Well over half the California electorate was ineligible to vote (or, like me, wasn’t even alive) in the June 1978 election that witnessed the passage of Proposition 13. Anyone under age 50 has never been given an opportunity to vote on its core principle of limiting property tax increases even though property taxes are one of the most effective and fair forms of revenue generation available to government.
Instead we have had 31 years of a state politics that treats Prop 13 as a sacred cow, mostly out of assumption and not reality. Most voters would like some sort of assurance that property taxes won’t force them out of their homes, but polls show that they also aren’t big on the undemocratic rule-by-minority that Prop 13 set up with its iteration of the 2/3 rule. Polls also show that voters don’t support giving businesses the same property tax protections that grandma enjoys.
In the 2002-03 budget crisis there was some talk of revisiting Prop 13, but it quickly faded. Without any leadership the issue died a quick death, as Arnold and the legislature borrowed our way out of the crisis and as the housing bubble took off.
Now, as two articles in today’s SF Chronicle note, there is increasing talk about Prop 13. But action on the matter is less clear than ever. Joe Garofoli does a good job examining the debate over Prop 13:
But this year, with California and the nation in the throes of the worst economic crisis in decades, some provisions of the 1978 measure – which curbed revenue for key state programs, particularly public education – may be open for discussion.
No changes just yet; just discussion.
One major challenge: There is no roadmap for changing Prop. 13. While the measure inspired a popular revolt against property taxes in the years after it was enacted, no other state has the same mix of property tax limits and the two-thirds majority required to pass budgets and increase taxes.
Government reform is the talk of the day, and whether you’re California Forward, the Bay Area Council, the Parsky Commission, the “joint committee to examine reforms to state government” the Legislature is likely to convene in a few weeks, or the Courage Campaign (where I am public policy director, and where we’ve been actively involved in government reform for years), you’ve realized that Prop 13 has to be part of the discussion.
One of the core aspects of the discussion is fixing the relationship between state and local governments. When then-gov. Jerry Brown and the state legislature decided to use a temporary budget surplus to bail out local governments, they set in motion a process by which counties and cities and school districts have lost most control over their own funding decisions. The 2/3 rule has made it even more difficult for localities to find their own solutions. If a community wants to support their local schools with a tax increase, it is very difficult to accomplish it.
Michael Cabantuan’s article focuses on SF City Assessor Phil Ting’s Close The Loophole effort to exempt commercial property from the Prop 13 tax protections. Polls show this “split roll” solution to be popular with voters, and it is a sensible method of restoring progressivity to the tax code.
And yet other key aspects of Prop 13 need to be in the mix as well. If we want to talk Prop 13, well, let’s really talk about it. Is it right for residential property owners to enjoy artificially low property taxes? Should a high-income property owner in Carmel or Woodside enjoy the same protections as a low-income homeowner in Soledad or East Oakland? Should we continue to build a homeowner aristocracy?
What of the effects of Prop 13 on the housing market? Since 1978 California has experienced two massive housing bubbles. The 1980s bubble, which seemed large at the time, was primarily focused on California, and caused widespread unaffordability before the 1989 crash. The 2000s bubble was a nationwide phenomenon, but Prop 13 played a role by removing a brake on housing inflation. If homeowners saw tax assessments rise in relation to their values, instead of being largely fixed at the rate at the time of purchase, it seems unlikely that we would have had the enormous and destructive boom and bust in the housing market we witnessed.
More over the flip.
Prop 13 distorts the market in several ways, as a 2005 report from the National Bureau of Economic Research noted. It creates a disincentive to sell, as those who were able to buy at a more affordable time and lock in a low tax rate hang on to their properties, locking out newer, younger, and more diverse buyers. First-time homebuyers, a key part of the market nationwide, are screwed in California, where they have had to seek the urban fringes to find affordability – or in the 2000s, seek subprime loans. The system fuels massive sprawl, unsustainable lending practices, while driving property values up to totally unreasonable and unaffordable heights here on the coast.
Prop 13 also plays a role in killing local businesses by pushing cities to seek big box stores to fill local coffers. The New York Times in offered a 2006 article on how Salinas, of all places, had become the least affordable place in the nation to buy a home:
The measure, which was supposed to facilitate home buying, has backfired to some extent; local governments prefer that land be used for retailing rather than housing because they collect more from sales taxes than from property taxes.
“Proposition 13 is a big stop sign saying ‘no housing needed,’ ” said Peter Dreier, professor of public policy at Occidental College in Los Angeles and an author of “Place Matters: Metropolitics for the 21st Century” (University Press of Kansas, 2001). “Every municipality is engaged in a bidding war for retail – they’re battling for Wal-Mart, to keep the libraries open.”
Sprawl, unaffordable housing, a foreclosure crisis, the inability to keep schools open – all these are some of the lasting impacts of Prop 13. Certainly there are others and I invite discussion of them in the comments. But if we are to talk about Prop 13, let’s have a wide-ranging and inclusive discussion about Prop 13 and the full range of its destructive impact on the state.
Among the easy Prop 13 traps to fall into is the notion that local government consists of cities, counties and school districts. With that simplistic thinking, the problem statements revolve around fiscalization of land use and insufficient money for schools. But California has something like 2000-3000 other units of local government that are independent of cities and counties and have NO ability to raise sales tax revenues through land use authority. That would be the many many special districts that provide services all over California. Services people depend on like sewer, water, parks, libraries, hospitals, airports, vector control, levees, electrical power, irrigation, marinas, fire protection and other community services. Their revenue bases are tied to property taxes and fees. Property taxes got clobbered by Prop 13 and fees can only be raised so high until the customer base (people, groups, businesses) can no longer afford to pay them. Still, a great many special districts have very limited fee capability. Those would be “non-enterprise” districts that provide services like parks, libraries or fire protection. You can only raise so much fee revenue from overdue book fines or after-school activity fees. Back in the day, the Governor and the Legislature came to the belated realization that Prop 13 screwed local governments, so they arranged a “rob from Peter to pay Paul” scheme (AB8) that kept most jurisdictions away from the brink of total ruin. But then the schools whined they didn’t get enough of the bread crumbs, so the Governor and Legislature “redistributed” money away from cities, counties and special districts to prop up schools via yet another shell game, ERAF. Along the way, the anti-tax thugs raised stinks about the horrors of letting local governments pass bond measures and tax levies with majority vote procedures and tricked the voters (with help from the stenographic MSM) into making it virtually impossible to pass local tax measures. Then the schools whined some more and got some relaxation from the ultra-super-majority assessment requirements down to a 55% super-majority assessment requirement. All other units of local government still have to muster up 67% approval. Oh, yes, there’s that other voter process whereby large property owners get extra votes and renters don’t get to vote. That one’s stacked in favor of the anti-tax thugs, to. Meanwhile, the state gets to pass bond acts with 50%+1. Prop 1A of 2004 slowed the ERAF bleeding a little by setting limits on the regular racheting up of the ERAF transfer amounts and painted the Governor and Legislature into a corner whereby they would have to fess up to picking local government pockets, but did not prevent them from doing so. Like we heard a few days ago, the Governor and the Legislature are still eyeing local government bank accounts (such as they are) for some kind of additional smoke, mirrors and pixie dust state budget fix. Well, mostly its the Governor and the uber-right Republicans leading that charge.
But, you ask, what’s the point of this rant? Answer, if you value the services you get from your local government and you think Prop 13 needs to be fixed to keep those services coming, you need to remember that the picture isn’t complete without the services you get from special districts. And, since your special district does not get sales tax money, the fix winds up being much more complicated than would happen if “local governments” were simply the combination of cities, counties and school districts.
And you’ve touched on one of my long-standing core beliefs, which is that our entire tax system is broken.
Cities have been encouraged to abuse redevelopment to launder property taxes into sales taxes. Mello-Roos fees, HOA’s, and toll roads have transferred government services to entities that are far less efficient than local governments.
Our county government structure, which delivers many state services, is patently absurd, and incredibly inefficient.
Efforts to plan for a more sustainable society are stymied when we have completely different agencies managing transportation and land use planning, with absolutely no ability to provide coordinated financial incentives towards goals.
We need to talk about all of these issues.
When you start to talk about this, you get the same problem as when you start to talk about our crazy quilt of water rights, which is the idea that “We stole it fair and square.”
We’re heading towards a great reset of government in California.
Will it look more like Sweden or Somalia?
Of the two primary effects of Prop 13 — limits to the property tax rate and restrictions on reassessments — the latter is a much bigger problem than the former. There’s a trade-off between higher property tax rates and higher home prices that hinders your ability to raise more revenue: people factor higher property taxes into their buying decisions, dampening demand and lowering home prices. This is not an obvious win-win from either an equity perspective (after all, poor homeowners now have to pay higher property tax rates) or from a revenue perspective (rates are higher, but on lower AVs). And regardless of the effects of Proposition 13, the way of doing government business before 1978 — whereby cities, counties, and special districts would simply spend what they wanted and submit their bills to the County Assessor for inclusion on the property tax rolls — was genuinely bad.
The much greater problem is the lock-in of assessed valuation. This actually is a clear detriment to equity (every expensive neighborhood in California — which is pretty much all of them — has at least once homeowner who’s been around 20 or 30 years and pays around $500/year in property taxes), is a market distortion that grows stronger the longer the resident or business owner stays, and causes a serious dent in revenues when the state needs them more than ever.
The upside to the lock-in from an equity standpoint is that it most benefits senior citizens who have been in their homes a long time, and are often now on fixed incomes. Being forced to sell their homes and relocate at the twilight of their lives, or worse, staying and becoming house poor off a brutal property tax bill that is no fault of theirs, are not acceptable solutions to the problem.
What I propose then is an AV “reset” to current market prices. Residential and commercial reassessment would continue to happen after resale, as it does now. It would also have to happen at least once every 5 years, at the homeowner’s discretion. Retired seniors on fixed incomes could elect to have their property tax bills added as liens to their homes (up to, say, 50% of the home’s value) to be paid off at resale.
I think this compromise works because it a) protects the dignity of a vulnerable population (poor seniors), b) gives homeowners an reassessment option they can work with (a 5 year clock), and c) only marginally affects current market prices (which are driven by new owners, who would now face slightly higher financial risk in terms of a tax bill that could go up by more than 2% a year, but I imagine they wouldn’t price this added risk very highly).
How would you get Howard Jarvis et al. to sign on to this? It’d be tough, no doubt. I imagine, though, that if you came up with a reasonable state spending cap (tying government spending, say, to gross state product, which would account for changes both to population and income), and employed a lot of prayer, you might be able to “swap” out the lock-in.
Prop 13 particularly distorts the commercial property sector. Because taxes are so low on property that has been owned for a long time relative to property that is bought now, all kinds of tax-avoidance schemes get involved in the transfer of property.
It also discourages new business formation because new businesses do not have the advantages this gives to existing owners of commercial property.