for Economic Democracy;
Carl Jones, President, Congress of California Seniors;
Tim Sampson, President, Citizen's Action League;
Dean Tipps, Legislative Advocate, California Tax Reform Association;
Shirley Wechsler, Americans for Democratic Action.
The complete list of participating organizations is attached.

Patrick Mason, Research Director
California Labor Federation, AFL-CIO
1127 llth Street, Room 610
Sacramento, CA 95814
Telephone 916-444-3676
opeu #29-afl-cio/sc

Organizations Participating in Coalition for Tax Justice

California Labor Federation, AFL-CIO
Citizens Action League
Campaign for Economic Democracy
Congress of California Seniors
California Tax Reform Association
Americans for Democratic Action
American Federation of State, County and Municipal Employees
International Association of Fire Fighters
Service Employees International Union
International Longshoremen's and Warehousemen's Union
California State Building and Construction Trades Council
United Automobile Workers
United Steelworkers of America
Communications Workers of America
State Council of Retail Clerks
Laborers International Union of North America
California Federation of Teachers
United Transportation Union
International Union of Operating Engineers
Friends Committee on Legislation
California Rural Legal Assistance
Western Center on Law and Poverty
City of Oakland
National Association of Retired Federal Employees
Legislative Council for Older Americans

opeu #29-afl-cio/sc

No comments: