INTRODUCTION

Howard Jarvis, the leader of California's most famous tax revolt, passed away in 1986. But in the spring and summer of 2007 his name continually popped up in newspaper articles across the United States. Property tax troubles were brewing throughout the country and Jarvis's prodigy, property tax-cutting Proposition 13, was remembered by beleaguered taxpayers as something to be emulated to protect against out-of-control levels of taxation.

Meanwhile, 29 years after California's tax revolt, things were pretty quiet on the property tax front in the Golden State. Proposition 13 still has it opponents and critics, but after nearly three decades, voters generally think the tax-cutting measure worked just fine. [1]

California taxpayers enjoy a sense of certainty and security knowing what their property taxes will be year-to-year. As California tax historian David Doerr has written, "Proposition 13 removed the fear that future taxes would be controlled by an inflated value, representing unrealized paper gains, and based on activity in the real estate market and other economic factors over which the taxpayer had no control." [2]

The same cannot be said of taxpayers in other states.

On its website, the Arizona Tax Revolt asks, "Can you live with a 25% tax increase in just one year? How about 50%? There are many whose taxes have doubled or even quadrupled and under the present system next year could be your turn for an even larger increase." [3]

In some South Florida markets, homeowners report a 100% increase in property taxes over the last few years. [4]

It's been only a couple of years since airline pilot Tracy Price of Virginia complained to the Christian Science Monitor, "The increase in my property taxes over the past seven years is enough money to pay for college for both my sons." [5]

Bountiful, Utah, resident Marva Egbert was shocked to see her taxes jump up 38% in one year because of the reassessment of her home. [6]

And, along Lake Tahoe just across the California border in Nevada, property taxes increased 135% in four years. [7]

Even what many view as paradise can't protect taxpayers from increasing home evaluations which turn into much higher property taxes: on the island of Kauai in Hawaii many residents have seen their property taxes double or even triple since 2000, according to a column in The Wall Street Journal. [8]

In 2007, many frustrated taxpayers looked to California for a solution to their tax problems. Howard Jarvis was a pioneer blazing a trail that others still plan to follow.

PROPOSITION 13 AS A MODEL ... AND A HOPE

Proposition 13 created a new property tax system that insured the taxpayer would not be surprised by rising tax bills. Proposition 13's acquisition-type property tax system set the property tax when a property is purchased and it capped future increases. (Properties held at the time that Proposition 13 passed in 1978 had their values set at the 1975-76 taxable year.) Proposition 13 placed in the state constitution requirements that property tax rates could not exceed 1% of the property's market value and, absent a sale or major remodeling of the property, market value increases were capped at a maximum of 2% per year. If a property was purchased, the property could be reassessed at 1% of the new market value with the 2% cap put in place for yearly increases.

As David Doerr notes, Proposition 13 instituted the revolutionary concept of acquisition value assessment, which "... mitigated the most cursed pre-Proposition 13 property tax problem: hardships created by increasing property taxes caused by an inflationary real estate market. Taxpayers considered it unfair to be subjected to higher taxes simply because of higher purchase prices of surrounding properties." [9]

Traditional property tax laws allowed assessors to set the current market value of a property. The taxes were then determined when a tax rate, usually consisting of a percentage of the property's value, was applied to the current market value. If inflation or other economic factors forced up the cost of property, even without changing the tax rate, property taxes could increase dramatically. That is what happened in California prior to Proposition 13, passing and that is what is happening in many states around the country.

Doerr points out that Proposition 13's 2% cap gave taxpayers assurance that they would be protected from rising assessed values. [10]

Implementing the acquisition-type property tax formula produced controversy. Critics claimed similar properties paying different property taxes depending when they were purchased violated the Equal Protection Clause of the United States Constitution. But the U.S. Supreme Court in the case of Nordlinger v. Hahn (1992) declared that the Proposition 13 acquisition system is constitutional.

Justice Harry Blackmun, writing the majority opinion for a near unanimous court (8-1) declared that an appropriate standard of review for Equal Protection was whether a policy furthered a legitimate state interest. Blackmun wrote that the state "had a legitimate interest in local neighborhood preservation, continuity, and stability." Blackmun also wrote it was legitimate to treat owners who have already invested in their property differently than new owners. "In short," he summed up, "the State may decide that it is worse to have owned and lost, than never to have owned at all." [11]

With the legal question settled, other states can look to California's Proposition 13 as a remedy for their property tax crisis.

The Proposition 13 property tax remedy echoed around the country as evidenced by mentions of the California tax-cutting measure in news reports in 2007:

The Wall Street Journal: The Spirit of Prop. 13 may be coming soon to a county near you. [12]

TIME magazine: It's been almost 30 years since California approved Proposition 13, one of the most dramatic property tax reduction measures in U.S. history and a revolt that emboldened homeowners across the country. Now, with the middle class again feeling squeezed out of the American Dream ... [13]

Las Vegas Review-Journal: ...so a California-style Proposition 13 property tax limit can be filed ... [14]

St. Petersburg (Florida) Times: Proposition 13 in California is perhaps the best-known citizen initiative in the country. [15]

Deseret Morning News (Utah): The solution, many would argue, would be for the Utah Legislature to enact a Proposition 13-type law that would cap the rate at which local governments can tax properties. [16]

Hendersonville (North Carolina) Times-News: ... the initiative they sponsored was known as Proposition 13. We need a North Carolina Jarvis and Gann to lead our citizens' tax revolt. [17]

Sarasota (Florida) Herald-Tribune: ... who is spearheading a new Proposition 13-style amendment ... [18]

KULR-TV (Billings, Montana): Is California's Proposition 13 right for Wyoming? [19]

PROPOSITION 13 WAS A SOLUTION TO A LONG-TIME PROBLEM

Taxpayers around the country in 2007, who are victims of rising property taxes, are dealing with an age-old problem. Property taxes have been controversial since the general property tax was first used to fund local government. Glenn Fisher, author of The Worst Tax? A History of the Property Tax in America cites a pair of early 20th-century professors pinpointing the beginning of unrest with the property tax to about 1875. [20]

In 1906, an organization named the National Tax Association formed and hosted a national conference in Ohio, which included representatives from 33 states, including four state governors. The underlying theme of the conference was that the property tax had failed. [21]

UC Davis professors Arthur O'Sullivan, Terri Sexton and Steve Sheffrin note that the property tax has always been among the least popular of taxes. They offer three reasons for this: [22]

1. Property taxes are highly visible taxes that the taxpayer pays directly
2. Property taxes are a tax on wealth, not income. Not all taxpayers with highly valued property also have high incomes.
3. Assessors and taxpayers often squabble over a property's real value.

It can be argued that while progressive income taxes take a higher percentage of upper incomes; property taxes often take a higher percentage of lower incomes—those people who own a highly valued property but have lower incomes.

During the Depression, property taxes hit taxpayers hard. When incomes were down, but a property had value, many taxpayers faced tax bills they could not pay. There were organized tax-resistance movements throughout the country. In Chicago, there was a tax strike that lasted from 1930 to 1933. A number of legislatures reacted to the crisis. In 1932 and 1933, 16 states and numerous localities enacted property tax limitations. [23]

States began to enact sales and income taxes to partially compensate for the loss of property tax revenues. [24] That is what happened in California. Both the California state income tax and sales tax took root during the Depression.

The idea of increasing sales and income taxes as a way to ease the property tax burden still has support today. To deal with the current property tax unrest in Indiana, the Indiana Farm Bureau, which represents 80,000 Indiana farm families, is offering a plan to cut property taxes and replace them with a 1% increase in the individual income tax rate and a 1% increase in sales taxes from 6% to 7%. [25]

California taxpayers rebelled against high property taxes a number of times over the last 50 years. In December 1957, the largest tax protest in the history of Los Angeles County, a rally of 6,000 people, gathered at the Los Angeles Coliseum. [26]

This protest petered out but the issue did not go away. In his kick-off speech announcing he was a candidate for governor of California, Ronald Reagan called for an in-depth study of California's troubled tax system and a possible moratorium on property taxes for the elderly. [27] He went further during the campaign for governor, suggesting there should be a cap on property taxes and assessments. [28]

Two attempts by initiative at property tax reform by Los Angeles Assessor Phil Watson failed at the ballot box in 1968 and 1972; and Reagan's own attempt at tax reform was defeated by the voters in 1973.

However, the squeeze on property taxpayers did not go away, setting the stage for Proposition 13 in 1978.

TAX REVOLTS ACROSS THE U.S.A. 2007

Headlines in national and local publications show that concern over high property taxes has hit a number of states in 2007. Arizona, Florida, Nevada, Indiana and Hawaii have had the most coverage. However, property tax protests have occurred with successful localized agitation against higher property taxes occurring in Tennessee, Connecticut, New Jersey and other states.

ARIZONA

There are at least two announced efforts to get a Proposition 13-type property tax measure on the November 2008 ballot. While the two groups have a difference of opinion on the best way to amend the constitution, they each have concluded separately that the way to protect Arizona taxpayers is to incorporate as much as possible the Proposition 13 formula on property taxes.

Ironically, Arizonans have already tried to protect themselves by passing an earlier property tax initiative. The initiative limited levies that are collected for counties, cities, towns and community colleges. [29] Levies are the portion of the budget paid for by property taxes. The taxing entities establish the revenue they need to perform their functions, then the property taxes are apportioned over the taxable properties to cover those designated costs. In broad terms, this is not so different from the way California property tax worked before Proposition 13.

However, certain tax entities like schools and fire districts are not subject to the Arizona levy limit passed by voters. This has led to steeply increasing property taxes.

If either or both initiatives are to qualify for the November 2008 ballot, they need 230,047 valid signatures by July 3, 2008.

FLORIDA

Florida passed a Proposition 13-type acquisition measure a decade ago, but it did not cover all property. The 3% cap established by that initiative on "homestead" properties comes off when the property is sold. The loopholes have led to skyrocketing property taxes on certain properties that created a hue-and-cry among the people of the Sunshine State. TIME magazine covered the Florida situation in the early summer.

"People have often said that Florida is the new California, but this week the Sunshine State hopes to really drive the point home — all the way into homeowners' pockets. On Tuesday the legislature started a special session to reform Florida's dysfunctional property tax system, aiming to save residents the tens of billions of dollars that Californians reaped a generation ago," TIME reported. [30]

The legislative special session did produce a property tax reform that did not please many taxpayer advocates. However, in late September a county judge struck the so-called "super homestead" amendment from the January 2008 presidential primary ballot saying the wording was inaccurate. [31]

While the governor and legislature are trying to reconsider whether they will try to get a measure on the January ballot, citizens are talking about taking matters into their own hands.

"It demonstrates that our elected officials can't get their act together and that it is now in the hands of the citizens to put limits on their government," said Dr. David McKalip, a St. Petersburg neurosurgeon who is spearheading a new Proposition 13-style amendment that would cap everybody's taxes in somewhat the same way that the Save Our Homes amendment now caps property assessments for homesteaded residents," reported the Sarasota Herald-Tribune. [32]

Other groups are looking at a measure that will have different exemptions for different property classifications depending on whether the property owner is a senior, is a permanent resident, or if a business is conducted on the property. The Florida taxpayers have to gather 611,000 valid signatures on a petition by February 1 to get it onto the November 2008 ballot. [33]

But there is another way to get significant tax reform in Florida. The Florida Taxation and Budget Reform Commission is empowered to make sweeping changes in the way the state collects taxes and runs its budget. By statute, the commission only gets together once every 20 years and this is the year. [34] What course they will take is uncertain, so taxpayer groups continue to pursue initiatives.

NEVADA

Following the passage of Proposition 13, California's neighboring state of Nevada put an initiative on the ballot similar to Prop. 13. The voters approved the measure. However, Nevada's law requires that the voters pass a constitutional amendment in two consecutive elections before the constitution is altered. With promises from the legislature that property tax burdens would be addressed, the voters turned down the initiative on the next ballot and it did not become law.

While there was peace on the property tax front for a few years, once again property taxes increased dramatically as more people moved to Nevada, the fastest-growing state in the Union. Two years ago Nevada legislators tried to deal with unrest over the property taxes by enacting a "temporary" annual cap on year-to-year tax increases not to exceed 3 percent for owner-occupied homes and 8 percent for all other properties. [35]

With property tax pressures increasing, and fear that a "temporary" fix by the legislature was not good enough, Sharron Angle submitted a Prop. 13-like initiative in early September.

Soon after Angle filed her initiative, a lawsuit was filed by the AFL-CIO and the Nevada Education Association claiming that language in the proposed law was misleading. Angle withdrew the petition, noting that there was an error in wording in the proposed law. However, the property tax problem still exists and Angle said her organization may soon circulate another petition. [36]

INDIANA

Property tax increases in Indiana brought what an editorial in the Indianapolis Star called "cries of outrage" from taxpayers. [37] Along with protests at the governor's mansion, a lawsuit against the assessment system and a movement to do away with property taxes altogether, the legislature has created a panel charged with reforming the property tax system. [38]

Without the initiative process residents of Indiana have to rely on the governor and legislature to come up with a solution to protect property taxpayers. Disgusted taxpayers are putting all ideas on the table, including taxing the property of nonprofits like churches, universities, and hospitals. [39] The Commission on State Tax and Financing Policy listened to the legislative analyst present information on how raising the state income and sales taxes could help ease property taxes, or do away with them altogether. [40] As stated earlier, the Indiana Farm Bureau has put forth an idea to cut property taxes and raise both the income and sales taxes.

If no satisfactory solution is presented to the voters, the property tax is predicted to become a major issue in the next set of state and local elections.

HAWAII

While voters in Indiana did not have the tools to go around government officials and solve their property tax crisis on their own, residents on the Hawaiian island of Kauai thought they did ... until courts decided otherwise.

Home prices on Kauai have more than doubled since 2001 and property taxes have doubled and even tripled with the increased prices. Residents turned to the ballot for property tax relief. In 2004, they collected enough signatures and put on the ballot an amendment to the county's charter. The measure was similar to Proposition 13. It called for rolling back property taxes to their 1998 level and limiting future property tax increases to 2% a year. And similar to Proposition 13, the measure passed by an overwhelming two-to-one margin. [41]

Kauai officials then went after the successful ballot measure in court. The county's attorney described the situation of allowing voters to determine their taxes as "chaos." A brief filed by the Hawaii public employees union stated it was an "absurd proposition" for voters to be allowed to vote on taxes. A court decided that the amendment was actually a ballot initiative that repealed a tax, which is not permitted by the county charter. [42] In an appeal, the state Supreme Court agreed and the measure passed two to one by the voters was thrown out.

All this brought the writer of an opinion article in The Wall Street Journal to declare: "In Kauai, owning a slice of heaven can be a tax hell." [43]

OTHER STATES

While the more dramatic tax protests around the country are described above, a number of other states also saw disgruntled property taxpayers lashing out in the pages of newspapers or in Internet blogs or protesting in great numbers to their local assessor's office. Interestingly, many states that have already attempted tax relief either through the legislative process or ballot initiative discovered that what they did was not enough to prevent a heavy burden from rolling back over the taxpayers.

Nevada's legislature responded to a Proposition 13-type property tax measure in 1980 by promising property tax relief to stop the amendment from passing a second time as was required by Nevada law. Relief did not last long. Now, another attempt to pass a Proposition 13 measure has been proposed for the ballot. Likewise, in Arizona and Florida, measures that promised relief that voters passed in the last decade or two apparently did not do the job, considering new efforts are afoot to put on more restrictive tax limits.

Massachusetts' 1980 tax revolt culminated in Proposition 2 1/2, the second most publicized tax revolt after Proposition 13. Yet, when recently elected Massachusetts Governor Deval Patrick laid out a plan to allow for resort gambling casinos in the state, he said one of the items the state would fund with its tax proceeds from the new casinos was a $215 million property tax credit for homeowners. [44]

Meanwhile, in California, Proposition 13 is nearing 30 years old and there are no tax protests from the taxpayers nor are there widespread calls for additional property tax relief.

PROPOSITION 13 IS WORKING

Despite Proposition 13's initial tax cut, its acquisition tax system keeping property assessments tied to purchase price valuation and the cap it places on year-to-year assessments, property tax revenue has been the most reliable of any tax revenue source in the state. There has been a steady increase of property tax dollars exceeding the inflation rate year in and year out.

In this last fiscal year, Los Angeles County had a 9.3 percent jump in property tax revenues. Napa County revenues were up 9.4 percent — Napa's yearly average increase since the passage of Proposition 13 has been 9.3 percent — and in Kern County the increase is 12 percent. Ventura County went up 8.1 percent. Even in this down real estate market year, Santa Cruz County had a 3 percent increase following a double digit increase last year. [45]

California has seen a steady increase in property tax revenue while Proposition 13 is protecting taxpayers from large jumps in their taxes. An analysis completed by The Center for Government Analysis shows that California property tax increase measured on a per capita basis over a five-year period from FY 1999-2000 to FY 2004-2005 has been healthy but, for the most part, not as high as some of the states suffering from taxpayer backlash. (Charts related to the analysis are attached to this report.)

The Proposition 13 tax system assures local government a steady stream of increased property taxes, even when the real estate market is weak. California tax historian David Doerr in his book, California's Tax Machine, explained how the acquisition value system created by Proposition 13 benefits local government:

Proposition 13's acquisition value assessment system acts in a counter-cyclical manner to provide stability in the flow of property tax revenue to local government. Acquisition value assessments have worked in the nature of a reservoir by keeping an untapped reserve of value that will accrue to local entities upon changes in ownership.

In years of high inflation or real estate values, Proposition 13 acts as a brake, holding money back that would have otherwise been generated by rapidly growing assessments under an ad valorum tax. Conversely, in times of falling property tax values, assessment growth continues under an acquisition value system as the new, substantially higher values from changes in ownership, new construction, and the 2-percent inflation factor are likely to exceed the Proposition 8 decline-in-value assessments. (An example of how the reservoir effect works: Assume a 10 percent drop in market values. A property worth $300,000 drops to $270,000 in value from one year to the next. Assume its base-year value is $100,000. When it changes ownership in year two, the value on the roll goes up $170,000, rather than falling $30,000.) [46]

Furthermore, the homeowner who remains in the property for a period of time does not pay less property tax in a down market when the current market value of the home drops. Since these homes are assigned their acquisition based values under Proposition 13, after a few years the property's assessed value will be lower than the market value even in a down market so their property taxes will still go up 2 percent for that tax year. Therefore, local government doesn't suffer the vagaries of the economy but has a steady source of property tax revenue.

Or as Doerr states it: "Even with falling real estate values, property tax growth held up because of this reserve value. If California had used a market value property tax system with a higher level of spending in the boom years, the results in the recession years would have been drastic reductions in revenues to local jurisdictions and severe cuts in local budgets." [47]

It was just this scenario of falling real estate values but property tax revenue growth in 1994 that caused Los Angeles County special assistant Gil Parisi to tell the Los Angeles Daily News, "Thank goodness for Proposition 13." [48]

CONCLUSION

While local government has enjoyed reliable property tax revenue under Proposition 13, taxpayers have enjoyed something they rarely, if ever, had under annual property tax reassessments: certainty. They know what their taxes will be year to year.

Tax certainty is an important value when it comes to taxation. World-renowned philosopher/economist Adam Smith stated: "The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty." [49]

Smith argued that taxes must be certain and not arbitrary, as they often are under the more familiar property tax assessment method. Without this certainty, Smith felt the taxpayer fell under the power of the tax collector. While corruption could result from such an arrangement, Smith argued, even those tax officials who were not corrupt might be viewed so by the public: "The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt." [50]

Proposition 13 avoids these pitfalls and gives assurance to the taxpayer. As David Doerr wrote: "To a great extent, Proposition 13 achieved its predictability goal." [51]

As Howard Jarvis Taxpayers Association president Jon Coupal has written, "The beauty of Proposition 13 is that it not only makes taxes predictable for property owners, which allows them to budget for taxes, but it also stabilizes revenue to those government agencies that depend on the property tax." [52]

That winning combination makes Proposition 13 a model for taxpayers who find they are searching for the answer to their property tax troubles in 2007.

CHARTS

Analysis and Charts by The Center for Government Analysis: Newport Beach, California.

Across the United States, property values (and subsequently property tax revenues) have accelerated rapidly during the period FY 1999-2000 to FY 2004-05. The total property tax revenues for state and local governments grew from over $249 billion in FY 1999-2000 to over $335.6 billion in FY 2004-05, a change of nearly 35%. Meanwhile, the per capita personal income in the United States has grown from $29,843 in FY 1999-2000 to $34,471 in FY 2004-05, an increase of approximately 15.5%.

Relative to the other states examined, California has been able to keep property tax growth at a lower rate. During the period FY 1999-2000 to FY 2004-05 property tax revenues per capita for state and local governments in California grew by only 22.1%. Yet, in Indiana (33.79%), Nevada (35.11%) and Florida (30.64%) the growth in property tax revenues per capita has been much greater. Arizona was one state where these revenues grew at a rate lower than in California (13.91%).

Percentage Growth in Property Tax Revenues Per Capita vs. Personal Income Per Capita, FY 1999-2000 to FY 2004-05

Percentage Growth in Property Tax Revenues Per Capita vs. Personal Income Per Capita, FY 1999-2000 to FY 2004-05

In California there has been significant growth in property values but significantly smaller growth in property tax revenues, thanks in large measure to the limits stipulated in Prop. 13. During the period FY 1999-2000 to FY 2004-05, property tax revenue per capita grew from $771 to $942, an increase of only 22.1%. This rate of increase is much lower than nationwide where property tax revenues grew by nearly 35%. Per capita personal income in California grew from $32,458 in FY 1999-2000 to $36,936 in FY 2004-05, an increase of 13.8%.

Percentage Growth in Property Tax Revenues Per Capita vs. Total General Revenues Per Capita, FY 1999-2000 to FY 2004-05

Percentage Growth in Property Tax Revenues Per Capita vs. Total General Revenues Per Capita, FY 1999-2000 to FY 2004-05

In California, the portion of Total General Revenues that comes from property taxes was only 12.61%. Yet in other states examined, property taxes comprise a greater percentage of Total General Revenues. (Arizona = 15.18%, Nevada = 15.09%, Florida = 18.19% and Indiana = 19.53%.)
Property Tax Revenues Per Capita vs. Property Tax Revenues as a Percentage of Total General Revenues, FY 2004-05

Property Tax Revenues Per Capita vs. Property Tax Revenues as a Percentage of Total General Revenues, FY 2004-05

Within California, the property tax revenues per capita vary significantly. Four large California counties are reviewed in this analysis, and it should be noted that the varying degrees of tax revenues per capita have as much or more to do with increasing property tax values, as they do with different tax rates.

Property Tax Revenues Per Capita, FY 2001-02 to FY 2005-06

Property Tax Revenues Per Capita, FY 2001-02 to FY 2005-06

Percentage Growth in Property Tax Revenues Per Capita vs. Personal Income Per Capita, FY 2001-02 to FY 2005-06

Percentage Growth in Property Tax Revenues Per Capita vs. Personal Income Per Capita, FY 2001-02 to FY 2005-06

BIBLIOGRAPHY

Cannon, Lou, GOVERNOR REAGAN: His Rise to Power. New York: Public Affairs, 2003.

Doerr, David R., CALIFORNIA'S TAX MACHINE: A History of Taxing and Spending in the Golden State. Sacramento: California Taxpayers Association, 2000.

Fisher, Glenn W., THE WORST TAX? A History of the Property Tax in America. Lawrence, Kansas: University Press of Kansas, 1996.

Fox , Joel, THE LEGEND OF PROPOSITION 13: The Great California Tax Revolt. Philadelphia: Xlibris, 2003.

Lo, Clarence Y. H., SMALL PROPERTY VERSUS BIG GOVERNMENT: Social Origins of the Property Tax Revolt. Berkeley: University of California Press, 1990.

O'Sullivan, Arthur, Terri A. Sexton, Steven M. Sheffrin, PROPERTY TAXES AND TAX REVOLTS: The Legacy of Proposition 13. New York: Cambridge University Press, 1995; Reprint 2007.

Smith, Adam, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, www.adamsmith.org, 1776.

ENDNOTES