Will Federal Assistance to California Be Affected by Proposition 13?, with Colorado Funding Data

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, 1978, limits assessment increases to 2-percent annually, and bases current property values on assessments as of March 1, 1975. Proposition 13 also requires that any state tax increases be approved by a two-thirds vote of the State Legislature and that new local taxes be approved by a two-thirds vote of the electorate. 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 or on federal funds to Colorado if a similar tax reduction were initiated. Congressional Budget Office (CBO) and Treasury Department estimates of the direct federal revenue effect of Proposition 13 both suggest that the actual increment to federal revenues will not exceed about $1.5 billion in the first year. It may be even smaller if the indirect federal revenue effects that the CBO attributes to the amendment materialize. These estimates are especially sensitive to untested assumptions 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 in California, and on the waiving of certain federal grant requirements.