Is Proposition 13 the reason behind this mess? Part 1

This is a two part investigative piece on Proposition 13 that explores whether Proposition 13 is to blame for the mess going on in the California Budget Crisis. There have been several vocal groups demanding a reform or repeal of this ballot measure, stating that it will make great strides in moving forward in this dark fiscal period. The first part is fairly general and explains what Proposition 13 is and why it is opposed. 

To read the second part click here

What is Proposition 13?

Proposition 13 is a ballot measure that was passed by 69% of voters in the California 1978 election. This ballot initiative set a cap on property taxes to no more than 1% of a home’s assessed value. It also restricts increases in assessment to 2% a year except upon the selling of the property and it established a measure that required a two-thirds vote approval to raise state or local taxes. Prop 13 drew its momentum from the Supreme Court decision of the Serrano v. Priest case where it was ruled that a property-tax based system for public schools was unconstitutional and that the amount of funds going to the school districts was disproportionately favoring the wealthy. Howard Jarvis, an American businessman, politician, lobbyist, and anti-tax activist, was the main supporter of prop 13. Before proposition 13 was passed, many homeowners, especially retired and elderly homeowners on fixed incomes, were hurt by the fluctuating property-taxes because of owners’ ill preparation against the sudden rise in tax rate. With the set tax cap, many homeowners can expect the amount they have to pay for property tax. Howard Jarvis would have smiled to see how drastically fewer homeowners are threatened by the unpredictable property taxes and are able to own private property at ease. Prop 13 remains as an iconic tax revolt symbol and looking back, its instantaneous effects was quite remarkable, if not revolutionary. However, with the passing of Prop 13, California cut property tax revenue by 57% in the fiscal year 1978-1979. The annual revenue of local governments was brought down by about $6 billion. The dramatic decrease of property tax revenue corresponded with the struggle in general funding to fund higher education, healthcare, law enforcement, and etc.

So why is Prop 13 under attack during this economic crisis?

The California Tax Reform Association argues that proposition 13 has been protecting business properties for the past 30 years. If a corporation owning commercial property is bought out or merged, but the property remains in the ownership (deeded) of the corporation, then the property can effectively change ownership and avoid Prop 13’s provision that fixes the amount of tax based on the property’s resale value. Michael Hiltzik of the Los Angeles Times summarizes this better, “What businesses dodge, the homeowners pays.” According to Phil Ting, San Francisco Assessor-Recorder, “30 years ago in San Francisco, commercial property owners contributed the majority of property taxes, 59%, and residential property owners contributed 41%. Today, we see the reverse: commercial property owners contributed just 43% of property taxes in 2008 while residential property owners contributed 57%.” Another way to look at this issue is Disneyland. Lenny Goldberg, director of the California Tax Reform Association, calculated that Disneyland, which has not had a change in ownership, is currently taxed at an average of about a nickel per square foot. In contrast, a median California home bought last year measuring 1600 square feet and selling for $330,000 would be taxed $2.06 per square foot. Hypothetically, if Disney merged with another company but still had possession of Disneyland, Disneyland can practically be handed over to that company and it will still be taxed a nickel per square foot. If there was a reform on this loophole in Prop 13 where business property were taxed at market rate, that would result in $7.5 billion a year in additional revenue to help close the gap in the $24 billion deficit. 

Critics of Proposition 13 stated that the limitations put on property tax has forced the government to depend on other taxes such as personal income tax and sales tax and to reallocate the state’s revenue to provide for services that faced funding gaps such as schools. The bank and corporation taxes have been steadily decreased and in today’s fiscal recession, the state unemployment reached 11%, leading to a reduction in Tax revenue. With less funding coming from property taxes, it has been difficult to balance the funding for services such as freeways, needy families, local governments, schools, law enforcement, and etc in this economic recession. Education has been taking a hit in funding as California’s public schools stand to lose $5.4 billion on top of the $7.4 billion lost last year. Before Prop 13 was passed, California’s education (per-pupil spending) was ranked 5^th in the nation back in the 50s and 60s, but now it is ranked in the mid 40s.

Not only did Prop. 13 lower the revenue; it made increasing the revenue more difficult as raising taxes requires a two-thirds vote of the legislature unlike 47 other states in this country where a simple majority is needed to pass. Because of the vote requirement to raise local taxes for special purposes, many local governments found it impossible to raise any taxes for the sake of funding the city. According to Andres Martinez of the New America Foundation, “Only a handful of states require a two-thirds majority to pass a budget, and in California it is pretty much guaranteed that you won't get two-thirds of people to agree on anything.” Why? It is hypothesized that in California, the people collectively share the “nothing for something” mentality where they want good services from their county and city but expect someone else to pay it for them.