Proposition 13 Under Increased Scrutiny as California Faces Economic Crisis | Link TV
Proposition 13 Under Increased Scrutiny as California Faces Economic Crisis
The 1978 passage of Proposition 13 was part of a nationwide anti-tax wave, spurred by residents’ frustration with high inflation and soaring property taxes. It was a pivotal moment in California history when, critics say, individual needs overruled those of society as a whole —and the long-term ramifications are still being debated to this day.
The measure placed strict limits on both residential and commercial property taxes. Under Proposition 13, property taxes can’t exceed 1% of the assessed value. The value can increase by only 2% annually or the rate of inflation (whichever one of these is less). If the property is sold, or if major construction occurs, then the property is reassessed at market value. Also, if the property declines in value because of changes in the real estate market, then Proposition 8 authorizes the assessed value to be temporarily reduced.
Meanwhile, Proposition 13 also restricts efforts by state and local governments to increase taxes. One requirement: proposals to increase state taxes must be approved by two-thirds of the California Legislature. It also requires two-thirds voter approval for local taxes for special purposes.
The measure has plenty of critics, who say that it has severely damaged the quality of public services in California. Many critics describe Proposition 13 as unfair to young people, the poor, and racial minorities — leading to greater inequality in society.
The impact on public schools has been especially severe.
More Stories about Prop 13
“It was a major turning point in education funding in California,” said Carrie Hahnel, an independent researcher and consultant who specializes in education policy.
Faced with a loss of property tax revenue to support public schools, the state government has needed to fill in the gaps. However, the state relies heavily on income tax revenue, which many experts consider to be more volatile. This has led to a “boom and bust” cycle in California — in which funding for public schools varies greatly, depending on the state of the economy.
On the other hand, Proposition 13 supporters say the measure has reduced uncertainty for many homeowners and employers, allowing them to thrive.
Now, with the economic downturn resulting from the COVID-19 public health emergency, the impacts of Proposition 13 are under greater scrutiny. Many reform efforts are being considered — including Proposition 15, the November 2020 ballot measure that would raise property taxes on businesses.
One thing is clear: it won’t be easy to reach consensus on the best way forward.
Origins of Proposition 13
Proposition 13 emerged during a financially turbulent time, as residents worried about skyrocketing property taxes.
According to the California Legislative Analyst's Office, before Proposition 13, the average tax rate on property in the state was 2.67% applied to the property’s assessed value (which increased with market value). High property taxes sparked the anger of voters, leading to a “taxpayer revolt.”
Policy activist Howard Jarvis championed the cause of “taxpayers’ rights,” and he helped lead the effort to get the measure on the ballot. In 1978, Proposition 13 won the support of 65% of voters.
Proposition 13 limited property tax rates to 1% (with some exceptions to repay local bond debt). Factoring all of that in, the average property tax rate today is about 1.25% applied to assessed valuation at the time of purchase, not the true property value, according to Dowell Myers, a USC professor of urban planning and demography. Additionally, Proposition 13 capped the increase in assessed value at 2% per year.
“So only the new buyers pay full taxes, often young people who hardly have that kind of money,” Myers said.
The ballot initiative led to many changes in California, in a variety of areas.
Homeowners did have legitimate financial concerns during the 1970s, Hahnel emphasized. In her view, though, Proposition 13 wasn’t the right approach to solve the problem. While some property owners have benefited from the measure, it also has had damaging effects on schools and other community services, she said.
According to Hahnel, the 1978 ballot initiative created a "boom and bust cycle of education funding," tied to the volatility of the personal income tax.
The K-12 educational system is funded by a combination of federal, state and local money.
Before Proposition 13, property taxes accounted for more than half of district revenues, according to a new report by the nonpartisan research center Policy Analysis for California Education (PACE). But since its passage in 1978, local property taxes have been drastically limited.
Overall, state funding currently comprises 59% of school district revenues, while 21% of revenues are from local property taxes, according to the PACE report. In addition, 12% comes from other types of local funds, and the federal government provides 8%.
“As the local property tax share has declined, the state share has increased,” according to the report. “This has made education funding more volatile than in other states due to the relative volatility of the state’s tax revenues, which are highly dependent on individual income taxes.”
“In good economic years, education funding surges as California’s top income earners do well, particularly in the stock market,” the report states. “In bad economic years, education funding suffers as earnings from capital gains and dividends evaporate.”
School districts have a funding “bucket,” and they fill in as much as possible with property taxes, Hahnel explained.
In general, school districts in high property-wealth regions depend less on state funding, compared to those in low property-wealth areas.
If a recession occurs, and the state government can’t afford to fill in the funding gaps, then the low property-wealth regions tend to be hit the hardest, said Hahnel, lead author of the PACE report.
Although education funding has improved in recent years, it’s still underfunded, “relative to other states, and relative to our needs,” Hahnel emphasized.
In California, per-pupil spending was about $13,100 in 2018-2019, according to state data, which the authors adjusted for inflation. That's an increase from six years earlier when per-pupil spending was $9,680.
When compared to other states, though, the picture isn’t good. California ranks 39th in school spending nationwide, according to the report.
In terms of education spending, California theoretically should rank as one of the top three or four states, considering that it has so much wealth, according to Stephen Menendian, assistant director at the Othering & Belonging Institute at UC Berkeley. However, Proposition 13 has played a significant role in the underfunding of public schools, he said.
The effects of the underinvestment aren't spread equally across society. In general, wealthier parents can better afford to send their children to private schools, said Jennifer Imazeki, an economics professor at San Diego State University. The most detrimental impacts typically are felt by poor and minority families, she said.
For their part, Proposition 13 supporters view the situation much differently.
The per-pupil spending figures include pension costs for teachers and other school employees, said Susan Shelley, spokeswoman for the Howard Jarvis Taxpayers Association.
According to Shelley, those expenses are draining the education budget, and changes to the pension system are needed so that more money goes to classroom instruction.
In response, Hahnel said that it’s fair to point out that the spending numbers include pension costs. But she also noted that California teachers don’t participate in Social Security. Also, strong pension systems can be viewed as a way to recruit and retain high-quality teachers, Hahnel added.
Stronger State Role
Over time, school funding decisions have shifted away from local governments and toward Sacramento. This shift in control began with a series of California Supreme Court decisions in the 1970s.
In the Serrano v. Priest cases, the court held that disparities in local property wealth couldn’t translate into disparities in school funding, according to Hahnel. These court decisions required the state government to offset inequities in the system.
“After Serrano, the state was required to kick in additional aid for low property wealth districts in order to bring all districts up to an adequate minimum level of funding,” Hahnel said.
While Serrano v. Priest began the process of centralizing school funding decisions, Proposition 13 also contributed to this shift.
Proposition 13 “gutted property tax revenues, requiring that the state put more funding into the system to ensure school districts were adequately funded,” Hahnel added. “This compounded the effect of moving decision making around school funding from the local level to the state level.”
In Hahnel’s opinion, the Serrano v. Priest cases benefited school districts, while Proposition 13 has had a harmful effect overall.
Other Public Services
Proposition 13 limited tax revenues that fund not only schools but also many other local services. These include fire and police departments, libraries, parks and other services.
According to Menendian, Proposition 13 is a “structural fiscal constraint” that makes it difficult for local governments to raise money.
“It starves municipalities of revenue,” Menendian said.
The state will need to make massive cutbacks due to the current economic crisis — and the impacts will filter down to the local level, he said.
With the economic damage arising from the coronavirus public health emergency, California now faces a $54 billion budget deficit. It's a sharp change from January when there was a projected $6 billion budget surplus.
One way the impact might be felt locally: municipal bankruptcies. In the wake of the last recession, many cities in California filed for bankruptcy. As the current economic downturn unfolds, history might repeat itself.
Property Tax Rates
Many business groups and anti-tax activists support Proposition 13. From their viewpoint, the caps on property taxes have provided a major boost for homeowners and companies.
“It has kept many homeowners in their homes,” said Tracy Hernandez, CEO of the Los Angeles County Business Federation (BizFed).
Also, she added: “It has enabled small businesses to grow and expand.”
Shelley also praised the measure, saying that its passage in 1978 reduced stress for many property owners.
“For the first time, people could predict with certainty what their property tax bill would be,” Shelley said.
Critics of Proposition 13 acknowledge that the measure has helped some people — especially those who have owned their property for a long time. Nevertheless, they say there’s been a huge cost to the rest of the state.
According to Menendian, it has exacerbated the “effective tax rate disparity” between different regions in the state.
A 2016 report by the real-estate website Trulia highlights the disparities. For instance, the report found that the ballot measure led to $12.5 billion in overall tax savings for homeowners in 2015 — but some people benefit more than others. According to the research, the lowest tax rates are paid by residents of wealthier cities.
In the view of many critics, Proposition 13 has worsened racial inequality.
EJ Toppin, a researcher at the Othering & Belonging Institute, wrote in a blog post: “Because of redlining and other racist, exclusionary practices in real estate during the twentieth century, most homeowners were white at the time of Prop 13’s passage.”
He added: “This racial imbalance in homeownership rates persists today. Since the provision discourages moving, it has made it harder for people of color to enter the housing market in California.”
Another way of looking at Proposition 13 is through the lens of age.
Myers concludes that the measure has resulted in a widening generational disparity.
“The generation once thought at risk for eviction from their homes because of high property taxes has now captured a California windfall,” he wrote in a 2009 report.
His research found unequal tax savings arising from Proposition 13, varying greatly based on age.
"Groups with high payments and below-average tax savings necessarily subsidize the groups with low payments and above-average savings," he stated in the report.
Another vocal critic of Proposition 13, Los Angeles economist Christopher Thornberg, also blasts the measure as unfair to young residents.
“It puts an undue burden on young people, who are the future of the state,” said Thornberg, founder of Beacon Economics.
He sees the need for comprehensive fiscal reform — noting that the state has high-income taxes for wealthy residents, but low property taxes under Proposition 13.
Regarding Proposition 13, a better approach would be a property tax break specifically for older homeowners, according to Thornberg.
Proposition 13 was designed for an emergency situation in the late 1970s, but the measure ultimately has created a long-term structural problem, Myers told KCET. It has led to underfunded schools, which has major implications for employers, he said.
Education is for the future, “so that the economy in 20 years will have really good workers,” Myers said. This is especially crucial as the Baby Boomer generation continues to retire.
However, Shelley questioned whether it's government's role to "equalize the playing field" between different generations.
She said that young adults have certain advantages compared to older people, such as generally being more employable. However, Myers noted that today's young people are generally more burdened by high student loan debt than Baby Boomers decades ago when they were attending college.
For the young, Proposition 13's ripple effects can also be seen in the housing market.
According to Imazeki, many homeowners have a disincentive to move because their taxes stay low as long as they keep their property. She sees this as a key reason for the housing shortage, which drives up home prices.
The approval of Proposition 13 led to a new era, in which severe fiscal constraints hobbled funding for vital community services.
From the perspective of some critics, it represented a major shift — from a focus on the needs of the entire society to a focus on people's own individual interests.
In the 1970s, Howard Jarvis’ emphasis on property “rights” seemed to resonate with many California residents, according to Hahnel. She said that this is often a coded way to convey the idea of “hoarding what’s mine, rather than investing in the collective good, and the future.”
Some even see a darker side to Proposition 13.
Not only did the measure have racist impacts, but there were also underlying racist undertones, according to these critics.
According to an article by USC sociology professor Manuel Pastor, a major demographic shift was underway in the 1970s, sparking tensions in society. One major change: the share of young people who were minorities was increasing.
Hahnel also sees the measure through this prism.
“I do think there were racist undertones,” she said, driven by changing demographics and fear of immigration.
But this isn’t a universal opinion.
From Menendian’s perspective, Proposition 13 has had racist effects at a structural level. Still, he doesn’t perceive it as inherently racist.
For his part, Thornberg said the ballot measure isn’t racist — instead, it’s “generationalist.”
Shelley, of the Howard Jarvis Taxpayers Association, said unequivocally that no racism was involved.
“Proposition 13 had nothing to do with race or racism,” she said.
Proposals aimed at reforming Proposition 13 were already being debated before the 2020 economic downturn. The current economic crisis is only intensifying reform efforts.
According to the PACE report, the COVID-19 emergency has created even more challenges for schools. For one thing, many students are struggling with the situation, both academically and emotionally. Meanwhile, schools must face the high costs of adjusting to the crisis, while also tightening their budgets.
The report aims to find potential solutions for both the short-term and the long-term.
Among the recommendations:
- request more federal funding
- find new and stable revenue sources, at both the state and local level
- develop a comprehensive plan for education funding
One reform proposal in the spotlight is Proposition 15, which is on the November ballot. The measure would limit the reach of Proposition 13 by increasing property taxes for large businesses. Its supporters include a philanthropic group run by Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan.
Under Proposition 15, commercial properties would be reassessed every three years, based on the current market value. It would exempt business properties that are worth $3 million or less. The ballot measure wouldn’t apply to residential properties.
According to the California voter guide, the measure would generate an estimated $6.5 billion to $11.5 billion in new funding annually.
Proposition 15 would improve the quality of schools and other local services and would create greater racial equality, according to a Sacramento Bee article by John A. Powell, director of the Othering & Belonging Institute.
Although Menendian perceives some flaws in Proposition 15, he still supports it. He noted that it likely would provide even more incentive for municipalities to build commercial space instead of residential housing. Nevertheless, he said he backs the measure because it would generate desperately needed revenue.
Proposition 15 also has generated strong opposition.
The measure’s critics include Hernandez and Shelley, who say that it would hurt small employers that are already struggling during the pandemic.
Many small businesses rent space in shopping malls or other locations. Under standard commercial lease agreements, these tenant businesses must pay property taxes for that space, Shelley explained.
If these extra costs are heaped on small businesses, they might be forced to lay off employees or raise the price of their products, according to Hernandez. The higher costs ultimately might drive businesses out of state, Shelley added.
There is also debate over other aspects of Proposition 15.
According to Shelley, the measure would make commercial property taxes a more volatile revenue source. In the event of a recession, commercial property values would drop, affecting property tax revenue, she said.
In Hahnel’s view, though, Proposition 15 would create more stability.
“The property tax is widely considered to be one of the most stable taxes,” Hahnel explained. “A system that is more heavily comprised of property taxes would be less susceptible to economic fluctuations than the system we have now, which is heavily based on income taxes.”
Proposition 15 would “not only help increase revenues for California but would also help smooth out revenues for schools and communities,” she added.
Any attempt to completely repeal Proposition 13 likely would face major obstacles, as shown by public opinion polls.
In a survey conducted by the Public Policy Institute of California (PPIC) for the measure’s 40th anniversary, for instance, respondents were given a brief summary of its tax restrictions. When asked if Proposition 13 was overall “mostly a good thing for California or mostly a bad thing,” 57% said that it was mostly a good thing.
Survey results on this topic have been fairly consistent over the past two decades, said Mark Baldassare, president and CEO of PPIC.
Many people like the idea of stable property taxes for homeowners, he noted.
“There is a solid and consistent group of people who feel like we shouldn’t change this,” Baldassare said.
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