There are a few ideas floating around to help stabilize general fund revenue through new taxes, or the modification of existing tax relief.
Proposition 13, approved by voters in 1978, established rules on how and when residential, commercial and industrial property can be assessed to determine how much in taxes is owed to local governments. Prior to this, local property taxes paid a larger share of K-14 education, but after the passage of Prop. 13, it fell on the state to offset spending, particularly after Prop. 98 was approved by voters ten years later.
While property values across the state have been climbing for decades, local governments don’t capture that value through taxation for homeowners who sit on their property. If you bought a home in 1990 and never left, you are paying property taxes based on the assessed value that year even if the house is worth, say, three times as much today.
One solution to relieving the funding pressure put on the state’s general fund to pay for K-14 education is by assessing taxes on most commercial and industrial properties based on market value, essentially removing the tax relief Prop. 13 offers them. This is called “split roll” and a recent attempt to have voters pass this lost by 3 percentage points in 2020. If it passed at the time, large commercial and industrial entities could have provided an estimated $6.5 billion to $11 billion a year for local governments and school districts, a boon that surely could offset Prop. 98 spending from the general fund.
In 2016, then-State Controller Betty Yee published a comprehensive report exploring alternative tax reforms to generate new income. One proposal called for expanding the state’s sales and use tax to include services, such as going to the doctor, using an accountant’s services, or getting your hair done. Since more and more of the economy relies on services, the current sales tax regime was seen as outdated.
This was proposed by then-state Sen. Robert Hertzberg, and it could have generated an estimated $10 billion a year in additional revenue. It didn’t pass, but Hertzberg continued to push the issue for years, albeit in different ways. Ultimately, none of the proposals panned out.
Due to how volatile revenue has become, how the state spends money has also changed in two important ways. One is a focus on one-time spending obligations instead of multiyear spending on state programs. This was a tactic used during the last budget negotiations, where the state was flush with cash.
Another approach is the state’s rainy day fund, basically a voter-approved savings account the state is required to invest in each year to weather an economic downturn when it inevitably happens. This became popular after the Great Recession saw deep program cuts when the state was facing down deep deficits.