Coping with the Tax Cut

California eases the impact with a $5 billion relief fund

While Howard Jarvis strutted around Washington and U.S. mayors fretted in Atlanta about how his tax-cutting crusade might hurt them, California struggled with a more immediate problem. On July 1, the end of this week, Jarvis' triumphantly successful Proposition 13 goes into effect, with its more than $7 billion slash in revenues from property taxes. As a select committee of six of the state legislature's most powerful members worked feverishly on a rescue plan, thousands of lobbyists flocked to Sacramento to apply pressure.

A brigade of disabled workers and people handicapped from birth parked their wheelchairs outside the hearing room in the Sacramento capitol in a quiet plea that their welfare aid not be reduced. Leaders of powerful police and fire fighters' lobbies jammed the committee chamber. So did the state's influential teacher and school lobbyists. Committee Member Leo McCarthy, speaker of the state assembly, passed up so many meals as the deadline neared that he had a severe allergic reaction to energy-sustaining almonds and had to be temporarily hospitalized. Select Committee Chairman Al Rodda, a mild-mannered former college economics instructor (his doctoral dissertation was The Economic Mind in 18th Century Colonial America), spent 18-hour days grappling with the economic minds of angry 20th century Californians. Also breathing heavily on the legislators was Governor Jerry Brown, whose own plans for dealing with the crisis--and perhaps his political career--were at stake.

The committee finally tied together a package of first-year emergency aid that will considerably soften the impact of Proposition 13. The solution was swiftly approved by the full legislature and signed into law by a pleased Brown, whose own relief plan had been only slightly modified. In a televised address to Californians, he declared: "Proposition 13 creates challenges, it creates problems, but it creates an opportunity to make government in California a model for people all over the country."

The stopgap solution was to parcel out $5 billion of an estimated $5.8 billion surplus in state revenues to more than 6,000 local government units. The schools will get the biggest chunk of the fund, $2.2 billion. That will mean only a 10.5% overall cut in their operating cash from current levels. The relief money will be applied on a sliding scale so districts that have long had less money for schools will get the most. This will help meet a California Supreme Court decision that support of schools should be equalized.

Police and fire-fighting forces fared even better. The legislature directed that a $250 million slice of the relief fund for cities be used to prevent any cut at all in police and fire department budgets. The result may be, however, that towns and cities will have to cut even more deeply than feared into services like parks and recreation, libraries, public transportation, street cleaning and garbage collection. Local officials may even have to pinch themselves where it hurts most: cutting administrative staffs and such perks as travel allowances and official cars.

Another $1.5 billion will go toward paying for welfare, Medicaid and other programs borne by the state's 58 counties. Thus fears that poor people would suffer drastically may not materialize. The legislature did decree, however, that there be no increase in welfare payments unless public employees also get a pay hike. Brown has already asked for a freeze on state salaries. Since it would seem to be political suicide for lower-level officials to vote increases for themselves at a time when the taxpayers are screaming so loudly for less spending, welfare payments probably will be frozen.

Most of the remaining rescue money, about $1 billion, will be reserved for emergency loans to local governments with special problems. Many local units, for example, commonly borrow from banks while awaiting anticipated property tax revenue. But with the property tax knocked down by 57% as a result of Proposition 13, banks now are understandably unwilling to make such loans.

Clearly, the initial effect of Proposition 13 will not be as draconian as some bureaucrats had predicted. But that is only because state revenues have been high, a condition that could change quickly. The slightest business recession could make a similar state bailout of local governments impossible next year. On the other hand, by relieving taxpayers, Proposition 13 could well stimulate enough business growth to generate added tax revenues.

Apartment dwellers in three large complexes near San Francisco may reap a dividend from the tax cut: their landlords have promised to reduce rents. To pass along his tax savings, one apartment-house owner pledged to lower rents $30 a month for 1,000 tenants. San Jose Businessman Larry Whitaker, president of Halcyon Communications, Inc., said he would prorate his own $18,921 property tax cut among his 150 California employees. The Bank of San Pedro knocked 1/4% off its consumer loan rate in a similar move to distribute its tax benefits.

Despite such calming gestures, a residue of bitterness persists in the wake of Proposition 13's passage. The city council in Livermore (pop. 54,400) has taken a defiant stand, vowing to spend $320,000 on new council chambers even while threatening to fire a fourth of the city's 207 employees. "There might never be that much money on hand again for years," explains Assistant City Manager Edward Shilling.

From their besieged bastions, public officials sometimes glowered out at the taxpayers. "The public is ugly, the citizens are mean," declared Los Angeles County Supervisor Kenneth Hahn. Despite the one-shot relief from the state, countless local officials remained fearful about the long-range effect. As Committee Chairman Rodda quipped, "Having rescued the state from chaos, the legislature can now proceed to address the problem of total confusion."

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