The Proposition 13 decision by California voters to roll back property taxes will reduce the U.S. inflation rate in 1979 and 1980, the Congressional Budget Office said yesterday.
The inflation reduction is expected to occur in two stages. First, homeowner's tax bills will be cut, and househeld costs, including taxes, will be less than before. Second, the CBO study assumes, businesses and landlords will pass on some of their property tax savings by lower prices and rents. A key to the inflation payoff is how much of the tax savings business passes along to consumers and how much it keeps for itself.
Nearly all the reduced costs will benefit Californians, but California is the largest state and the budget office said the $7 billion tax reduction there will be so great that it will reduce the inflation rate by 0.2 percentage points in 1979 and by 0.4 percentage points in 1980.
Nationally, the California tax cuts will have little impact on economic growth, the CBO said. But if the tax-cutting fever should spread to other states, there could be an effect on the performance of the economy.
And, the budget office said, contrary to accepted wisdom, California is not that different from other states. Many states have tax burdens nearly as large as California's. Many state have had tax increases as large as California's. And many states have large budget surpluses as well.
The budget office study anticipates that other states will reduce taxes, either by voter initiative as in California or by local politicians who take action on their own to pre-empt voter initiatives.
If local governments cut spending at the same time they cut taxes, there would be a retarding effect on the growth of the economy. If, however, they dip into their surpluses to offset the tax loss, the economy would be stimulated.
Robert Reischauer, an economist at the budget office, said state and local governments have accumulated surpluses of about $18.1 billion.
"If states decide to cut taxes and run down their surpluses," Reischauer said, then that national economy would be stimulated. California, for example, will transfer $4.1 billion of its budget surplus to localities to help cushion the impact of $7 billion in property tax cuts.
If, on the other hand, governments cut spending at the same time they cut taxes, there would be a depressing effect on the national economy. Consumers would spend some of their tax savings, but not all of it, while at first businesses would save nearly all their tax windfall.
Since governments would cut back spending and likely lay off workers, the overall effect would be to retard economic growth, the budget office said.
If governments run out of surpluses before they find new sources of revenues to tax, presumably they would then be forced into spending cutbacks and layoffs as well.
Federal policymakers already are faced with a situation in which inflation is worsening and growth is slowing. A spread in Proposition 13 fever would help the inflation problem, but could worsen the slowdown in job-creating economic growth.
The budget office study noted that many states besides California have accumulated large surpluses.
"Such surpluses could have contributed to the revolt by angering taxpayers who saw their taxes rise without commensurate service increases. The surpluses also allowed voters to support Proposition 13, comfortable in the knowledge that major service cutbacks could be avoided by spending accumulated funds."
According to a survey by the National Association of State Budget Officers, five states have projected 1978 surpluses that are, relative to the size of their spending, bigger than California's. Those states are Alaska, North Dakota, Arkansas, Utah and Texas.
Several states - including Massachusetts, New York and New Jersey - have tax burdens larger than or nearly as large as California's, the budget office said.
The 42.2 percent increase in California's property taxes over the past five years is smaller than the national average increase of 44.1 percent, the study said.
"It is probable that state and local officials will respond to the signal sent by California taxpayers, even if not required to do so by their own voters," the CBO concluded.
Unless "the magnitude of the tax cut is significantly larger than the accompanying reduction in expenditures . . . tax and spending cuts would tend to reduce near-term aggregate economic activity and employment," the Congressional Budget Office said.