Some economists point out that although California’s tax revenues are “unstable”

Question

Some economists point out that although California’s tax revenues are “unstable” during times of severe economic downturn, the system has other benefits: It is highly progressive (i.e., more equitable in terms of who pays taxes), and the state raises most of the revenues for local governments, which are often less efficient in collecting taxes and which use more regressive tax sources. Those who lament the passage of Proposition 13 often fail to note that the property tax gets low marks for fairness and progressivity. Given that economic recessions like the one spawned by the financial meltdown are rare, should more states emulate California’s tax system?

Explanation / Answer

State of California in 2008 -2009 witnesses one of the worst crisis observed by any states in USA. It all started with fiscal changes proposed by proposition 13, which was introduced in state of California 30 years back.

Proposition 13 changed the government financial planning and created a situation where the deficits were as high as almost half of the expected revenue for state of California. This resulted in California's rating falling to as low as just one step above the junk bond status. California had to release IOUs to meet the demand of creditors.

Because of the magnitude of fiscal deficit and downgraded credit rating it was almost impossible for California to borrow money. Even if they could borrow it was at a very high cost. The state faced one of the worst crisis related to managing the cash considering its residents spending level and the low revenue level.

Though such economic recessions like the one spawned by the financial meltdown are rare, it was California's progressive tax policy and proposition 13 that increased the magnitude of financial crisis for the state. Considering this in my opinion other states should not emulate California's tax system.

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