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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: JF Quinnelly who wrote (12654)8/19/2003 4:29:18 PM
From: Elroy JetsonRead Replies (2) of 306849
 
The problems caused by Prop 13 are easily traced.

The lost Property Tax revenues left Counties and Cities with large deficits. These local shortages have been made up with revenue sharing from the California State government from the proceeds of the Sales Tax and Income Tax. This revenue sharing has increased over the past decades since Prop 13 was enacted.

While property taxes provide a stable and predictable revenue flow, revenue flows from Income and Sales taxes are erratic and fluctuate dramatically with the fortunes of the economy. The collapse of the economic bubble has brought these revenues down especially hard.

In the event of a default by the California State government, subsidies of the County and City governments by the state would no longer be permitted. Thus a state default will almost at once become a default of local governments as well.

The local residents can then choose to supercede Prop 13 restrictions in their area or impose special local County and City Income and Sales taxes on themselves. Many may prefer to close their hospitals and halt their garbage collection or what-not. Each government can decide for themselves.

The local government most recently in this fix, Orange County, cut some services but primarily chose to sell a huge amount of County Muni bonds at a hefty rate to shift the problem off to a later date. But that's due to their bias toward fiscal prudence and speculation.
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