1978 California Proposition 13
Proposition 13, officially titled the "People's Initiative to Limit Property Taxation," was a ballot initiative to change the constitution of the state of California. It 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[1], 505 U.S. 1 (1992).
Its passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States. Its passage 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 rose 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 Amendment 14 of the United States Constitution included the equal protection clause that 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, a local property tax would go directly to local school system, which minimized state government's involvement in the distribution of revenue. This also allowed wealthy homeowners to fund their school at a lower tax rate than inner-city residents would be required to pay in order to yield comparable amount of funding. The court ruled that the state needed to find a way to make the distribution of revenue more equitable. The legislature responded by capping the amount of revenue the wealthy school district would receive, while increasing revenue into poorer districts. Though more equitable, this diverting of money led wealthy homeowners to recognize that they were not receiving the benefits of property taxes going to their school.
Moreover, the increasing number of residents in California raised property values as demand for housing rose, leading to higher taxes as the state struggled to pay for new ventures, such as housing, schools, roads, and transportation system. 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.
Both these events were considered to have led to a conservative backlash against property taxes, with Howard Jarvis at the center of the raging controversy.
The revolt
A movement started, with the late Howard Jarvis as the most vocal and visible backer of Proposition 13. Officially titled the "People's Initiative to Limit Property Taxation," Proposition 13 passed with 65% of voters in favor and 35% against, and with 70% of registered voters participating. Proposition 13 was placed on the ballot through the California ballot initiative process, a clause in the California constitution that allows voters to place a proposition for a law or constitutional amendment provided that the backers have collected a sufficient number of signatures on a petition. When Proposition 13 was passed, it became article 13A of the California state constitution.
Under Proposition 13, the real estate tax on a parcel of property is limited to 1% of its purchase price, adjusted for inflation, until the property is resold. There is a maximum 2% increase allowed in the assessed value per year, and property is reassessed when additions or new construction occur. In addition, assessed values can be temporarily reduced if the value of the home drops below the amount paid. The proposition was passed, in part, due to homeowner anger at ever-increasing tax rates. Among those affected by the increasing tax rates were senior citizens on fixed incomes, who could no longer afford to pay the property taxes on their homes because of soaring population and land value speculation in California.
Aftermath in California
Proposition 13 has 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 mainly 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 tens 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 less 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 property taxes are higher and their real estate equity buys less in the California housing market.
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," and strip malls anchored by "big-box" retailers 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. On talk radio and in other venues, working- and middle-class white and Asian residents of the conservative San Gabriel Valley often complain that the city of Los Angeles "steals" their tax dollars and funnels them into impoverished black and Latino districts.
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, aware that to advocate changing Proposition 13 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 called for its repeal met with a firestorm of right-wing criticism, and is credited as one of the major factors in the continuing exodus of conservatives from the paper's subscriber base.
The geopolitical landscape in the United States
California's initiative system, which gives voters the power to legislate and pass laws, is distinct from that of many other states. Residents of states that lack the referendum process, for example, have been unable to create their own Proposition 13. However, the states that do allow voter-passed referenda (24 in all) have been able to pass laws weaker, if not similar, to Proposition 13.
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. Many historians believe that Franklin D. Roosevelt's revolutionary form of government dedicated to preventing the Great Depression and providing opportunities for all Americans to succeed lost its idealism in Lyndon Johnson's Great Society and faded. 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.
Meanwhile, 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.