This report argues that the property tax shift beginning in FY 1992-93 has introduced significant new distortions into the public-private decision making process. The property tax, as a relatively static revenue source, has been a problematic aspect of California's fiscal composition since the passage of Proposition 13. The property tax shift, which created the ERAF (Educational Revenue Augmentation Fund) fund for schools, has exacerbated this already serious problem, especially for counties.

We believe that the unintended consequence of the property tax shift, which amounted to $3.5 billion in FY 1995-96, is a reduction in both local and state revenues that would otherwise accrue if the property tax were allocated according to the pre-shift formula. The current allocation of the property tax constitutes a significant disincentive to new development that has measurable economic and tax revenue consequences. Reversing this disincentive can reasonably be expected to unlock a sufficient amount of new economic activity such that both the state and local governments will be better off. This is discussed in Section I.

Read Study