Publication 216, The First 100 Years


Revenue Crisis of the 1930s Ends Separation of Sources: Riley-Stewart Plan Enacted

Prior to 1930, most of the changes in California’s tax structure were instigated by inequities in taxation rather than by insufficient revenue. However, the Great Depression of the 1930s brought drastic changes, and confronted California with a critical shortage of revenue. In 1930, the Board of Equalization warned of “an unsatisfactory condition in tax matters.” 63 In 1932 the Board further cautioned:

“Two years ago, when reporting to His Excellency, the Governor and the Members of the legislature, we observed that California was facing an unsatisfactory condition in tax matters. Since then, this condition has grown so acute that we are now confronted with a tax crisis.” 64

The tax crisis was actually twofold. The state was faced with the necessity of providing relief for the property taxpayer, who by this time was feeling the crunch of the depression. Although property values plummeted in the economic crisis, property tax rates remained relatively high. With property owners unable to meet mortgage and tax payments, foreclosures were widespread. As tax delinquency increased, county governments were plagued by dwindling revenues, for they had relied heavily on property taxes as their prime source of funds. At the same time, the state government revenues, which had declined from a surplus to a deficit between 1930 and 1932, were in need of additional funds. A proper solution to both problems would require sweeping changes in California’s system of taxation. Relief was to come in the form of the 1933 Riley-Stewart Act. It is this legislation which launched the Board of Equalization into its modern role as a tax agency, and it is this act which remains the backbone of revenue and taxation in California.

The Riley-Stewart plan was named after two Members of the Board-Ray L. Riley, who was State Controller, and Fred E. Stewart. It is not surprising that the Board chose to play such an active role in tax legislation at that time: its power had dwindled almost to the point of extinction. A forerunner to the Riley-Stewart plan, Proposition 9 (1932), called for the transfer of school taxes from the county to the state. The taxes were to be funded by both a sales tax and a personal income tax. Although many property owners welcomed the tax relief this change would provide, most people opposed the sales tax and were not disposed to provide an increase in school revenues in the midst of a depression. Proposition 9 was defeated and the state was left with no property tax relief and an unbalanced budget.

Recognizing the urgency of the crisis, the Board entered this tax struggle with the support of many proponents of Proposition 9. The Riley Plan, which contained some elements of Proposition 9, was submitted as a solution to the crisis, but the plan met opposition in the legislature. Accordingly, with the assistance of Fred Stewart, a modified version of Controller Ray Riley’s plan was formulated. The resulting Riley-Stewart Plan went to the voters as Senate Constitutional Amendment Number 30. The proposed amendment carried with it the support of the Board of Equalization, the Governor, the legislature, and the many property owners and county officials who had earlier supported Proposition 9.

The subsequent enactment of the Riley-Stewart Plan on June 27, 1933, marked the end of the 1910 “separation of sources” period. Amendment Number 30 mandated the following changes:

  • the abandonment of the “separation of sources” system of taxation effective January 1, 1935;
  • the return of public utilities to the local tax rolls with the State Board of Equalization designated assessor of such properties;
  • the assumption of some public school expenditures by the state effective July 1, 1933;
  • a limitation on city, county, and school district expenditures to an amount not to exceed by five percent the preceding year’s expenditures and a limitation on state expenditures for each biennial period to an amount not to exceed by five percent those of the preceding biennium. Amendment Number 30 added to the latter limitation a prohibition against raising more than 25 percent of all state funds by an ad valorem tax on property; 65 and
  • authorization by the legislature of “any form of taxation not prohibited by the Constitution for meeting the state’s expenditures.”

One notable carryover from the “separation of sources” period is the 1911 Insurance Tax. The tax was initiated as a one-and-one half percent gross premiums tax. Several rate changes have been implemented since 1911; however, with the exception of the deletion of “offsetting real estate taxes”, there have been few changes of much consequence in this tax. A 1930 constitutional amendment separated marine insurers from the general structure of the gross premiums tax by subjecting them to a five percent tax on underwriting profits.66

Effective January 1, 1935, public utilities were returned to the local tax rolls and the State Board of Equalization was charged with the assessment of all “pipelines, flumes, canals, ditches, and aqueducts not entirely within the limits of any one county, and all property, other than franchises, owned or used by (1) railroad companies including street railways, herein defined to include interurban electric railways, whether operating in one or more counties; (2) sleeping car, dining car, drawing room car, and palace car companies, refrigerator, oil, stock, fruit and other car-loading and other car companies operating upon the railroads in the state; (3) companies doing express business on any railroad, steamboat, vessel or state line in this state; (4) telegraph and telephone companies; (5) companies engaged in the transmission or sale of gas or electricity. . . .” 67

The property thus valued by the Board was to be taxed “to the same extent and in the same manner as other property.” 68 It was this stipulation which restored the Board of Equalization to its original constitutional role of intercounty equalizer. During the 1910-1935 gross receipts tax period” certain utility and other property was taxed exclusively for state purposes. During this period, as the Board itself informs us, “the need for equalization between counties ceased and for twenty-five years the function lost its practical significance.” 69 The return of the utility property-which in 1935 approximated one-seventh of the total assessed wealth of the state—to the local tax rolls made it necessary for the Board to resume exercising its constitutional intercounty equalization powers.

63 Report of the State Board of Equalization (1929-1930), p. 9

64 Report of the State Board of Equalization (1931-1932), p. 9

65 It is interesting to note that the State Board of Equalization, which had been authorized to permit expenditures by local government exceeding the limitations imposed by the Riley-Stewart Amendment, rarely permitted such excess expenditures. In fact, in its 1933-34 biennial report (page 12) the Board recommends the continuance of this limitation and warns: “. . . unless the Legislature takes affirmative action for the continuance of this expenditure limitation, it will expire On June 30, 1935.” The legislature did extend the limitation provisions in 1935 under the so-called Wright Act for a two-year period ending June 30, 1937. Apparently the legislature did not further extend the expenditure limitations; the Board notes, in its 1937-38 biennial report that the limitations “were abandoned by the Legislature in 1937.”

66 California Statutes, Chap. 63, p. 56

67 Code Amendments, 1933, p. 3074

68 Ibid.

69 Report of the Stale Board of Equalization 1935-1936, p. 7