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Proposition 13: A Look Back

In the Beginning, there was Proposition 13.

On June 6th, 1978, nearly two-thirds of California’s voters passed Proposition 13, reducing property tax rates on homes, businesses, and farms by about 57%. Now, according to the newly amended state constitution property tax rates could not exceed 1 percent of the property’s market value and valuations couldn’t grow by more than 2% per annum unless the property was sold.

Prior to Proposition 13, the tax rate throughout California averaged a little less than 3% of market value, and there were no limits on increases either for the tax rate or property value assessments. Some properties were reassessed 50% to 100% in just one year and their owners’ tax bills jumped correspondingly. Under the tax cut measure, property tax valuation was set at the 1976 assessed value. As stated above, property tax increases on any given property were limited to no more than 2% a year as long as the property was not sold. Once sold, the property was reassessed at 1% of the new market value with the 2% yearly cap placed on this new assessment. Thus, the new buyer is aware of what the taxes will be and knows the maximum amount property taxes can increase each year for as long as he or she owns the property.

In addition, Proposition 13 required that all state tax rate increases be approved by a two-thirds vote of the legislature and that local tax rates also have to be approved by a vote of the people. The people’s right to vote on taxes is a key taxpayer protection.

So, what happened next? Well, that depends on whom you ask.

When the interstate highway collapsed during the 1989 Loma Prieta earthquake in the San Francisco Bay Area, an editorial cartoon appearing in the Los Angeles Times showed a car crushed by a freeway, and the license plate of the car read: Prop 13.

When 12-year old Polly Klass was abducted from her home in Petaluma, California north of San Francisco, and brutally murdered, Proposition 13 was judged culpable in the crime by national columnist and noted author Richard Reeves in a Money Magazine article. Reeves wrote that the killer might have been apprehended before the murder took place if only the police had advanced communication equipment which was surely denied them by the Proposition 13 tax cuts.

How absurd can it get? Try this one. In his TRB column in the New Republic of October 23, 1995, Robert Wright listed his reasons that the O. J. Simpson criminal trial ended without a conviction. His number one reason — Howard Jarvis and Proposition 13!

He argued that because Proposition 13 cut taxes, the city and county of Los Angeles had inadequate funds to hire a competent coroner and competent police officials — and, basically, you get what you pay for. There’s a problem with this theory, however. On every rung of the ladder from rookie cop on up, the Los Angeles Police Department paid higher salaries than the police departments in the other two largest cities in the country, New York and Chicago.

In biblical times unfortunate occurrences and unexpected terrors called plagues came from the hand of God. In twentieth century California, modern plagues apparently are the result of Proposition 13.

Proposition 13 has been and continues to be the victim of scapegoating for all the ills that befall California.

It is not surprising that Proposition 13 is blamed for all of California’s problems. The bureaucracy doesn’t miss an opportunity to blame Prop 13 for its own failings as they repeat the mantra for any faulty service: “It’s Proposition 13’s fault.”

Unfortunately, children have been murdered, bridges have collapsed, and public services have stalled in other states over the same time period. And all of these states did not have a tax cut initiative like Proposition 13. For example, New York librarians began a misery index to record library closures. Could Proposition 13 have caused this problem all the way across the country? Frankly, it wouldn’t surprise us if someone said, yes, it was the Proposition 13 mentality that caused the problem.

However, Proposition 13 has been successful at what it promised to do. It prevented people from being taxed out of their homes and for the first time gave taxpayers a measure of certainty over their taxes.

A study by the University of California at Davis found that under Prop 13 low and middle income people, on average, pay less in taxes than they would have paid under the former property tax system.

The study’s authors wrote that if Los Angeles County reverted to the market value property tax system in which property was revalued every year at its current value, and the tax rate were lowered so that the revenue collection would be equal to what was collected from the property tax the year before: “We estimate that this policy would adversely affect elderly and low-income households. In fact, according to our calculations, 92% of the elderly would lose under this revenue neutral reform.”

Proposition 13 as Symbol

Proposition 13 has reached the exalted status of a symbol — for taxpayer revolt and people controlling the power of their government.

Proposition 13 was a California tax cut with a national identity. The tax cut message rolled across the country after Proposition 13 passed. Some say it was the spark that ignited a conflagration, which culminated in the election of Ronald Reagan to the presidency. At the same time, the notion that California problems can be blamed on Proposition 13 are raised by out-of-state media and accepted as urban myth. No one knows where the myth comes from, but people are ready to believe it if the source is earnest in its story telling.

In fact, in the aftermath of Prop 13 passing, California outperformed the rest of the nation in nearly every conceivable measure including personal income growth, employment growth, and real estate appreciation values.

While state and local property tax revenues fell from $11 billion in Fiscal Year (FY) 1978 to $6 billion in FY 1979, higher revenues in other categories largely offset them. For example, sales tax revenues grew 14.6 percent over the same time period. Total state and local revenues fell by only $1.2 billion in total. Local government direct expenditures did not even decline. The tax reduction which had invigorated the state’s economy so profoundly imposed no significant reduction in government services. If anything, Proposition 13 and other tax limitation and tax reduction measures which soon followed, benefited California’s private sector and California’s public sector by giving incentives to workers to earn and keep more money and grow the economy. Tax revenue increased as a result of this economic growth. The California tax revolt of the late 1970’s more than paid for itself.

Despite Prop 13’s restrictions, today’s government in California collects the same 16% of personal income in taxes, fees and assessments that it collected before Proposition 13 passed. Today, the government in California collects and spends per capita in constant dollars — that is, incorporating population growth and inflation growth — more than it taxed and spent per capita in 1978.

But then why don’t we get the quality of services we use to get? The answer is expanded government including not only increased government spending on many programs, but also the expansion of government employees wages and benefits, the largest portion of any budget.

Brown to Reagan to Brown and the Taxpayers are Out

The year was 1968. It was opening day for California’s newest major league baseball team, the Oakland A’s, freshly arrived from Kansas City. The fans were in a festive mood — until the dignitary was announced to throw out the ceremonial first pitch.

Governor Ronald Reagan was greeted with lusty boos which one reporter timed lasting three minutes. After tossing out the pitch, Reagan commented, “I can certainly hear that a helluva lot of you paid your taxes.”

It was April, and not only was a new baseball season about to begin, but income taxes were due. Much higher income taxes because of a plan signed by Reagan to close a yawning California budget deficit the year before.

Pat Brown, California’s Governor from 1959 to 1967 left office with the legacy of being a builder whose achievements included the intrastate water project and the California higher education system. While he accomplished these things during a period when California was collecting less tax money per capita than it is now, in the end, Pat Brown’s administration was spending more money than it brought in.

Over the last three years of the Pat Brown administration, spending was up over revenues. A phased-in transition from a cash treatment of revenues to an accrual treatment of revenues, in which revenues are counted when they come due on paper rather than when the revenue is actually in hand, covered over the deficits. When Brown’s successor, Ronald Reagan, moved into the governor’s mansion the deficits were waiting on the doorstep.

Reagan later calculated the state overspending figure at $1 million a day. This calculation underestimated the problem. Reagan’s supposed solution was to balance the books with a tax increase.

David R. Doerr, now a tax specialist for the business sponsored California Taxpayers Association, was employed by the state legislature’s Assembly Revenue and Taxation Committee in 1967. He worked on the tax increase plan, which was signed by Reagan.

“Basically, the legislature taxed everything that moved,” he said. Sales taxes were increased; liquor taxes went up, as did inheritance taxes. But the engine of what was then the largest tax increase in California history was the income tax. Rates were increased, brackets were narrowed, and exemptions were replaced by tax credits. The income tax was made extremely progressive. In fact, Doerr said with regret, “it became a money making machine.”

Money making for government, that is, money reducing for the taxpayers.

Reagan, himself, argued that the income tax was the only levy that could generate needed revenues and provide property tax relief. Reagan’s plan raised taxes $900-million. The tax increases signed by Reagan did more than close the budget gap. They kept pumping revenue into the state treasury well after the crisis was over. In fact, the tax increase piled up so much revenue into the state treasury that within a decade the state was sitting on a six billion dollar surplus or about 40% of the entire state budget at the time.

With the tax spigot turned on, Reagan, himself, could not turn it off. His measure on the special election 1973 ballot to limit spending was defeated. Tax revenue continued pouring into the state treasury after the budget crisis was past. In fact, for the five years between the defeat of the Reagan initiative to Proposition 13’s tax revolt in 1978, state spending increased an amazing 12.5% a year; state revenues went up an incredible 18.4% a year. It was coming in so fast; government couldn’t spend it all!

The existence of a growing surplus became a major issue in the Proposition 13 campaign. Voters were convinced government was too fat, and they voted overwhelmingly for Proposition 13.

Jerry Brown, Pat’s son, inherited the governor’s chair and budget surplus from Reagan. Ironically, with the treasury bursting at the seams, Brown was talking about an “era of limits.”

His initial instincts were to control the growing property tax crisis. He proposed a circuit-breaker program that would have the state backfill local property taxes above a certain percentage of household incomes; he called for businesses to carry a larger share of the property tax burden; and he asked for strict statutory limits on property tax growth. Brown’s problem was he did not follow through. Taxes continued to rise, home ownership was threatened, and, as far as the people were concerned, the governor and legislature did nothing.

The Tax Revolt of 1978

By the late 1970s California’s property tax burden was intolerable. For many seniors on fixed incomes, it meant selling their homes or giving it up to the tax man. Howard Jarvis told the story of watching an elderly lady suffering a heart attack while visiting the Los Angeles assessor’s office when she couldn’t convince the authorities to change her tax bill.

One can only imagine what happened to a retired couple reported by the Newhall Signal newspaper. Because they lived on land near a new apartment house, the assessor reassessed their property at the land’s highest and best use, as if their land would possess a motel. Their small home was required to pay taxes of $1800 a year. The total income of this retired couple was $1900 a year. This situation occurred a full decade before Proposition 13 passed.

An Internet user recently reminisced about an empty house at the end of the street, which was constantly turned over by speculators. No one ever lived in the place, but every time it sold, all the houses in the neighborhood were reassessed upward.

Perhaps the situation can best be summed up with the following San Francisco anecdote prior to the passage of Proposition 13. The San Francisco assessor was taking bribes to keep business taxes down below the market value. He went to jail. To make sure the valuations were correct and equal in San Francisco, the new assessor used computers. When a property sold in a neighborhood, all the surrounding properties found new tax bills reflecting a new market value, resulting in great increases in taxes for everyone. Property taxes went up so quickly in San Francisco that bumper stickers soon appeared pleading: “Bring back the crooked assessor!”

The assumption of government was that homeowners were profiting off of the housing inflation, which increased their property values. But these were paper profits only, and real people can’t pay real taxes with paper profits.

Prop 13 as Slow Poison?

The private sector of the economy fared beautifully in the aftermath of Proposition 13, but some people questioned whether this private sector success might not have come at the expense of the public sector. Opponents of the tax cuts voiced concerns that the tax reductions might have gone too far requiring excessive program cuts. Vital services, they said, would suffer, schools would have to close, and fire and police protection would no longer be adequate. Yet in spite of the precipitous fall in the state’s average tax rate, state and local revenues did not fall proportionately. The total general revenue for local governments fell only 1 percent in the year following Proposition 13. By FY 1980 total revenue had risen more than 10 percent above the FY 1978 level. The tax base expanded by more than enough to offset the reduction in tax rates.

The disruptive shortage of funds so widely anticipated never materialized. At least, not initially.

Civil War hero Joshua Chamberlain, who was awarded the Medal of Honor for his critical action at the Battle of Gettysburg, received many wounds during the war. When Chamberlain died at the age of 83 in 1914, noted Civil War historian Bruce Catton declared Chamberlain’s death the result of a war wound and wrote that the old soldier was the last military victim of that war.

Many people argue that California took a bullet from Proposition 13 back in 1978, but like Chamberlain, the bullet’s deadly effect was delayed for years. They said Proposition 13 was bailed out by the state surplus; and that the true effects of Proposition 13 were felt in the time of the 1990s recession.

California took the recession of the early nineties particularly hard. In a reverse spin on the peace dividend from the end of the Cold War, California’s defense and aerospace industries were hobbled by federal spending cuts. Workers lost their jobs and taxes were not paid. California would rebound from this crisis, but it would take time as the state economy evolved. In the meanwhile, a search for scapegoat explaining California governments’ revenue shortfall settled on Proposition 13.

Washington Post columnist Lou Cannon viciously attacked Proposition 13 and its supporters in 1993: “Proposition 13 is a government of the selfish, by the selfish, and for the selfish,” he declared. In the same article he sought to paint Proposition 13 with a share of the blame for the Los Angeles riots following the jury decision on the police officers in the Rodney King case.

The problem for local governments was exacerbated during the recession when the state ordered the shifting of property tax revenues to meet state obligations for funding education. Property tax revenue for local government services was available, but the state was required by ballot initiative Proposition 98, to spend a certain amount of revenue on the schools.

The recession cost California state government about one-third of expected income. Just like any family that loses one-third of its income, the state suffered. The reason state revenue was down was because the taxpayers themselves had less money. It’s simple economics that seems to confuse big spenders and some journalists.

Bemoaning Prop 13’s tax limitations, officials wished they had the ability to get more money by raising property taxes during the recession. How could they raise taxes on the poor taxpayer who had less income because of the recession? The recession was not Proposition 13’s fault. However, Proposition 13 had one positive influence during the recession. Many of the taxpayers that lost their jobs or saw their pay cut at least could hold onto their homes because Proposition 13 limited their property taxes.

A Note on Fairness

Before leaving Proposition 13, we must comment on the charge that the measure’s acquisition tax plan is unfair. The acquisition property tax system calculates the tax at the time the property is acquired by a new owner. A cap is placed on future increases. The traditional ad valorum (of the value) property tax system bases taxes yearly on the current value of the property. Adherents to the ad valorum property tax system object that similar homes, side by side, pay different taxes depending on when they were purchased.

As HJTA Director of Legal Affairs Jonathan Coupal explained in a Los Angeles Times article, paying different taxes for similar services is not unique in our tax system. The acquisition property tax system is no more unfair than the traditional method of property taxation under which owners of more valuable property pay more for the same services. This fairness argument ignores the nature of taxes. If we were that concerned with proportionality between the amount of tax and the level of service, we would evolve to a system of nothing but user fees. Because proportionality between tax liability and services has never been an attribute of property taxes, it is unfair to level this charge against Proposition 13 alone.

The ad valorum tax system doesn’t assure equal taxation. A 1966 report from the Assembly Revenue and Tax Committee said: equalization of assessments is “more myth than a reality.”

A number of economists argue that the equality argument is misguided. California homebuyers probably pay no real tax penalty under Proposition 13 because the differential assessments are capitalized into the purchase price. In other words, prospective taxes reduce the purchase price below what would otherwise be paid, hence no tax penalty.

Proposition 13 is a contract between government and individual taxpayers. As Karen Nolan of the Vacaville Reporter commented, Proposition 13 is like her grandmother’s quilt: each patch is different, but stitched together it keeps everybody warm. Under Proposition 13, each property may have a different tax amount, but every one in the community is protected.

That overall taxpayer protection comes from that revolutionary aspect of Proposition 13 — tax certainty.

The Unusual Case of Tax Certainty

Because of Proposition 13, for the first time the certainty in taxation lay in the hands of the taxpayer instead of the tax collector. Proposition 13 set up an acquisition value system that treats all homeowners alike in that they pay 1% of the market value established at the time of purchase. It limits increases to 2% a year.

In 1992, Justice Harry Blackmun wrote in the United States Supreme Court’s decision in Nordlinger v. Hahn, upholding the constitutionality of Prop 13’s acquisition system: “The Equal Protection Clause is satisfied as long as there is a plausible policy reason for the classification.” He found two rational reasons — 1) Neighborhood preservation and continuity, and 2) Protecting of existing owners of property who purchase property with certain tax expectations, who might be forced to sell or divert expenditures from food to taxes when taxes get too high.

An acquisition property tax policy is predictable and removes the problem of subjective assessments by assessors, while protecting homeowners against prohibitive property tax increases.

For government, the system works, too. Property tax in California was increasing about 10% a year statewide before the recession and continued to produce positive revenue growth despite the recession.

Government also enjoys a measure of certainty under Proposition 13 during lean times. Normally, under the market value system, when property values drop during a recession, taxes must be reduced. Because, under Proposition 13, many properties are paying taxes on assessed values below even the reduced market values, taxes on these properties do not have to be lowered. In fact, they can still be raised 2% if inflation rises that much or more. The government does not suffer a severe shock to its revenue collection. During the 1990s recession, one Los Angeles County assessor’s official acknowledged that advantage and told the L.A. Daily News: “Thank goodness for Proposition 13.”

Acquisition based property tax has now spread to Florida in 1993, and to Michigan in 1994.

Adam Smith stated in his “Wealth of Nations”: “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, … is not near so great an evil as a very small degree of uncertainty.”

Proposition 13 has captured Smith’s notion of certainty.