A Not So Happy 35th Birthday for Proposition 13

Thirty-five years ago today, California voters passed an initiative that would change the fiscal trajectory of their great state for decades: Proposition 13.

Championed by two citizen-activists with a politically popular message, but ill-conceived vision for California’s fiscal future, Proposition 13 cut and capped the state’s property tax at one percent and allowed for assessed property values to rise by no more than 2 percent per year. Stripping localities of their primary ability to raise revenues, the initiative changed how public services like K-12 education, police and fire protection, road and bridge upkeep, and water and sewers would be paid for.

Many proponents of Proposition 13 were individual homeowners who saw housing prices grow rapidly throughout the 1970s. Because California property taxes were assessed at market value, rapidly growing housing prices were causing property tax liabilities to grow in matching fashion. As Bruce Bartlett recently wrote in the New York Times, “Many Californians were literally being taxed out of their homes.” (Proposition 13 was a poorly targeted response to this problem because research has shown time and again that sensible options exist that wouldn’t involve capping property taxes). Additional supporters included those who believed the initiative would shrink the size of government – a mentality that went on to cause what commonly referred to as the “national tax revolt.”

Thirty-five years later, Proposition 13 is still in full effect. How has the 1978 ballot initiative fared? Well, after years of fiscal crises, several of the country’s largest municipal bankruptcies, deteriorated spending on public education (PDF) at both the state and local level, and increased reliance on the very regressive sales tax, Proposition 13 didn’t have exactly the impact its advocates had hoped for.

Proposition 13’s shortfalls are becoming increasingly clear, particularly in how it has shifted revenue collection (and spending power) from local governments to the state. Take K-12 education, for example. According to the California Budget Project (CBP)  (PDF), “Passage of Proposition 13 in 1978 fundamentally changed how schools receive their dollars,” by significantly shifting their revenue source from the local level to the state level. Alone, this shift shouldn’t have affected schools negatively, but state lawmakers engaged in poor fiscal stewardship throughout the 1990s and 2000s (primarily in the form of tax cuts, spending cuts, and a weak rainy day fund) and generally failed to fund schools as well as local governments previously did. CBP writes, “State cuts to education combined with California schools’ substantial reliance on state dollars explains the widening gap between the resources available to California schools and those of the rest of the US.”

William Fulton and Paul Shigley, experts on Proposition 13 and editors of the California Planning & Development Report, who summarize this dilemma by saying:

“In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more.”

In addition to this shift in responsibility, Proposition 13 has shifted the property tax burden away from commercial property owners and onto residential homeowners. This shift has taken place due to a loophole which allows companies to avoid reassessments when properties change hands, allowing them to pay taxes on assessed land values from years (and in some cases decades) ago. This practice is termed the “Dell Tax Maneuver,” after Michael Dell, who has avoided paying more than one million dollars a year in property taxes on a piece of commercial property he bought in 2006, but which is still taxed at its 1999 assessed value.

In May, Assemblyman Tom Ammiano (D-San Francisco) introduced AB 188, a bill that would keep residential homeowners under Proposition 13’s umbrella, but would force business owners to pay property tax based on a more realistic assessment of their property’s value. While the bill stalled in committee and most likely won’t be heard again until next year, it is a step in the right direction – and the public seems to agree.

According to a new survey (PDF) conducted by the non-partisan Public Policy Institute of California, a majority of voters – regardless of political affiliation – support splitting the property tax roll.

This movement is significant. It signals that after thirty-five years of wreaking fiscal havoc on the state, both the political climate and public opinion are such that change to Proposition 13 is possible.