Will Federal Assistance to California Be Affected by Proposition 13?

In June 1978, California taxpayers overwhelmingly approved a constitutional amendment to limit state and local taxation. Proposition 13 limits realty taxes to 1 percent of market value after July 1, l978, limits assessment increases to 2-percent annually, and bases current property values on assessments as of March 1, 1975. Property tax revenues of local governments will decline by an estimated $7 billion annually as a result of Proposition 13. To offset this revenue loss, the State will distribute $4.1 billion from its accumulated surplus during the fiscal year beginning July 1, 1978. Passage of Proposition 13 aroused concern that California may lose federal grant funds due to the effect of state and local spending reductions on compliance with matching and maintenance of effort requirements.

It is too early to tell the impact of matching and maintenance of effort requirements on federal funds to California as a result of Proposition 13. An in-depth evaluation of the actual impact must await final local decisions on the size and shape of budget reductions following distribution of the State surplus. Congressional Budget Office (CBO) and Treasury Department estimates of the direct federal revenue effect of Proposition 13 suggest that the actual increment to federal revenues will not exceed $1.5 billion in the first year. It may be even smaller if the indirect federal revenue effects that CBO attributes to the amendment materialize. These estimates are especially sensitive to untested assumptions that are being made concerning the shifting of the property tax savings. The level of federal grant outlays will depend largely on local government budgetary decisions, on uses made of the State surplus, and on the waiving of certain federal grant requirements.