1978 California Proposition 13
Proposition 13, officially titled the "People's Initiative to Limit Property Taxation," was a ballot initiative to amend the constitution of the state of California. The initiative was enacted by the voters of California on June 6, 1978. It would eventually be upheld as constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article 13A of the California Constitution. [1]
Its passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. In addition to lowering property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States. Passage of the initiative presaged a "taxpayer revolt" throughout the country that is thought to have contributed to the election of Ronald Reagan to the presidency in 1980.
Precedents
Proposition 13 drew its impetus from 1971 and 1976 California Supreme Court rulings in Serrano v. Priest, 5 Cal.3d 584 (1971) (Serrano I); Serrano v. Priest, 18 Cal.3d 728 (1976) (Serrano II); Serrano v. Priest, 20 Cal.3d 25 (1977) (Serrano III) that a property-tax based finance system for schools was unconstitutional. The California Constitution required the legislature to provide a free public school system for each district, and the Fourteenth Amendment of the United States Constitution (which includes the Equal Protection Clause) required all states provide to all citizens equal protection of the law. The court ruled that the amount of funding going to different districts was disproportionately favoring the wealthy. Previously, local property taxes went directly to the local school system, which minimized state government's involvement in the distribution of revenue. This system also allowed a wealthier district to fund its schools with a lower tax rate than the rate a less affluent district would have to set in order to yield the same funding per pupil. The Court ruled that the state had to make the distribution of revenue more equitable. The state legislature responded by capping the rate of local revenue that a school district could receive and distributing excess amounts among the poorer districts. Although this was more equitable, property owners in affluent districts perceived that the benefits of the taxes they paid were no longer enjoyed exclusively by the local schools.
Moreover, the state's increasing population fueled increased demand for housing, resulting in higher property values and, consequently, higher taxes. Although the revenues supported the costs of growth, such as new schools, roads, and the extension of other municipal services, older Californians on fixed incomes were especially hard hit by rising property values. Due to inflation, reassessments on residential property drove property taxes so high that some retired people could no longer afford to remain in homes they had purchased long before.
These developments contributed to a backlash against property taxes which coalesced around Howard Jarvis.
The revolt
Howard Jarvis and Paul Gann were the most vocal and visible backers of Proposition 13. Officially titled the "People's Initiative to Limit Property Taxation," and popularly known as the "Jarvis-Gann Amendment," Proposition 13 was placed on the ballot through the California ballot initiative process, a provision of the California constitution which allows a proposed law or constitutional amendment to be placed before the voters if backers collect a sufficient number of signatures on a petition. Proposition 13 passed with 65% of those who voted in favor and with the participation of 70% of registered voters. After passage, it became article 13A of the California state constitution.
Under Proposition 13, the real estate tax on a parcel of residential property is limited to 1% of its assessed value, until the property is resold. This "assessed value", however, may only be increased by a maximum of 2% per year. If the property's market value increases rapidly (values of many detached dwellings in California have appreciated at annual rates averaging more than 10% over the course of several years) or if inflation exceeds 2% (common), the differential between the owner's taxes and the taxes a new owner would have to pay can become quite large. The property may be reassessed under certain conditions, when additions or new construction occur; the assessed value is also subject to reduction if the value of the house declines, say during a real estate slump.
Aftermath in California
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Some of the biggest losers under Proposition 13 were California public schools, libraries, and other city services (i.e. firefighters and police.) California public schools, which in the 1960's had been ranked #1 nationally in student achievement, have fallen to 49th in many surveys of student achievement. Police forces and fire departments were gutted because of a drastic loss of funds, and a transfer system from state income taxes to cities was enacted to partially make up for the shortfall.
California's Proposition 13 has introduced major problems of equity and efficiency into the state's tax structure (Mullins, D. “Financing urban services—local fiscal resources: the basics of a meaningful local resource structure” in Managing Municipal Change, Bosner, C.F. ed. (1994) Bloomington, IN: School of Public and Environmental Affairs, Ch. 9). An analytical approach to examining a tax policy is to apply the traditional principles of taxation, including equity, allocative efficiency, revenue yield/elasticity and administrative and political feasibility. Equity reflects the basic values of how our society determines different groups should be treated, these values include horizontal and vertical equity, ability to pay and benefits received. Allocative efficiency refers to the ways in which a tax policy influences changes in private consumption behavior. Revenue yield and elasticity refer to whether a revenue policy has the capacity to increase in the future in order to continue enabling government agencies to meet the demands of its residents. Lastly, administrative and political feasibility refer to whether a tax policy can be implemented and enforced with relatively little effort and is politically possible.
Proposition 13 freezes the value of properties at the time of purchase with a possible 2% annual assessment increase. Therefore, properties of equal value have a great amount of variation in their assessment, even if they are next to each other. Assuming that the price of a house is somewhat a determinant of a person’s wealth (and therefore ability to pay) and benefit received, this feature would lead neighbors who purchased a property at different periods of time to pay a different assessment, without any relationship to ability to pay or benefits received. Overall, these qualities create serious inequities and potentially introduce some amount of regressivity into the tax structure. Similarly, Proposition 13 creates inefficiencies because it provides dis-incentives for selling property in favor of modifying or transferring to family members in order to avoid a new tax rate. Mullins (Mullins, D. R. (2003). Popular processes and the transformation of state and local government finance. In D.L. Sjoquist (Ed.), State and Local Finances Under Pressure, (pp. 95-162) Northampton, MA: Edward Elhar) points out that “prospects of increased property tax liabilities triggered by residence or business location changes likely constrain mobility and filtering in the housing and property markets” (pp. 118). If these policies favor remodeling or modifying over buying, it would follow that this policy has efficiency implications because it limits individual’s mobility from one community to another and other private economic activity.
Similarly, Proposition 13 greatly benefited homeowners whose homes have appreciated in value since it was passed, particularly those (such as the elderly) whose incomes have not risen as fast as property values. In cities with many older residents, this has led to a severe shortage of affordable housing, since new developments must often be far above the state's median home price in order to provide enough tax revenue to pay for the services they require. Impact fees have offset this problem somewhat, but are limited by developers' ability to go "jurisdiction shopping" for localities with low impact fees.
Owners of commercial real estate have also benefited: if a corporation owning commercial property (such as a shopping mall) is sold or merged, but the property stays deeded to the corporation, ownership of the property can effectively change hands without triggering Proposition 13's provision that fixes the amount of tax based on the property's resale value. Since many properties are nominally owned by shell companies whose sole assets are the properties in question, this has led to situations that have struck many commentators, such as Steve Lopez and Michael Hiltzik of the Los Angeles Times, as absurd and unfair. For example, the Times has reported that the property tax bill of the historic Capitol Records building in Hollywood is approximately five cents per square foot, while a small house assessed at $300,000 may pay up to 60 times that on a per-square-foot basis. Critics of Proposition 13 have argued that this situation unfairly benefits commercial property owners and should be changed, but recent attempted ballot initiatives have not succeeded in altering assessment formulas.
Proposition 13 has hurt immigrants and young upwardly mobile workers in California. Because Proposition 13 is a disincentive to sell, there is less turnover among owners near the older downtown areas, and prices have appreciated fastest in these areas. Young people who would be wealthy in other states are "house poor" in California, and are forced to live dozens of miles from their workplace in order to afford a home. Thus, the Proposition can be seen as a transfer tax from the working classes to the retired class, as retirees are subsidized and the young have fewer working hours in their day because of long commutes. Immigrants are another class of losers under Proposition 13, since they come from other states where real estate is more affordable (due to higher property taxes) and their real estate equity buys less in the California housing market.
Supporters of Proposition 13 argue that purchasers of homes, which are particularly expensive in California, should be able to predict their tax burden over the long term or else have to sell their property when taxes exceed their income. They also point out that property taxes as implemented in other states are dramatically higher as a percentage of house value and can be raised at the whim of local and state entities.
Imaginative strategies have been necessary for localities to compensate for Proposition 13 and the state's loss of most property tax revenue (which formerly went to cities and counties). Most California localities have recently sought their voters' approval for special assessments that would levy new taxes earmarked for services that used to be paid for entirely or partially from property taxes: road and sewer maintenance, school funding, street lighting, police and firefighting units, and penitentiary facilities. Sales tax rates have skyrocketed from 5% (the typical pre-Prop 13 level) to 8% and beyond.
California localities have taken measures such as using eminent domain and redevelopment laws to condemn blighted residential and industrial properties and convert them into sales tax generators such as shopping malls, multi-dealer "auto malls" such as the Cerritos Auto Square, and strip malls anchored by big-box stores such as Costco and Wal-Mart. Cities that have been notably successful with this strategy include Cerritos, Culver City, Emeryville, and Union City. However, the spread of big box retail is credited as another major factor behind California's severe housing shortage, as cities have routinely rezoned vacant parcels and "blighted" neighborhoods for retail in an attempt to increase their share of the sales tax pie. With developable land made scarce by open space preservation laws and by the resistance of single-family homeowners to up-zoning, the resulting market pressures have led to urban sprawl that has brought formerly rural areas like the Antelope and northern San Joaquin Valleys into the urban areas of Los Angeles and San Francisco, respectively.
Some commentators have said that cities no longer control their own property tax revenue, and even claim Proposition 13 has exacerbated city-suburb class and racial tensions in California, particularly in Los Angeles.
Recent events
In the 2003 California recall election in which Arnold Schwarzenegger was elected governor, his advisor Warren Buffett suggested that Proposition 13 be repealed or changed as a method of balancing the state's budget. Schwarzenegger, believing that taking such a step would be to touch a political third rail that could end his gubernatorial career, said, "I told Warren that if he mentions Proposition 13 again he has to do 500 sit-ups." A 2004 Los Angeles Times Magazine cover story that detailed the proposition's damaging effects and advocated its repeal drew heavy criticism from its supporters.
The geopolitical landscape in the United States
The initiative system, which gives voters the power to legislate, is not available in all states. In states that lack the initiative process, advocates of lower property taxes have been unable to advance measures like Proposition 13. In states that do allow citizen initiatives (24 in all)[2], measures similar to Proposition 13 have been passed.
Proposition 13 has been widely regarded as the most visible catalyst that launched the modern conservative movement - dedicated to lowering taxes, decreasing the size of government, and increasing states' rights - into the national spotlight. The newly launched conservative movement, in turn, was considered to have helped to catapult former California Governor Ronald Reagan into the U.S. presidency and the Republicans into control of both houses of Congress and of a majority of state governments.
The Howard Jarvis Taxpayers Association continues to lobby for lowered and limited taxes in California and has been the most ardent defender of Proposition 13.