The state that launched the nationwide tax revolt 18 months ago with Proposition 13 may now be on the verge of providing the clearest test yet of where Americans are willing to draw the line on sacrificing social, welfare, and other government services in order to lower taxes and trim back the size of local and state government.
Looked at another way, Californians may be about to find out, once and for all, whether the "Laffer curve" really works. That's the theory that sees lower taxes as spurring economic growth by taking more of people's income out of taxes and freeing it instead for private investments and savings.
It is generally agreed that, thanks to a bailout from surplus state funds, Californians have yet to feel the full, long-term impact of lost revenues from Proposition 13's cutback in property taxes. Yet it is also widely agreed that Prop 13 has helped stimulate the state's economy, boosting personal income and corporate earnings and creating new jobs at a rate faster than other states or the country as a whole. How much of the state's current "boom" is attributable to unique circumstances that have nothing to do with reduced taxes -- such as the preponderance of aerospace and defense manufacturers in California, for instance -- is far from clear. Yet this has not deterred the populist forces of Howard Jarvis from pushing ahead with new and stiffer measures for further trimming government bureaucracy. In November they won voter approval for putting a cap on government spending, and this year, in June, they are expected to win a sharp reduction in state income taxes.
There is little doubt that "Jarvis II" -- or "Jaws II," as opponents have dubbed the proposed income-tax cut -- will create ripples beyond California's borders. Proposition 13 led a number of other states to lower property taxes, index state income taxes to offset inflation, and put caps on state spending. The resulting state and local belt-tightening has taken various forms. Some cities and states have neglected maintenance of structures, streets, and roads. In general, state and local governments are operating in the red, according to one recent study. Their combined budget balances had a surplus of $8.4 billion in the first quarter of 1978, but by the second quarter of 1979, aggregate state and local accounts nationwide had a deficit of $6.1 billion.
Until now, California's bureaucracy has had enough "fat" to shield the average taxpayer from drastic cuts in services. And one positive result of Proposition 13 has been a dramatic reversal of California's previous long-term trend of steady growth in state and local government employment. However, public employee strikes are more frequent now. Many localities have started charging user fees for libraries, zoos, trash collection, and other services previously paid for by taxes. Parks and streets in some cities already show the results of reduced maintenance. The National Association of Social Workers report a 5 percent drop in services to the poor and a 22 percent shift of federal revenue-sharing funds from social programs to basic government operations.
Many experts on local and state financing are taking a wait-and-see approach to Jarvis II. After previous "doom and gloom" predictions about Proposition 13 proved wrong -- or, so it would seem -- everyone is more cautious with projections. Still, Californians would seem to have good reason to be wary of a projected 54 percent reduction in income tax revenues -- nearly one-fourth of the entire state budget. If, as some economists argue, the full impact of Proposition 13 has only been delayed, Jarvis II's proposed harsh revenue cutbacks on top of those from Prop 13 could provide an unexpected jolt, especially to the poor and needy dependent on social servies. Other states, too , would be well advised to watch what happens in California before taking the Jarvis II plunge.