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Institutional Causes of California's Budget Problem

Listed author(s):
  • Bruce Cain
  • Roger Noll


    (Stanford University)

Since the early 1990s, California has experienced a recurring budget crisis. This article examines the combined budgets of state and local governments and the institutions for creating these budgets to ascertain the source of the problem. The facts are that California collects more taxes and fees as a percent of income than most other states, but local California governments have lower revenues. Total revenue as a percentage of income is close to the national average. California spends less than the average of other states, but local governments spend much more. The cause of California’s unusual fiscal relationship is decades of initiatives that more severely constrain local revenues than state revenues. The state has responded by creating a system of state-local transfers that allow local governments to face a form of soft budget constraint, leading to excess local spending and lack of clear accountability for the state’s recurring fiscal crisis. Because the cause is the cumulative effect of numerous state-wide initiatives, the only plausible cure is initiative reform and revision of numerous initiatives, which most likely can be accomplished only through a state constitutional convention. All other pending reforms are at best palliatives, and many would make the fiscal situation worse.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 10-006.

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Date of creation: Sep 2010
Handle: RePEc:sip:dpaper:10-006
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