California Schools Suffering as Proposition 13 Tax Cap Breeds Fiscal Chaos
Three decades after Californians voted to limit their property taxes and helped start a national revolt with Proposition 13, some consequences are still emerging.
The average California real-estate tax rate is 60 percent lower than when the law passed in 1978, according to the Board of Equalization, the state’s tax administrator. The most populous U.S. state ranks 28th nationally in combined state and local property-tax collections per person in a 2011 study by the Washington-based Tax Foundation.
Yet the measure that inspired tax-limiting laws in New York and New Jersey is also blamed for California’s perennial budget crises, the proliferation of strip malls and auto dealerships, a decline in the state’s once top-10 ranking for spending on students and unequal tax bills among neighbors.
“Prop. 13 helped usher in the modern anti-tax movement,” said Robert Ward, the deputy director of the Rockefeller Institute of Government in Albany, New York. “Now, other states look at Prop. 13 as an example of what to avoid.”
Proposition 13 was born in a petition drive that gathered enough signatures to get on a statewide ballot, bypassing the legislative process. It passed with 65 percent of the vote.
The measure rolled back and froze assessments for both residential and commercial property at 1976 levels. It set the tax rate at 1 percent of that valuation, and limited annual increases of the value to 2 percent. Only when property is sold is its value reassessed. That means people who have owned the same property for years may have a far lower tax bill than a neighbor who just bought a comparable home.
If it weren’t for the tax cap, “a lot more Californians would be called Oregonians or Nevadans,” said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, named after the initiative’s late author. “We have a high-tax state. People see jobs and taxpayers leaving the state. People see that the only defense they have is Prop. 13.”
In the first year under the new system, property tax collections dropped 52 percent to $4.9 billion from $10.3 billion in 1978, according to Board of Equalization data.
Cities and counties, unable to raise property taxes, realized that one way to get more revenue was to encourage businesses that generate sales taxes, such as auto dealerships and strip malls. California’s statewide sales-tax rate, which was lowered to 7.25 percent from 8.25 percent this month, is still the highest in the U.S. Local governments are allowed to add as much as another 1.5 percent.
Cities, Counties, Schools
Before Proposition 13, cities, counties, school districts and other local agencies could set their own tax rates and collect and spend the proceeds as they saw fit. The ballot measure changed that, putting the state in charge of allocating proceeds of a property tax set at a statewide, uniform rate.
“Very few people anticipated the increased role of Sacramento as a byproduct of 13’s passage,” said Dan Schnur, a Republican former political consultant who now directs the Unruh Institute of Politics at the University of Southern California, in Los Angeles. “Arguably that’s had as great an impact on how California functions as the freeze on property taxes did.”
Proposition 13 also required that any statewide tax increase be approved by a two-thirds vote of each chamber in the Legislature. The struggle to find compromise to fill deficits without higher levies led to a record 100-day late spending plan in 2010. The previous year, the state ran out of cash and had to issue $2.6 billion of IOUs.
Critics such as Assemblyman Tom Ammiano, a San Francisco Democrat, say Californians eventually will have to come to terms with what he called an inequitable tax structure that sapped schools of funds and lets business avoid assessments.
Since Proposition 13 became law, California has slid from 7th place among states to 27th place in spending per pupil, according to the U.S. Census Bureau, as the law constricted the biggest traditional source of education money.
Ammiano, a former public-school teacher, has introduced a bill that would create a tiered system that would assess commercial and industrial property differently from residential. It would require land and buildings owned by publicly traded companies to be reassessed every three years instead of just when the assets change hands.
“I know there is a way to do it, where seniors are protected and without making public education suffer,” Ammiano said in a telephone interview. “There’s a way to do to it that makes commercial property man up and stop playing Three-Card Monte with this law for their own advantage.”
Effort to Weaken
Governor Jerry Brown, a Democrat who was also governor when Proposition 13 was enacted, said in June at a San Francisco housing conference that his failure to win Republican support to extend $11 billion of now-expired taxes and fees to offset deeper spending cuts may spur a move to weaken Proposition 13’s commercial property protections.
“I believe there will be efforts to accelerate the reassessment of commercial property,” he said. “I think the core of Prop. 13 is very important to Californians.”
Vosburgh of the Jarvis Taxpayers Association said any attempt to weaken Proposition 13 is doomed to fail, as opposition is driven by a “fringe element” of public-employee unions with limited support. Proposition 13 remains as valid now as it was in 1978, he said, with only one possible change.
“Well, maybe they could reduce the tax rate,” he said.
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