California Prop 13 Turns 35

June 17, 2013

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Thirty-five years ago, in 1978, California started the property tax revolution by voting in a constitutional amendment that limited property taxes to 1% of the property’s assessed value, and that limited annual increases to 2%, regardless of the increase in assessed value.

The amendment came about because of several ongoing situations. First, Ronald Reagan as governor had increased taxes in the state by 200% during the eight years that he was in office. Secondly, the dramatic increase in California housing prices during the 1970s meant that homeowners were finding themselves unable to keep up with skyrocketing taxes.

California beachAnd the third factor was a California Supreme Court case, Serrano v. Priest, in which per-pupil spending was equalized across the state. Affluent people paying higher property taxes no longer saw the benefit directly affecting their own children.

Californians voted to approve the measure on June 6, 1978. The measure was proposed by anti-tax activist Howard Jarvis and Paul Gann, and was the turning point for property tax reform nationwide. The tax-reform sentiment spread across the country, and is credited as being one of the catalysts for the Reagan federal tax cuts in 1981.

There are arguments both in favor of Prop 13 and against it, but in recent polls, the great majority of Californians agree that it’s still a great thing for the state.

However, lately there has been discussion about creating a separate property tax structure for business as opposed to residential. 58% of Californians approve of changing the law to retain the tax caps for residential properties, but allowing different business properties to be taxed at potentially higher rates.

“Californians remain steadfast supporters of Proposition 13 tax limits on the 35th anniversary of its passage, but they are open to some change,” said Mark Baldassare, president and CEO of the nonpartisan nonprofit think tank the Public Policy Institute. “Most support altering the provision that calls for the same treatment of residential and commercial property taxes.”

Last month the California Assembly Appropriations Committee rejected bill AB 188, which would have re-defined at what constitutes change of ownership of business property for tax reassessment reasons.

The problem with Prop 13 is that a full change would actually require voter approval to amend the state’s constitution, since Prop 13 did exactly that. Polls indicate that voters would be amenable to making such a change, but no initiative has yet been put forward.

The Public Policy Institute polled voters, and 56% responded that they would support raising the taxes on business properties to the “current market value,” as opposed to whatever taxable value is currently on the books.

On the other hand, the California Taxpayers’ Association, which is a business-backed organization, was critical of the PPI poll, opining that it did not directly state the nature of the massive tax increases that would possibly be assessed if such a change in assessment was made. They pointed out that such an increase would likely mean loss of jobs and higher cost of goods for many consumers, as businesses struggle to absorb the additional cost.

Los Angeles beachLiberal groups, including many labor unions, are vocal supporters of the increased tax on commercial property, saying that it will appropriately shift the burden of taxes away from residents and back to business. This shift occurred as house taxable values increased more frequently than businesses, since homes are sold more frequently than commercial property.

Other Prop 13 critics feel the entire property tax issue should be revisited, as the limits on increases have eroded the autonomy of local governments. David Brunori of The Tax Analysts’ Blog  argues that local governments have tended to be more efficient and effective than state or federal governments, in large part because they are ultra-responsive to their constituents.

However, when their most reliable source of income, the local property tax, is constricted, then too are the services that they can provide to their residents. Citizens may be more willing to pay higher property taxes in order to receive a greater level of service, but Prop 13 prevents it.

Regardless, it is clear that something will be changing in the California property tax situation in the future. Whether the changes affect commercial property only, or residential properties as well, remains to be seen.