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Low Taxes for Some, Chaos for All

Revolt of 1978 gave us a byzantine government budgeting system and endless fiscal Band-Aids.

June 01, 2003|William Fulton and Paul Shigley | William Fulton and Paul Shigley are the editors of California Planning & Development Report. They are the principal authors of a special report by CP&DR on the effect that Proposition 13 has had on California.

Twenty-five years ago this week, California voters ushered in a new era in government and taxation by passing Proposition 13, a citizen-driven initiative that reduced property taxes dramatically and touched off a national tax revolt. Proposition 13 profoundly changed how we pay for government services like police, fire, streets, parks, water and sewers. But it didn't change our expectations about what we get in return.

Many recent trends and crises in governing California can be traced to this disconnect. Heavy state funding of education, a huge obstacle to a balanced state budget today, is a result partly of Proposition 13. So are development-impact fees, Mello-Roos taxes, auto malls, parcel taxes and elections on utility-user levies and assessment districts.

Championed by tax-cut crusaders Howard Jarvis and Paul Gann, Proposition 13 cut property taxes by more than half and has permanently kept them low. And it made government more complicated, more desperate and, ironically, more concentrated on the remote, inside-the-Beltway world of state politics in Sacramento. After 25 years of post-Proposition 13 Band-Aids, there is almost nobody in the state who understands how we finance government, or who can trace the connection between what we pay and what we get.

The evasions pile on every year, but neither political leaders nor voters have much motivation to change the situation. The reason: Proposition 13 has created a self-perpetuating base of support -- at least as long as most voters also own houses.

Proposition 13 contains two provisions that are politically inviolate. One is the overall property tax rate of 1% on assessed value, which creates a much lower property tax rate for California homeowners than for homeowners in other states. The second -- more important in maintaining the initiative's popularity -- is the "reassessment on sale" clause, which says that property is reassessed only when it is sold. If the value of a property goes up after you buy it, you aren't ever taxed on the new wealth (except for a nominal 2% annual boost in assessments).

This essentially amounts to a huge tax exemption for people whose property has greatly appreciated in value since they bought their house. This "buy-in" occurs quickly. If you bought your house for $200,000 in 1999, and it's worth $350,000 now (not an unusual scenario at all these days), you're already a big winner. You're paying $2,000 and change in property tax, whereas your neighbor who buys today, only four years later, pays at least $3,500. It's not just the little old ladies who bought their houses in 1960 who win. It's all people whose houses have appreciated significantly since they bought them, no matter when they bought them. This is most people, or -- more to the point -- most voters.

Is it unfair to give a tax break to people who happen to buy their houses right before a big run-up in home prices? Sure it is. But the U.S. Supreme Court upheld the constitutionality of this system more than a decade ago. And the unfairness leads to a self-perpetuating cycle of political support, because if you own a house in an up market, you're a winner.

Then there's the legacy of unintended consequences: the cumulative effect of Band-Aid after Band-Aid after Band-Aid, and the desperate efforts of the state and local governments to deal with these consequences.

Part of Proposition 13's intent was to reduce the size of government by reducing the amount of tax revenue available. But it is not government's basic impulse to cut its size. Rather, local governments have gone into survival mode in several ways that have made the system almost impossible for average voters to understand.

They first tried to find loopholes in the proposition. Many cities turned to utility taxes, which are not property taxes and thus are not covered by the initiative. This strategy was blocked by Proposition 62, which requires a vote on all taxes that might be used to replace revenue lost under Proposition 13. This, in turn, encouraged local governments to start creating more assessment districts, which were not covered by Proposition 13. But the boom in assessment districts led to Proposition 218, which requires a vote of property owners (many of whom are not registered voters or even residents of California) before an assessment district can be created.

Then there are the inventive ways to lay off the costs of expanding communities onto developers and new homeowners. Assessment districts were part of this trend, as are Mello-Roos taxes, development-impact fees and any number of financial techniques. This has created a two-tiered taxation system -- one for longtime homeowners, consisting primarily of low property taxes, and another for newer residents, which includes a dizzying array of special taxes, assessments and fees.

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