California Proposition 13 (1978)

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Proposition 13 (officially named the People's Initiative to Limit Property Taxation) was an amendment of the Constitution of California enacted during 1978, by means of the initiative process. It was approved by California voters on June 6, 1978. It was declared constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article 13A of the Constitution of the State of California.[1]

The most significant portion of the act is the first paragraph, which limited the tax rate for real estate:

Section 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 decreased property taxes by assessing property values at their 1975 value and restricted annual increases of assessed value of real property to an inflation factor, not to exceed 2% per year. It also prohibited reassessment of a new base year value except for in cases of (a) change in ownership, or (b) completion of new construction.

In addition to decreasing property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases of any state tax rates or amounts of revenue collected, including income tax rates. It also requires a two-thirds vote majority in local elections for local governments wishing to increase special taxes. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States.[2]

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 during 1980. However, of 30 anti-tax ballot measures that year, only 13 measures passed.[3]

A large contributor to Proposition 13 was the sentiment that older Californians should not be priced out of their homes through high taxes.[4] The proposition has been called the "third rail" (meaning "untouchable subject") of California politics, and it is not popular politically for lawmakers to attempt to change it.

Background[edit]

Proposition 13 drew its impetus from 1971 and 1976 California Supreme Court rulings in Serrano v. Priest,Serrano[›] that a property-tax based finance system for public schools was unconstitutional.[neutrality is disputed] The California Constitution required the legislature to provide a free public school system for each district, and the Fourteenth Amendment of the United States Constitution (which includes the Equal Protection Clause) required that 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 lesser tax rate than the rate a less affluent district would have to set 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. As a result, 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 resulted in increased demand for housing, resulting in greater residential property values and, consequently, greater taxes for residences. Many older Californians with fixed incomes had difficulty paying increasing property taxes. Due to severe inflation during the 1970s as a result of the 1973–75 recession, reassessments of residential property increased property taxes so much that some retired people could no longer afford to remain in homes they had purchased long before. Government spending had also increased dramatically during the years prior to 1978. Between 1973 and 1977, California state and local government expenditures per $1000 of personal income were 8.2 percent higher than the national norm. From 1949 to 1979, public sector employment in California outstripped employment growth in the private sector. By 1978, 14.7 percent of California's civilian work force was state and local government employees, almost double the proportion of the early 1950s.[5]

During the early 1960s, there were several scandals in California involving county assessors.[5]

The measure[edit]

Howard Jarvis and Paul Gann were the most vocal and visible advocates of Proposition 13. Officially named the "People's Initiative to Limit Property Taxation," and known popularly as the "Jarvis-Gann Amendment," Proposition 13 was listed on the ballot through the California ballot initiative process, a provision of the California constitution which allows a proposed law or constitutional amendment to be offered to voters if advocates collect a sufficient number of signatures on a petition. Proposition 13 passed with almost 65% of those who voted in favor and with the participation of nearly 70% of registered voters. After passage, it became article 13A of the California state constitution.

By Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This "assessed value," may be increased only by a maximum of 2% per year, until and unless the property has a change of ownership.[6] At the time of the change in ownership the low assessed value may be reassessed to complete current market value which will produce a new base year value for the property, but future assessments are likewise restricted to the 2% annual maximum increase of the new base year value.

If the property's market value increases rapidly (values of many homes in California appreciated at annual rates averaging more than 10% in the decade ending with 2005) [7] or if inflation exceeds 2%,[8][9] the differential between the owner's taxes and the taxes a new owner would have to pay can become quite large; and, in fact, one or both of these situations occurred in most of the years since 1978.

The property may be reassessed under certain conditions other than a change of ownership, such as when additions or new construction occur. The assessed value is also subject to reduction if the market value of the property declines below its assessed value, for example, during a real estate slump. Reductions of property valuation were not provided for by Proposition 13 itself, but were made possible by the passage of Proposition 8 (SCA No. 67) during 1978 which amended Proposition 13. Such a real estate slump and downward reassessments occurred during 2009 when the State Board of Equalization announced an estimated reduction of property tax base year values due to negative inflation.[10][11] Property tax in California is an Ad valorem tax meaning that the tax assessed (generally) increases and decreases with the value of the property.

Outcome[edit]

CAJun1978Prop13.svg
Proposition 13
Choice Votes  %
Referendum passed Yes 4,280,689 62.6%
No 2,326,167 34.0%
Invalid or blank votes 236,145 3.4%
Total votes 6,843,001 100.00%

Analysis[edit]

Positive effects[edit]

Advocates argue that Proposition 13 has provided predictability for property owners, and increased community stability. They argue that, while progressive income tax structures affect higher incomes, property taxes take a higher percentage of lower incomes, for those people who own a highly valued property but have lower incomes. It is pointed out that state income tax and sales tax were started during the Great Depression,[12] when taxpayer resistance began due to property taxes that unemployed workers could not pay. According to the Center for Governmental Analysis, between fiscal years 2000 and 2005 property tax revenue has increased 22.11%, while personal income per capita has increased 13.80% and general per capita revenue 21.93%.[13]

Estimates are that Proposition 13 has reduced taxes paid by California taxpayers by an aggregate $528 billion (value retrieved 31 May 2009).[14]

Other groups, such as the California Taxpayers Association, citing "The Future of Proposition 13 in California," California Policy Seminar, March 1993, University of California, authored by Arthur O’Sullivan, Terri A. Sexton, and Steven M. Sheffrin, argue that the tax is progressive, and that acquisition-value assessments seem to provide property tax equity.[15]

Advocates of Proposition 13 argue that the restriction of tax increases for previously owned property has decreased the volatility of funding for municipalities. They claim that pre-Proposition 13 property tax revenue was almost three times as volatile.[15]

During 2009, the State Board of Equalization noted that only five times since the passage of Proposition 13 was the annual increase less than the permitted 2%, and that the estimated adjustment for 2010 would be negative, for the first time since the passage of Proposition 13.[10]

David Doerr argues that the "acquisition value system" acts as a control to overspending due to high real estate values, while permitting a source of revenue growth in times of recession. Local governments would then have to decrease spending more severely when the housing market decreased.[16]

According to the California Building Industry Association, construction of a median priced house results in a slight positive fiscal impact, as opposed to the position that housing does not "pay its own way". The trade association argues that this is because new homes are assessed at the value when they are first sold.[17] Additionally, due to the higher cost of new homes, the trade association claims that new residents are more affluent and may provide more sales tax revenues and use less social services of the host community.[18]

Proposition 13 remains popular among Californian likely voters, who are mostly homeowners.[19] Among likely voters, 53% described Prop 13 as "mostly a good thing" while 33% responded that it was "mostly a bad thing" in a 2006 Public Policy Institute of California survey. For adults who are not likely voters (mostly renters), Prop 13 was unpopular—- only 29% approval to 47% disapproval. Among California adults, overall approval was 47% approval to 38% disapproval.[20] Periodic newspaper accounts report high voter approval.[21]

Others argue that the real reason for the claimed negative effects is lack of trust for elected officials to spend the public's money wisely.[22] Business improvement districts are one means by which property owners have chosen to tax themselves for additional government services. Property owners find that these targeted taxes are more palatable than general taxes.[23]

Relationship to redevelopment law[edit]

Any changes to Proposition 13 would need to take into account potential impacts on 400+ (2008 figure) local redevelopment agencies across California. As of June 30, 2008, the total assessed valuation of land in redevelopment project areas was over $674 billion and combined revenues for FY 2007–2008 were over $10 billion.[24] Changes to Proposition 13 may result in an unintended windfall in tax increment revenue for local redevelopment agencies which are restricted severely by state law on how they may use the funds. Redevelopment agency revenue in California is kept separate from cities' general funds, which are used to pay for basic services such as fire, police, parks, streets and so on.[25] Community redevelopment law in California is based on the controversial Tax increment financing mechanism.

As an example, in Alameda County, California, 12.24% of assessed property value, or $24.5 billion worth, is subject to redevelopment tax increment, and in Fiscal Year 2007–08, $232 million of property taxes went to local redevelopment agencies instead of to the county or city general funds.[26] Of property tax receipts in Alameda County, 13 cents of every property tax dollar goes to local redevelopment agencies, 18 cents goes to cities, 13 cents goes to special districts, 15 cents goes to the county, and 41 cents goes to local schools.[27] In Contra Costa County, Schools get 48%, Special Districts get 19%, the County gets 13%, Redevelopment Agencies get 12%, and Cities get 8%.[28]

Negative effects[edit]

On the housing market[edit]

Sales disincentives, less individual mobility, higher housing costs[edit]

Proposition 13 alters the balance of the housing market because it provides disincentives for selling property, in favor of remaining at the current property and modifying or transferring to family members to avoid a new, higher tax assessment.[29] More detailed evidence of this is provided in the book Property Taxes and Tax Revolts: The Legacy of Proposition 13.[30]

The statutory 2% maximum annual increase in assessed value has, on average, under-paced the consumer price index since the adoption of Proposition 13 to date. This leaves governments with reduced purchasing power from its property tax levies. Large real estate bubbles tend to increase property tax revenues, while the collapse of bubbles places downward pressure on them. The net effect on any single owner of any single property depends largely upon the market conditions prevailing at the time of assessment and/or reassessment(s) and the length of time between assessments.

California has more rigidity and friction in both its housing market and in renting than other states; one study comparing California's market to that of other states found that between 1970 and 2000, tenure of owned homes increased by 10% and in renting by 19%, and attributed this change to Proposition 13.[31] Other studies have found that increased tenure in renting can be attributed in part to rent control.[32] D.R. Mullins states that “prospects of increased property tax liabilities triggered by residence or business location changes likely constrain mobility and filtering in the housing and property markets.”(pp. 118)

Moreover, evidence shows that because homeowners would allegedly keep their homes for longer, young households often rent for longer before buying a house.[31] Because Proposition 13 could be a disincentive to sell, there is less turnover among owners near the older downtown areas, and prices appreciate fastest in these areas. 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 greater prices for existing housing.[citation needed] Because of geographical limits and enacted environmental and growth legislation from cities and counties, new development is increasingly expensive. Builders build where land is cheap and thus homes are more affordable, increasing already massive suburban sprawl even farther out.

California also has high rates of migrants from other countries and a high birth rate, which has contributed to more demand for housing, and it has low amounts of moderately priced housing due to the increased property tax liability after a sale. In effect, because the different tax treatment makes real estate more valuable to the current owner than to any potential buyer, selling it makes no economic sense.[2]

Effects on commercial property owners[edit]

Owners of commercial real estate benefited under the original rules of Proposition 13: if a corporation owning commercial property (such as a shopping mall) was sold or merged, but the property stayed technically deeded to the corporation, ownership of the property could effectively have changed without triggering Proposition 13's provisions.[4] Under current law, a change of control or ownership of a legal entity causes a reassessment of its real property as well as the real property of entities that it controls.[33]

Corporations often avoid reassessment by limiting portion of ownership by purchasing in groups where no single party owns more than 50%. For example: "In 2002 ... wine barons E&J Gallo purchased 1,765 acres of vineyards in Napa and Sonoma from Louis M. Martini. But the deal avoided a reassessment, because 12 Gallo family members individually obtained minority interests. " [34]

On the state tax structure[edit]

Unequal assessments based on purchase date result in regressive taxation[edit]

Proposition 13 sets the value of properties at the time of purchase, with a possible 2% 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.[4] The disparity grows when property prices appreciate by more than 2% a year. The Case-Shiller housing index shows prices in Los Angeles, San Diego, and San Francisco appreciated 170% from 1987 (start of available data) to 2012 while the 2% cap only allowed a 67% increase during this 26-year period.[35]

On sales and other taxes[edit]

Other taxes created or increased[edit]

Local governments now use imaginative strategies to maintain or increase revenue due to Proposition 13 and the state's attendant loss of property tax revenue (which formerly went to cities and counties). Most California localities have recently sought their voters' approval for special assessments such as Mello-Roos that would levy new taxes and fees for services that used to be paid for entirely or partially from property taxes: streets, water, sewer, electricity, infrastructure, schools, parks, police protection, firefighting units, and penitentiary facilities.[citation needed] Sales tax rates have increased from 6% (pre-Prop 13 level) to 8.25% and more.[2][3]

On cities and localities[edit]

Greater effect on coastal metropolitan areas than on rest of California[edit]

Proposition 13 disproportionately affects coastal metropolitan areas, such as San Francisco and Los Angeles, where housing prices are higher, relative to inland communities with lower housing prices. According to the National Bureau of Economic Research, more research would show whether benefits of Proposition 13 outweigh the redistribution of tax base and overall cost in lost tax revenue.[31]

Loss of local government power to state government[edit]

Cities and localities have become more dependent on state funds, which has increased state power over local towns and cities.[4] The state provides "block grants" to cities to provide services, and bought out some facilities that locally administer state-mandated programs.[36]

Resultant planning changes, loss or degradation of services, new fees[edit]

Local governments have become more dependent on sales taxes for funds, which some maintain has resulted in poor land planning, and has made cities encourage more retail stores and "big box" outlets. The jobs and ongoing sales tax those stores provide may discourage growth of other sectors and job types that may provide better opportunities for residents.[4][36] Additionally, cities have decreased services and increased fees to compensate for the shortfall, with particularly high fees levied on developers creating new houses or industrial outlets.[36] These costs transfer to the building's buyer, who may be unaware of the thousands in fees included with the building's cost.[36]

On education and public services[edit]

Effect on public schools[edit]

California public schools, which during the 1960s had been ranked nationally as among the best, have decreased to 48th in many surveys of student achievement.[37] Some [38][39] have disputed the attribution of the decline to Proposition 13's role in the change to state financing of public schools, because schools financed mostly by property taxes were declared unconstitutional (the variances in funding between lower and higher income areas being deemed to violate the equal protection clause) in Serrano vs. Priest, and Proposition 13 was then passed partially as a result of that case.[36] California's spending per pupil was the same as the national average until about 1985, when it began decreasing, which resulted in another referendum, Proposition 98, that requires a certain percentage of the state's budget to be directed towards education.[4]

Loss of funding for libraries, city services[edit]

Public libraries have seen a decrease of funding from cities.[36] Police departments received generally the same amount of funding, from 15% in 1978 to 16% during 1995.[36] Cities also decreased water, gas and electricity expenses.[36]

Aftermath[edit]

The U.S. Supreme Court declared, in Nordlinger v. Hahn, that Proposition 13 was constitutional. Justice Harry Blackmun, writing the majority opinion, noted that the state had a "legitimate interest in local neighborhood preservation, continuity, and stability" and that it was acceptable to treat owners who have invested for some time in property differently from new owners. If one objected to the rules, they could choose not to buy.[40]

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.[41] Schwarzenegger, believing that such an act would be inadvisable politically and could end his gubernatorial career, said, "I told Warren that if he mentions Proposition 13 again he has to do 500 sit-ups."[42]

In January 2011, California Governor Jerry Brown was quoted as saying that it wasn't Proposition 13 that was the problem, but "It was what the Legislature did after 13, it was what happened after 13 was passed" because the legislature reduced local authorities' power.[43]

In December 2011, a team of lawyers headed by a former federal appeals court judge sued to overturn the requirement that a two-thirds vote of the legislature is required to raise state taxes.[44]

Amendments to Prop 13[edit]

  • California Proposition 8 (November 1978) allowed for a reassessment of real property values in a declining market.
  • California Proposition 60 (1986) allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home if the replacement home is located in the same county, is of equal or lesser value, and purchased within 2 years of sale.
  • California Proposition 39 (2000) lowered the required supermajority necessary in order for voters to impose local school bond acts, from 2/3 of all votes cast, to fifty-five percent (11/20ths)

Proposed changes[edit]

Tax recapture on sale[edit]

One proposed change to Prop 13 is to recapture the lost tax revenue retroactively at the time of sale by summing the differences between the actual taxes paid each year and the taxes that would have been paid using assessed values calculated from a straight line between the original purchase price and the final sale price over the entire time the home was owned. This amount will be owed in taxes at the time of sale. This allows older homeowners to keep their homes, but recaptures the capital appreciation benefit they received from urban development paid for by tax dollars to which they did not contribute.[45]

Base value changes during falling prices[edit]

Prop 13 currently increases the base value by a max of 2% every year, regardless of whether house prices are falling or inflation is negative. It has been proposed to modify prop 13 to not increase the base value in any year where the assessed value is less than the base value.[citation needed]

See also[edit]

Notes[edit]

^ Serrano: 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)

References[edit]

  1. ^ Full text of Article 13A
  2. ^ a b Tugend, Alina (May 7, 2006). "The Least Affordable Place to Live? Try Salinas". New York Times. Retrieved April 28, 2010. 
  3. ^ "Who’s Afraid of the Big Bad Initiative?". Hoover Institute. 
  4. ^ a b c d e f "Senator Peace: Cure Prop. 13 'Sickness' by Reassessing Commercial Property, Boosting the Homeowners' Exemption and Cutting the Sales Tax". Cal Tax Digest. 
  5. ^ a b Citrin, J. and Sears, D. Tax Revolt:Something for Nothing in California (1985)Harvard Press
  6. ^ "Property Tax". California State Board of Equalization. Retrieved August 21, 2012. 
  7. ^ "California Home Prices Appreciation Rates". Retrieved December 9, 2009. 
  8. ^ "U.S. Department Of Labor Bureau of Labor Statistics, Consumer Price Index". 
  9. ^ "California Consumer Price Index". Retrieved 12-09-09. 
  10. ^ a b "State Board of Equalization Statement On Negative Inflation Factor for Annual Proposition 13 Adjustment". California State Board of Equalization. Retrieved December 9, 2009. 
  11. ^ Said, Carolyn (June 21, 2009). "Lower home values mean lower tax revenue". San Francisco Chronicle. Retrieved December 9, 2009. 
  12. ^ California State Board of Equalization
  13. ^ PROPOSITION 13 & THE PROPERTY TAX REVOLTS OF 2007 Howard Jarvis Taxpayers Association
  14. ^ Howard Jarvis Taxpayers Association
  15. ^ a b "Proposition 13: Love it or Hate it, its Roots Go Deep". Retrieved December 9, 2009. 
  16. ^ California's Tax Machine, California Taxpayers Association, 2000.
  17. ^ Constitution Article 13A
  18. ^ http://www.cbia.org/go/cbia/?LinkServID=15E85BB6-0ECB-6F37-179D4439C07525A3&showMeta=0
  19. ^ PPIC_AtIssue_English_revised
  20. ^ PPIC_AtIssue_English_revised
  21. ^ LA Times, June 2008
  22. ^ Lochhead, Carolyn (August 16, 2003). "Prop. 13 remains controversial after a quarter of a century / ECONOMICS: / Budget woes fuel opposition to tax measure". The San Francisco Chronicle. 
  23. ^ "Cities' lack of resources acts as catalyst for BID formation". Los Angeles Business Journal. [dead link]
  24. ^ California State Controller's Annual Report on Redevelopment Agencies, 2007–2008
  25. ^ Stradling Yocca Carlson & Rauth Review of California Redevelopment Law
  26. ^ California State Controller's Annual Report on Redevelopment Agencies, 2007–2008, Table 1
  27. ^ Office of the Assessor Alameda County 2009–10 Annual Report, Page 9
  28. ^ Said, Carolyn (January 25, 2009). "Property tax revenue plummets with home values". San Francisco Chronicle. Retrieved December 9, 2009. 
  29. ^ Mullins, D. R. (2003) Popular processes and the transformation of state and local government finance. In D.L. Sjoquist (Ed.), State and Local Finances Under Pressure, (pp. 95–162) Northampton, MA: Edward Elhar
  30. ^ O’Sullivan, Arthur, Terri A. Sexton, and Steven M. Sheffrin, Property Taxes and Tax Revolts: The Legacy of Proposition 13, Cambridge Press, 1995. Paperback reissued 2007
  31. ^ a b c Picker, Les. "The Lock-in Effect of California's Proposition 13". National Bureau of Economic Research. 
  32. ^ http://www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1186
  33. ^ [1].
  34. ^ SF Weekly
  35. ^ http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----
  36. ^ a b c d e f g h Chapman, Jeffrey I. "Proposition 13: Some Unintended Consequences" (PDF). Public Policy Institute of California. 
  37. ^ "Ultimate Test: Who Is Accountable for Education If Everybody Fails?". Rand Institute. 
  38. ^ "The Merrow Report: Serrano V. Priest". 
  39. ^ http://www.vdare.com/guzzardi/immigrant_influx.htm
  40. ^ Nordlinger v. Hahn, 505 U.S. 1 (1992)
  41. ^ http://www.wealthandwant.com/docs/Buffett_Prop13.html
  42. ^ rolls out his economic recovery plan
  43. ^ Gov. Jerry Brown talks Prop. 13
  44. ^ Overturning of Prop. 13 sought in lawsuit
  45. ^ http://prop13recovertaxesonsale.wikispaces.com/

Sources[edit]

  • Smith, Daniel A. (1998). Tax Crusaders and the Politics of Direct Democracy. New York: Routledge. ISBN 0-415-91991-6. 

Further reading[edit]

  • Campbell, Ballard C. "Tax revolts and political change," Journal of Policy History, Jan 1998, Vol. 10 Issue 1, pp. 153–78
  • Marmer, Nancy. "Proposition 13: Hard Times for the Arts," Art in America, September/October 1978, pp. 92–94.
  • Martin, Isaac William. The Permanent Tax Revolt. Stanford University Press, 2008.
  • O’Sullivan, Arthur, Terri A. Sexton and Steven M. Sheffrin, Property Taxes and Tax Revolts: The Legacy of Proposition 13, Cambridge Press, 1995. Paperback reissued 2007.
  • Sexton, Terry A. and Steven M. Sheffrin, Proposition 13 in Recession and Recovery, Public Policy Institute of California, 1998.
  • Sheffrin, Steven, "Re-Thinking the Fairness of Proposition 13," in Jack Citrin, ed., Proposition 13 at 30, Berkeley, CA: Berkeley Public Policy Press, 2009.
  • Smith, D. A. "Howard Jarvis, Populist Entrepreneur: Reevaluating the Causes of Proposition 13". Social Science History (1999). 23 (2): 173–210. in JSTOR [inaccessible: behind a paywall]

External links[edit]

Archival collections[edit]

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