Ookay... I see California tax code being used naively as an example in this thread -- there's a few things that need to be understood before we can apply the Golden State to other cases:
Prop 13: Almost irrelevant in terms of education. While this is often cited as the dagger in the back of education funding, the fact is that per-pupil spending remained stable until 1985, seven years after Prop 13's passage, and the relative quality of California education began to decline as early as 1974, well before Prop 13.
Prop 13 is also a double-bill. It is commonly understood as limiting real estate taxes, resulting over time in a net decrease in property taxes in real dollars, ala Tea Party shenanigans, but this is only half of the effect. It's also wrong anyway -- in some periods, property taxes have increased at rates higher than the increase in household earning, even after the "freeze." There is also the Mello-Roos real estate tax in many areas which is a flat-out circumvention of Prop 13 (and to my mind wholly unethical). The other, more concrete effect of Prop 13 is to require a two-thirds majority for tax measures to pass on future ballots. This is an issue.
California Never Increases Taxes: Not true at all. Calfornia sales taxes are hiked routinely, most recently in 2008-2009 as part of desperate budget-balancing initiatives (which naturally remain unbalanced). Personal income tax is hiked frequently, one memorable recent incident being the "millionaire tax" as part of the California Mental Health Services Act of 2004, which stapled an extra 1% tax on income over $1M with a specific earmark.
We've also implemented a great deal of quasi-taxes under the banner of "saving education," the first coming to mind being the California State Lottery. Fat lot of good it did! Yet this "idiot tax" remains.
Overall, today California ranked 11th out of 50 in terms of per-capita tax revenue, versus being 13th out of 50 in terms of per-capita income. Therefore, 34 years of Prop 13 have not turned California into a revenue-poor wasteland or a Libertarian Utopia. Seriously, the idea that California doesn't or cannot tax enough.. is insane.
And yet, our schools still suck.
One of the biggest problems we have is that so much of the California budget is driven by mandates. Lots of crazy formulas exist on which revenue has to be spent on what, an incredible array of spot-taxes and special fees all dedicated to special programs (which wind up getting raided anyway by Legislative sleight-of-hand), and complicated chain-reaction ballot initiatives every couple of years as the Governor gets frustrated with the Legislature and tries to do an end-run around an increasingly broken State Constitution.
It is also not correct to state that people "demand ever-increasing services and don't want to pay for them." Over the last ten years the State Government has been gradually underserving the public, starting with furloughs and parks closures, and now we're about to cut several more days out of the school year just because. I've also been somewhat heartened by the decreasing success of crazy bond measures -- used to be that any ol' cause could get on the ballot and get a $5G bond issue, before never being heard from again, but these days they pretty much all go down to defeat. One notable exception is the "Bullet Train," but the Bullet Train is utterly doomed as its price tag now exceeds the initial promise by 200%+, proving that we were in fact baited and switched. A pity that one won't be fixed, in my opinion, but it's DOA in the end like the rest of the bond measures.
Another major, major problem with California's budget, as some have noted, is optimistic pension plans for State workers -- even if we overlook abuse and fraud of these plans, which is fairly common. However, there are steps being taken in the right direction, notably in San Diego just a couple of weeks ago. Slowly we are going to see a conversion from State-funded (and budget-formulaic) pensions to employee-contributed 401K style plans, and this will eventually fix some of the logjam. It'll take another decade, but this is finally moving in the right direction.
It also comes at a good time if you think now's the time to hire more teachers. I tend to think that it is, provided we aren't stupid about it.
There's a lot of lessons in California for the rest of the country, but take care you get the details right. It's more complicated than soundbite reporting or major political campaigns would have you believe.