Economists Eye the Impact

Members of the TIME Board of Economists generally share the growing voter sentiment that the total burden of local, state and federal taxes is too high. But a number of those interviewed favor cuts less drastic on a nationwide basis than those called for in California's Proposition 13, which reduces property taxes by 57%.

"Federal, state and local taxes are still in the vicinity of 30% of the gross national product in this country," says Walter Heller, chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson. He adds, "Taxes in most European countries run up to 35% and 45%. The only major country that's below us is Japan." As Heller sees it, the California revolt reflects local circumstances, including California's booming real estate market and Governor Jerry Brown's delay in promoting tax reductions. Recalls Heller: "Several of us economists were invited to Sacramento in the summer of 1975, and we told Brown that there would be revenues running out of his ears by the time the economy went back up the recovery path. He didn't believe us, didn't plan for it and piled up the state budget surpluses. With local government overspending and state government overtaxing, you had an explosive situation."

In the short run, at least, the five members of TIME's board interviewed after California's vote say they believe cutbacks in local expenditures for government services are inevitable; most pinched will be those with lower incomes who are the most dependent on publicly financed programs and jobs. But, says Beryl Sprinkel, executive vice president of Chicago's Harris Trust & Savings Bank, "in the long run, the lower-income people will benefit if the cut does what I argue it will: namely, stimulate growth and development in California. It will lead to more jobs and higher standards of living."

Alan Greenspan, chairman of the Council of Economic Advisers under Gerald Ford, cites another benefit: "Because property taxes are a component of the consumer price index, and because California property taxes are such a large portion of the national total, the proposition will cut the index by .2% in December--say, from an inflation rate of 7% to 6.8%."

Less sanguine is Washington Economic Consultant Robert Nathan, who argues that "Proposition 13 has more to do with a feeling of government inefficiency" than with the tax bills. "I doubt that California can live with the kind of cut in services that is expected," says Nathan, "and I expect an eventual rise in income taxes and other business taxes."

Greenspan defends the drastic medicine prescribed by Proposition 13. Says he: "Such brutal sledgehammer techniques turn out to be necessary to prevent government from continuing to increase its share of overall economic activity." Washington University Economist Murray L. Weidenbaum agrees: "If government doesn't cut rates, people have to do it."

Many of the experts would have preferred other tax-cutting measures. Heller says he would have voted for the defeated Proposition 8, which promised smaller (30%) property tax cuts--only to homeowners, not the owners of commercial and industrial property, who pay 48% of California property taxes. Heller notes that California homeowners eventually will be paying higher taxes relative to commercial-industrial properties, since private residences change hands more often than factories and office buildings; with each sale, a property may be reassessed and its taxes may rise. Says Heller of the disparity: "An abomination." Weidenbaum counters that "by reducing business costs, Proposition 13 ought to spur business expansion and employment." Sprinkel favors a proposal defeated by California voters in 1973 limiting total state spending to a fixed percentage of personal income in the state. Both Sprinkel and Weidenbaum also argue that federal income taxes ought to be indexed to inflation. Otherwise, says Weidenbaum, "if you get a 6% cost of living increase, chances are your income tax will go up more than 6%, thus giving Washington a positive stake in inflation."

The economists agree that Proposition 13 will weaken local governments by increasing their dependence on state and federal funds. Warns Nathan: "As the state government becomes a more important source of revenue, more politics will be introduced into the allocation of funds." Still, argues Weidenbaum, "it was a ridiculous situation where the government was collecting money faster than they could sensibly spend it, so I don't think those who want to control the situation should be put on the defensive." Notes Sprinkel: "It will make local government more dependent on state financing, but it will also cut down state spending. If the states run protracted deficits, the quality of their bonds will go down and the interest rates they pay will go up, so the market provides a built-in mechanism to force state governments to live within their budgets."

Concedes Alan Greenspan: "I am uncomfortable because local governments will be more dependent on state and federal governments. Still, if I had to choose between nothing at all or Proposition 13 and a weakening of local government, I must say that I would prefer Proposition 13."

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