Proposition 13 at Age 35

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform - Why We Need It and What It Will Take.”

Thirty-five years ago this week, on June 6, 1978, California voters approved an amendment to the state constitution known as Proposition 13. It cut and capped property taxes in the state and remains in effect today.

Prop 13, as it came to be known, arose from three developments. First, California was a high-tax state, in no small part because of huge tax increases enacted by Gov. Ronald Reagan. One of his first acts in office in 1967 was to ask for a $1 billion tax increase, the largest tax increase in state history, equal to one-third of state revenue. Reagan also supported further tax increases in 1971 and 1972. State revenue tripled on his watch, to $8.6 billion from $2.9 billion, in eight years.

Second, home prices in California rose very rapidly in the 1970s. Because property taxes were assessed on market value, any increase in home prices led automatically to higher property taxes even if the tax rate was unchanged. Many Californians were literally being taxed out of their homes.

The third important development leading to Prop 13 was a state Supreme Court decision, Serrano v. Priest, which equalized per-pupil school spending in the state. This meant that the higher taxes homeowners paid no longer benefited their own children. According to research by William A. Fischel, an economist at Dartmouth, the strongest support for Prop 13 came from school districts adversely affected by Serrano.

Two tax activists, Howard Jarvis and Paul Gann, organized a petition drive to get Prop 13 on the ballot and were successful in early 1978. In an article on April 14, 1978, The New York Times reported that support for the initiative was weak and that it was strongly opposed by the business community, which feared higher business taxes would result from a cut in property taxes.

The Times also cited an analysis by economists at the University of California, Los Angeles, that enactment of Prop 13 would sharply raise the state unemployment rate, to 6.7 percent from 5.9 percent under their best-case scenario.

Nevertheless, two-thirds of California voters supported Prop 13 despite the dire warnings of devastation to government services by both Republican and Democratic state leaders. This quickly led to talk of a nationwide tax revolt. A New York Times/CBS News poll in June 1978 found strong support for tax and spending cuts throughout the country, at both the federal and state and local government levels.

Prop 13 unquestionably bolstered the efforts of Representative Jack Kemp, the Republican of New York for whom I worked, and Senator William Roth, Republican of Delaware, to enact a big federal income tax cut. Within weeks of Prop 13’s enactment, the Senate Finance Committee held hearings on their legislation. Other tax cutting initiatives, such as a proposed cut in the capital gains tax led by Representative Bill Steiger, Republican of Wisconsin, also benefited. Indeed, the Steiger bill was enacted by Congress in November against strong opposition from President Carter, who ultimately signed the bill, an acknowledgment of the strong tax-cutting sentiment among Americans.

A year later, there was little evidence that the dire predictions of devastation from Prop 13 had materialized. A state budget surplus cushioned the blow to local governments and fees increased, but over all there were no signs that government services were significantly reduced.

On the first anniversary of Prop 13, an article in The New York Times found that the principal impact was on the way people talked about government: “After June 6 there was less emphasis on tax reform and more on cutting back the tax burden, less on innovation and social justice and more on fiscal accountability, less on enrichment of programs and more on questioning their productivity.”

By 1983, it was apparent that a huge shift in power resulted from Prop 13. More local funding decisions were made in Sacramento, as the state government picked up responsibilities that could no longer be financed at the local level because the property tax was the principal revenue source for local governments.

On the 25th anniversary of Prop 13 in 2003, William Fulton and Paul Shigley, editors of the California Planning & Development Report, asserted that Californians had lost a great deal of control over their local governments as a consequence. As they wrote in The Los Angeles Times:

The most important â€" and peculiar â€" side effect of Proposition 13 has been to tether local governments to Sacramento, turning them into lobbyists and dragging them into the annual budget debate. Proposition 13 was intended to empower the people against tax abuse by the government. But, paradoxically, it also took the power to determine what to do with the property taxes away from local governments.

In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more. Proposition 13 says that the allocation of the property taxes among local government entities is a decision to be made by the governor and the Legislature.

In the immediate aftermath of Prop 13, the combined state and local government tax burden in California dropped to 10 percent from 12 percent of income. But over the years, it has crept back up. According to the conservative Tax Foundation, California was the fourth most heavily taxed state before Prop 13 and is still the fourth most heavily taxed state, with total state and local taxes at 11.2 percent of income.

While California’s property tax remains lower than it was before Prop 13, other states generally did not follow its lead. According to the Census Bureau, property taxes nationwide raise almost exactly the same amount of revenue today as they did in 1978 - 3 percent of the gross domestic product in 2010 compared with 2.9 percent in 1978.

A 2008 poll by the Public Policy Institute of California found that Prop 13 remained overwhelmingly popular, supported by 59 percent of the state’s residents, with only 27 percent opposed.

Prop 13 once loomed large, but over time its historical importance has shrunk.