California Proposition 13 (1978)
Among other provisions, Proposition 13 returned property assessments to 1975 levels and capped annual property tax increases at 2%.
Proposition 13 was the brainchild of low-tax crusader Howard Jarvis. It expressed taxpayer sentiment in the state after a decade of rapidly rising property tax bills. The two main objectives of Proposition 13 were to freeze the tax-assessed value of properties at the time of purchase with a two percent cap on annual assessment increases, and to require that when legislative bodies in the state (either the state legislature or local governing boards) wanted to raise taxes, a two-thirds majority vote is required. After Proposition 13 was approved, property tax rates in the state dropped an average of 57%.
In the more than 30 years since its passage in 1978, Proposition 13 has been lavished with praise and showered with blame. It is seen by taxpayer advocates as an enduring symbol of the importance of the ballot initiative process while its opponents say that it is the root cause of much that they see as wrong with California and its politics.
When Proposition 13 took effect, California's population was 23.6 million. In 2009, the state's population is over 38 million.
Official ballot summary
The official ballot summary said:
- Limits ad valorem taxes on real property to 1% of value except to pay indebtedness previously approved by voters. Establishes 1975-76 assessed valuation base for property tax purposes. Limits annual increases in value. Provides for reassessment after sale, transfer, or construction. Requires 2/3 vote of Legislature to enact any change in state taxes designed to increase revenues. Prohibits imposition by state of new ad valorem, sales, or transaction taxes on real property. Authorizes imposition of special taxes by local government (except on real property) by 2/3 vote of qualified electors. Financial impact: Commencing with fiscal year beginning July 1, 1978, would result in annual losses of local government property tax revenues (approximately $7 billion in 1978-79 fiscal year), reduction in annual state costs (approximately $600 million in 1978-79 fiscal year), and restriction on future ability of local governments to finance capital construction by sale of general obligation bonds.
Provisions of Prop 13
The most significant portion of the act is the first paragraph, which capped real estate taxes.
- 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed One percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.
The proposition's passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. In addition to lowering property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States.
The vote had barely been counted on Proposition 13 when its opponents filed a lawsuit, Amador Valley Joint Union High School District v. State Board of Equalization, in the California courts arguing that Prop 13 was unconstitutional. The California Supreme Court, however, upheld Prop 13 against this challenge. Opponents filed additional legal challenges. The most notable, Nordlinger v. Hahn, argued that acquisition-value assessments are unconstitutional under the federal constitution as a violation of the Equal Protection Clause of the Fourteenth Amendment. Nordlinger reached the Supreme Court of the United States. The nation's highest court in 1992 upheld Prop 13 against the Nordlinger challenge by a vote of 8-1.
A factor in Proposition 13's electoral victory was the sentiment that older Californians should not be priced out of their homes through high taxes. The proposition has been called the "third rail" of California politics and it is not politically popular for Sacramento lawmakers to attempt to change it.
Passage of the initiative presaged a "taxpayer revolt" throughout the country that is sometimes thought to have contributed to the election of Ronald Reagan to the presidency in 1980. However, of 30 anti-tax ballot measures that year, only 13 passed.
Proposition 13 drew its impetus 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 the Fourteenth Amendment to the United States Constitution (which includes the Equal Protection Clause) 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, local property taxes went directly to the local school system, which minimized state government's involvement in the distribution of revenue. This system also allowed a wealthier district to fund its schools with a lower tax rate than the rate a less affluent district would have to set in order to yield the same funding per pupil. The Court ruled that the state had to make the distribution of revenue more equitable. The state legislature responded by capping the rate of local revenue that a school district could receive and distributing excess amounts among the poorer districts. Although this was more equitable, property owners in affluent districts perceived that the benefits of the taxes they paid were no longer enjoyed exclusively by the local schools.
Moreover, the state's increasing population fueled increased demand for housing, resulting in higher property values and, consequently, higher taxes. Although the revenues supported the costs of growth, such as new schools, roads, and the extension of other municipal services, 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.
In the early 1960s, several scandals erupted through California involving county assessors. These assessors, who had traditionally enjoyed great latitude in setting the taxable value of properties, were found rewarding friends and allies with artificially low assessments, with tax bills to match. These scandals led in 1966 to the passage of AB 80, which imposed standards to hold assessments to market value. However, assessors, who are elected officials, had traditionally used their flexibility to aid elderly homeowners on fixed incomes, and more broadly to systematically undervalue vote-rich residential properties and compensate by inflating commercial assessments. The return to market value in the wake of AB 80 could easily represent a mid-double-digit percentage increase in assessment for many homeowners.
As a result, a large number of California homeowners experienced an immediate and drastic rise in valuation, simultaneous with rising tax rates on that assessed value, only to be told that the taxed moneys would be redistributed to distant communities. The ensuing anger started to form into a backlash against property taxes which coalesced around Howard Jarvis.
The preceding taxpayer revolt
Howard Jarvis and Paul Gann were the most vocal and visible backers of Proposition 13. Officially titled the "People's Initiative to Limit Property Taxation," and popularly known as the "Jarvis-Gann Amendment," Proposition 13 was placed on the ballot through the California ballot initiative process, a provision of the California constitution which allows a proposed law or amendment to be placed before the voters if backers collect a sufficient number of signatures on a petition. Proposition 13 passed with 65% of those who voted in favor and with the participation of 70% of registered voters. After passage, it became article 13A of the California state constitution.
Under Proposition 13, the annual real estate tax on a parcel of residential property is limited to 1% of its assessed value. This "assessed value," however, may only be increased by a maximum of 2% per year, until and unless the property is resold. At the time of sale, the assessment may increase by an arbitrary amount, but future assessments are likewise restricted to the 2% annual maximum increase. If the property's market value increases rapidly (values of many detached dwellings in California have appreciated at annual rates averaging more than 10% over the course of several years) or if inflation exceeds 2% (common), the differential between the owner's taxes and the taxes a new owner would have to pay can become quite large.
The property may be reassessed under certain conditions other than a sale, such as when additions or new construction occur. The assessed value is also subject to reduction if the value of the house declines, for example, during a real estate slump.
Tax bills to decline in 2010
A California Board of Equalization preliminary estimate of a deflation rate of 0.237% in 2009 means that most California homeowners will see a slight decline in their property tax bills in 2010 under the provisions of Proposition 13. The decline in taxes will be about $2.60 per $100,000 in assessed value. The estimate is based on U.S. Bureau of Labor Statistics Consumer Price Index numbers released in mid-November. The Board of Equalization must send an official notification of the decline to county assessors in December.
The announced adjustment factor will be reflected in assessments made as of January 1, 2010.
This deflationary decline in property tax assessments is the first time since Proposition 13 was enacted in 1978 that property tax assessments will go down because of Proposition 13. In all but five years since 1978, the annual increase was the maximum allowable 2%. In five years, tax bills were flat or went up less than the allowable 2% increase.
Because housing prices in Los Angeles and the Bay Area are higher than housing prices in California's inland, some have said that Proposition 13 has a disproportionate impact on coastal areas.
Cities and localities have become more dependent on funds from the state, which transferred to the state more power over local towns and cities than they otherwise would have had. The state provides money in "block grants" to cities to provide for services, buying out local county health and welfare centers. Many local governments turned to a local sales taxes for funds. Some local municipalities also increased fees to make up for the shortfall, with particularly high fees levied on developers creating new houses or industrial outlets.
California public schools, which in the 1960s had been ranked #1 nationally in student achievement, are said by Proposition 13 opponents to have fallen to #48 in some surveys of student achievement. Some have disputed Proposition 13's direct role in the move to state financing of public schools, because schools financed mostly by property taxes were declared unconstitutional in Serrano vs. Priest, and Proposition 13 was then passed partially as a result of that case. California's spending per pupil was the same as the national average until about 1985, when it began dropping, which led to another referendum, Proposition 98, that requires a certain percentage of the state's budget to be directed towards education.
An analytical approach to examining a tax policy is to apply the traditional principles of taxation, including equity, allocative efficiency, revenue yield/elasticity and administrative and political feasibility. Equity reflects the basic values of how our society determines different groups should be treated; these values include horizontal and vertical equity, ability to pay and benefits received. Allocative efficiency refers to the ways in which a tax policy influences changes in private consumption behavior. Revenue yield and elasticity refer to whether a revenue policy has the capacity to increase in the future in order to continue enabling government agencies to meet the demands of its residents. Lastly, administrative and political feasibility refer to whether a tax policy can be implemented and enforced with relatively little effort and is politically possible.
Proposition 13 freezes the value of properties at the time of purchase with a possible two percent annual assessment increase. Therefore, properties of equal value have a great amount of variation in their assessment, even if they are next to each other. Assuming that the price of a house is somewhat a determinant of a person’s wealth (and therefore ability to pay) and benefit received, this feature would lead neighbors or business owners who purchased a property at different periods of time to pay a different assessment, without any relationship to ability to pay or benefits received. Overall, these qualities create serious inequities and potentially introduce some amount of regressivity into the tax structure.
Because homeowners keep their homes for longer, young households often rent for longer before buying a house. 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 dozens 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 fewer 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 real estate is more affordable (due to property taxes being a larger fraction of the overall tax base) and their real estate equity buys less in the California housing market.
However, Proposition 13 is not the only factor working on California's housing market to create these conditions: as it grows, fewer places available to build new housing result in higher prices for existing housing. Because of geographical limits and enacted environmental and growth legislation from cities and counties, new development is increasingly expensive. California also has high rates of migrants from other countries and a high birth rate, which has contributed to higher demand for housing, and it has low amounts of moderately priced housing due to supply and demand.
This same policy has had a higher effect on migrants and African-Americans than whites, with both groups staying longer in their homes or renting for longer than whites.
Similarly, Proposition 13 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.
One other complaint of young couples that are trying to buy a house is the fact that people that have retained their houses for several years have not only had the benefit of paying low property taxes but also are able to sell their property for a big premium. This a double "whammy" for these people. In order to afford a house, for young couples, both the husband and wife have to work. In essence, young couples and home buyers are subsidizing the existence of other people in the state. This is analogous to the same situation that was used as an excuse to push Prop 13 in that taxes from one district were being diverted to other districts. In this case, taxes from young and upcoming couples are being used to pay for other established people in the district.
Supporters of Proposition 13 argue that purchasers of homes, which are particularly expensive in California, should be able to predict their tax burden over the long term or else have to sell their property when taxes exceed their income. They also point out that property taxes as implemented in other states are dramatically higher as a percentage of house value and can be raised at the whim of local and state entities.
Commercial real estate
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 technically 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 owned by large companies 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, with companies taking a lesser percentage of the overall tax burden than private homeowners.
Smaller property owners do not have the "shell company" advantage that large property owners do. As an 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.
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" such as the Cerritos Auto Square, and strip malls anchored by big-box stores such as Costco and Wal-Mart. Cities that have been notably successful with this strategy include Cerritos, California, Culver City, California, Emeryville, California, and Union City, California. 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.
According to Dan Walters, "...in the uncertain days following passage of" Proposition 13, the "California Teachers Association and other school interests created an Education Coalition that wages constant war in political and legal arenas to protect its share of the state budget." Walters credits Proposition 98 as a significant victory for the "Education Coalition."
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, believing that taking such a step 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 advocated its repeal drew heavy criticism from its supporters.
A Field Poll survey of 1,005 California voters was conducted between September 18-October 5, 2009. This poll indicated that about 69% of voters oppose amending Proposition 13 to allow the California State Legislature to increase taxes with a simple majority vote. Only 27% of those polled would like to see that change. 52% of those polled also oppose the idea of amending Prop 13 in order to tax commercial property at a higher rate than residential property.,
- Arizona Proposition 13 (2010), the Arizona version of Proposition 13
- Massachusetts Proposition 2.5 (1980), the Massachusetts version of Proposition 13, passed in 1980.
- Amador Valley Joint Union High School District v. State Board of Equalization
- Full text of amendment
- Legal Constraints on Local Control
- Howard Jarvis Taxpayers Association
- Smith, Daniel A. (1998) Tax Crusaders and the Politics of Direct Democracy, New York: Routledge. ISBN 0415919916
- "Proposition 13 Then, Now and Forever" by Stephen Moore
- ↑ 1.0 1.1 New York Times, "California to Use Deflation in Assessing Property Taxes", December 1, 2009
- ↑ 2.0 2.1 Time, "How California's Fiscal Woes Began: A Crisis 30 Years in the Making", July 1, 2009
- ↑ San Francisco Chronicle, "Attitudes shift on abortion, same-sex marriage", August 5, 2009
- ↑ New York Times, "Pinch of Reality Threatens the California Dream", July 21, 2009
- ↑ New York Times, "The Least Affordable Place to Live? Try Salinas", May 7, 2006
- ↑ Text of Nordlinger v. Hahn
- ↑ CalTax, "Cure Proposition 13 'Sickness' by Reassessing Commercial Property, Boosting the Homeowners' Exemption and Cutting the Sales Tax", February 2000
- ↑ Hoover Institute's analysis of 1978 ballot propositions
- ↑ Central Valley Business Times, "Recession spurs first time property tax reductions", November 30, 2009
- ↑ Fresno Bee, "Dan Walters: Judges quarrel as California fiscal crisis worsens", November 16, 2009
- ↑ Field Poll Online, "Polling on the Next 10 Questions", October 14, 2009
- ↑ San Francisco Chronicle, "Field Poll: Support for Constitution Changes", October 14, 2009
Portions of this article were adapted from Wikipedia.