An Alternative Tale of Two Tax Jurisdictions.

Abstract

I Introduction In A Tale of Two Tax Jurisdictions, Galles and Sexton (1998) demonstrated that both California's Proposition 13 and Massachusetts' Proposition 2-1/2 were only temporarily successful in reducing the real per capita levels of state and local revenues and expenditures. While those measures fell upon implementation of the propositions, within a decade they had grown to exceed their pre-proposition levels. In An Alternative Tale of Two Tax Jurisdictions, Richard Cebula (1999) suggests that these propositions' success should be judged by their effects on the growth rates of real per capita revenues and expenditures, rather than on the levels of those variables. Using our data for California and Massachusetts, he shows that the growth rates of those variables were substantially lower over the period from the passage of each proposition to 1990 than from 1966 to the year prior to passage, and judges these propositions to be longer-term successes as a result. While we would argue that focusing on real per capita revenue and expenditure levels is more consistent with these propositions' focus on tax reductions, the arguments of their authors and supporters, and critics' claims that they have sharply eroded the level of state and local government services (since the same real per capita level of revenues and expenditures should allow the same level of service to constituents, even with no improvement in government productivity), we recognize that growth rates provide an alternative measure of their effects. However, the evidence Cebula cites cannot establish these propositions' effects on long-term growth rates. Adjusting for the one-time reductions during the propositions' implementation and trends in the U.S. as a whole over this period, there is very little evidence that these propositions significantly reduced the longterm growth rates of real per capita revenue and expenditure growth. II Growth Rates, One-Time Reductions, and National Trends Cebula compares real per capita growth rates from the year before each proposition passed to 1990 with their previous growth rates, and he attributes the entire difference to the propositions' effects on long-term growth rates. However, this misrepresents these propositions' one-time rollbacks as part of a long-term trend, and it ignores other factors which would also change these growth rates in the period after their implementation. Propositions 13 and 2-1/2 featured one-time rollbacks, not just growth restrictions. Including the one-time rollback implementation periods, after which growth resumed, in his measures of post-proposition long-term growth rates biases these measures downward. To determine the post-proposition long-term growth rates, the one-time effects of the propositions' implementation period should be broken out separately, and the ensuing long-term growth rates should be estimated from the period after the one-time roll-back was implemented. Since there was a significant nationwide taxpayer revolt during the post-proposition period considered, as well as a substantial recession in the early 1980s, the real per capita revenue and expenditure trends would have fallen even without the propositions' passage. …