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Proposition 13 and financial markets

  • Design
  • Economics
  • Political Science


"Taxes," said Justice Holmes, "are the price we pay for civilized society." If that be true, Westerners were in a downright uncivilized mood in 1978, because voters in five Western states overwhelmingly adopted tax-or spending- limitation measures during the year. Voters in only one state (Oregon) rejected such a measure where it appeared on the ballot, and that may have been simply because two competing ballot measures cancelled each other out. The most widely publicized of these measures was California's Proposition 13-the Jarvis- Gann Initiative-which was designed to reduce local property taxes 57 percent and to curb future tax increases of either the state or local variety. This $7-billion tax reduction amounted to almost one-fifth of the total revenues raised by all levels of California governments. Yet despite widespread campaign rhetoric, Proposition 13 did not bring about a collapse of California public services or public finance-nor did it usher in the millenium. Nonetheless, the measure did have important economic and financial con- sequences, which are evaluated in two articles in this issue of the Review. The third article anal- yzes an important financial development of the past decade-the rapid growth of the com- mercial-paper market. William H. Oakland cautions that the circum- stances surrounding Proposition 13 were almost unique to California. A major contributing fac- tor to its success was a high and growing state- local tax burden during a period when similar burdens were levelling off in other states. A second factor was a substantial shift in the distribution of property-tax burdens towards home-owners, at a time when inflation already was causing budgetary problems for many households. And a third factor was the emer- gence of a massive California state-government surplus in the period preceding the election. 5 Oakland notes that Proposition 13 achieved two of its three major objectives-property-tax reduction and state-surplus liquidation. How- ever, its initial

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