Such analysis, simply drawing a straight line between 1977-78 and the most recent year, is incomplete and masks important information about California's tax structure and its ability to produce revenues for public services. Policymakers should be skeptical of claims of long-term downward trends based on such analysis. In order to see whether a trend really exists, it is necessary to chart the data for other years in between the years in question. Only that level of detail can show whether revenues and spending continue to decline or have actually "turned the corner" and begun increasing.
This bulletin, by Cal-Tax Director of Research Stephen Kroes, provides that kind of analysis, using the latest financial data available from the U.S. Bureau of the Census. The figures show that there is no long-term downward trend in government revenues and spending. One-time events caused revenues and spending to drop sharply in the late 1970s and early 1980s: the back-to-back effects of Proposition 13 and the 1981-82 economic recession. Since 1982-83, however, California's public finance system has rebounded from those one-time adjustments with surprising strength - revenues and spending have grown much faster than the economy and faster than finances in other states.
This rapid revenue growth occurred even after ongoing public finance reforms were enacted in the early years after Proposition 13, including indexing of the state income tax to inflation, elimination of the state inheritance tax, and spending limits on state and local governments.
The public finance trends illustrated in this bulletin were fueled by a healthy, growing economy. Once the initial effects of Proposition 13, other tax reductions, and a sharp recession were over, California's system of public finance provided ample revenue for high, sustained spending growth.
Nevertheless, California is now experiencing fiscal difficulties. The current recession has been the worst this state has seen since the Great Depression. But if the recent past is any indication, California's public finance system has the capacity to generate abundant revenue if the economy is nurtured. Rather than advocate economically harmful tax increases aimed at solving an imaginary long-term revenue crisis, these data suggest that California policymakers should focus on ways to make the economy more productive, which in turn should provide ample revenue for necessary public investments. The challenge, as always, will be to keep spending growth within the confines of even this generous revenue-generating system.
Once California recovered from the recession, after 1982-83, state and local revenues began to grow rapidly. Because revenues grew faster than the economy, the percent of personal income paid to government in taxes, fees and other revenues increased. Although a similar trend was evident for the rest of the country, revenues in California grew at a faster rate than in other states.
That growth continued through the 1980s, with only a slight dip in 1987-88, caused by major federal tax changes that induced taxpayers to accelerate income and tax payments into 1986, resulting in a temporary drop in 1987.
Note in Figure 1 that revenues as a percent of personal income dropped slightly in 1990-91. A severe recession began in June 1990, causing revenues to grow more slowly than personal income. Absent any major tax reductions, when the recession ends, revenues should continue their long-term upward trend, although growth may be slower than it was in the 1980s, since most economists are predicting slower economic growth.
Figure 1 shows state and local revenues only, but a significant amount of state and local spending
is funded by federal revenues subvened to state and local governments. Figure 2 shows the
overall revenue picture when federal funds are added to the revenues shown in Figure 1. As
above, although recent revenues are below their peak in 1977-78, growth in California since
1982-83 has outpaced growth in other states.
Despite reductions in federal assistance to state and local governments, California has fared well in total revenues, making up any losses in federal money with state and local increases. From 1982-83 to 1989-90 (before the temporary effects of the recession), state, local, and federal revenues as a percent of personal income grew three times faster in California than in all other states combined: 16.5% in California versus 5.5% in other states. As the following graphs show, that increase in revenues has allowed California to significantly surpass the spending growth trends of other states.
Figures 4 through 8 illustrate trends in major spending categories. Since 1983-84, in every category except welfare, California has increased spending per $1,000 of personal income much faster than other states. Welfare spending, shown in Figure 5, continued to grow more slowly than personal income until 1986-87, when it began increasing relative to income. California's welfare spending per $1,000 of personal income was 40% higher than other states at the beginning of this period, and state fiscal decisions during the 1980s have allowed welfare spending to converge closer to the national average.
Figure 9 clearly shows that, beginning in the early 1980s, California far outpaced other states in
public spending growth. Public safety and health spending have grown the fastest, but rapid
revenue growth has allowed other categories that are important to the state's economy and quality
of life, such as education and transportation, to also grow faster than the economy and much
faster than other states.
It should be noted that deficit spending does not significantly influence this spending growth until the very last year in the charts. Although 1989-90 ended with a small deficit, California's significant deficit problems did not begin until 1990-91. The bulk of spending growth depicted in these charts occurred during the mid- to late-1980s, when budgets were roughly in balance.