Devolution on crack

October 4, 2009

(c) 2009 travellin' john photography

Ten days in at Berkeley and I’ve already had my first walkout: picket lines went up last week to protest against University budget reductions.  Spending cuts have already arrived here. Most buses now run only once an hour; bins are collected once a month. And Governor Schwarzenegger has announced a giant fire sale of state assets (an idea suggested to him via his Twitter feed).

For urban obsessives like me, the California fiscal crisis is fascinating (and depressing) stuff.  The politics of cuts is highly localised. American states and cities have a range of tax, spend and money-raising powers (in 2005-6 California and its cities raised $200bn in bonds [pdf]; in 1916 a bond issue financed the Golden Gate Bridge). Washington’s willingness to bail out localities is also limited: since 1937, at least 543 American cities have gone bankrupt.

So there’s been an intense debate here about the mix of tax rises, borrowing and spending needed to balance the books. But the state’s unique system of direct democracy make it much more fraught.

Since 1911 California has used three types of referendum to decide major issues, or ‘Propositions’. The State Legislature in Sacramento can pass proposals, which citizens then vote on. Citizens can propose new laws; if they can raise signatures for 5% of registered voters, the proposal goes to a referendum. Voters can also recall elected officials via a petition of 12% of voters (this happened to Gray Davis in 2003, bringing Schwarzenegger to power).

The Economist calls these ballot initiatives ‘the crack cocaine of democracy’. As my Berkeley colleague Malo Hutson told me earlier, it’s an apt comparison. If Propositions with spending implications pass, Sacramento has to find the money. Conversely, it’s tough to pass anything perceived as raising taxes (only about a quarter of bond issue propositions succeed). Worst of all, while most Propositions need a simple majority to pass, a 2/3 majority is required for any tax increases or other revenue-raising measures. This is the notorious Proposition 13, itself passed by referendum in 1978.

The results are dire. California’s main revenue streams are choked off, with a heavy reliance on volatile local income and sales taxes. Long term planning is very difficult, with only 25% of the budget under legislators’ direct control. But repealing the measure is seen as political suicide: after one kit-flying exercise, Arnie famously told supporter Warren Buffett to do 500 sit-ups if he mentioned it again.

This also means some very peculiar tax laws survive – for instance, local property taxes are based on initial purchase price, not the current value. (Malo explained that when his girlfriend bought a 50% share of a house, the two halves of the property were taxed at different rates.) Since land value is not properly captured, the result is a massive transfer of wealth from young to old, and huge windfall gains to property owners.

Some policy innovation arises from all of this – it turns out Tax Increment Financing was invented in California in the 1950s. But right now, extreme devolution is making it almost impossible to solve the State’s budget crisis. Voters have rejected everything proposed by Sacramento, forcing the State into emergency service cuts.

Californians seem confused about how to fix things. According to a 2008 survey, 64% favour some reforms to the system, and 78% think ballots are often too complex to understand. But 60% believe they make better public policy decisions than elected officials.

There are some resonances here for British debates about localism and public spending cuts. As Dermot points out, Labour and the Tories are still playing chicken on spending reductions. Tony Travers recently suggested that Whitehall should ‘delegate the axe’, avoiding the blame for cuts by giving local authorities the power to make their own. But centralism is so engrained in the UK that in the short term, Ministers would still face the kind of protests we’ve seen in Berkeley.

As Tim Williams argues, ‘casting off the Whitehall shackles’ should encourage British cities to develop more innovative ideas. But unlike America, I don’t think Brits would be up for city bankruptcy. There are cultural, as well as practical limits to localist self-reliance.

The California crisis also highlights the importance and limits of strong leadership. The Governor really has to direct the public conversation, but even popular leaders like Arnie have found it hard to push their favoured measures through. Still, if The Governator might be running for President in 2012, Californian  democracy is clearly a gateway drug to something much harder.

2 Responses to “Devolution on crack”

  1. […] California is an extreme example of where low-tax bias takes you. Under Proposition 13, the state has capped property taxes *and* requires a supermajority for any revenue-raising measures. Right now, recession-hit public finances are in a total mess, but it’s proving politically impossible to pass a budget. As a result, one small town is now disbanding its police force. […]

  2. […] quote Squareglasses: California is an extreme example of where low-tax bias takes you. Under Proposition 13, the state has capped property taxes *and* […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: