Get CP&DR
  • Become a subscriber
    Get access to all CP&DR premium articles including the past article archives.
Connect with CP&DR

facebook twitter

Follow us on Facebook and Twitter

Articles by Category
Solimar Research

Twenty Years of Proposition 13; Tax-Cutting Initiative Shaped Planning and development in State

Jun 1, 1998
It is not too much of an overstatement to suggest that the California planning and development landscape as we know it today was created by Proposition 13 when it was passed by the voters 20 years ago this month. Prop. 13 didn't invent most of the impulses at work in California's communities today, of course. Fiscal zoning and competition between municipalities for tax revenue is nothing new. Neither is the vigorous political jockeying within any community over who pays for new growth, nor the slow-growth desire to "pull up the drawbridge", nor even the practice of requiring two-thirds voter approval for local school bonds. All these things existed before 1978. But all were accelerated by the passage of Proposition 13. And just as important, Proposition 13 created an intensified, crisis-oriented atmosphere among local governments - a kind of a hothouse - within which all these trends have baked together to create California's peculiar approach to building and financing communities. Part of Proposition 13's intent, of course, was to reduce the size of government by reducing the amount of tax revenue available. What Proposition 13's drafters couldn't predict, however, was that instead of reducing their size, government agencies - especially at the local level - would intensify their competition with one another for the revenue sources available. Proposition 13 created a "zero-sum culture" among government agencies. And because local government revenues sources are so closely tied to land and real estate development, the zero-sum culture was quickly translated into tangible changes on the urban landscape, many of which were tied to post-Proposition 13 revenue-raising strategies. The "auto mall" is now common throughout the United States, but it was invented in California - not by the auto industry trying to sell cars, but by local governments trying to capture sales taxes. The plethora of outlet malls, entertainment retail centers, and regional malls is also partly the result of Proposition 13. So is the boomlet in the creation of new cities in the last twenty years - because for the first time in history, a California community could incorporate by transferring money out of the county treasury rather than raising taxes. Many of California's sprawling regional development patterns are the result of Proposition 13 also. Well-located cities have been able to cherry-pick retail centers, high-end housing, and other tax "winners". Meanwhile, starter homes and other tax "losers" have been relegated to distant locations on the metropolitan fringe, often in unincorporated areas, where county leaders are desperate to generate any types of revenue they can get. As to the benefits of Proposition 13, they are unquestionable - even if local governments officials are rarely willing to admit it. By reducing property taxes and keeping them low, Proposition 13 reduced California's overall tax burden. Sales and income taxes are still high by national standards, but the low property tax means that overall California's tax burden falls somewhere in the middle nationally - rather than at the high end, as was the case prior to Proposition 13. This tax situation is especially important to property-intensive businesses, making California more competitive for businesses than it might otherwise be. Proposition 13 also made real estate a better investment for most Californians. Every dollar not used for property taxes was another dollar available to pay the mortgage. Thus, the average homebuyer could qualify for a higher mortgage - and this fact permitted real estate prices to continue going up even after the passage of Proposition 13. Perhaps most important, Proposition 13 eliminated the unpredictability of property taxes for millions of California homeowners. Traditionally, property owners had been vexed by two different types of unpredictability - the property assessment and the property tax rate. The assessment was traditional in the hands of the county assessor, while the tax rate was in the hands of myriad local government agencies with the power to levy property tax. Keeping property taxes down required taxpayers to fight a war on several fronts at once. With one stroke, Proposition 13 ended that war. "The lasting legacy for taxpayers," wrote Larry McCarthy of the California Taxpayers Association in a recent op-ed piece, "is the protection against surprise increases in assessed value. Taxpayers know what to expect in property taxes when they buy property and what they will owe 10 years down the road." The End of the Crooked Assessor A citizen initiative placed on the ballot by taxpayer activists Howard Jarvis and Paul Gann, Proposition 13 contains three critical provisions that have become political bedrock in California over the past two decades: o Property may be reassessed only when it is sold. o The total property tax rate may not exceed 1%. o New property-based taxes may be imposed only by a vote, with a majority vote required for "general" taxes and a two-thirds vote required for "special" taxes. To understand why Proposition 13 passed - and why it remains popular today - it is important to understand the problem that Proposition 13 was trying to address: a system of property assessment and taxation that was arcane and unpredictable at its best and scandalously corrupt at its worst. In his new book PARADISE LOST, a chronicle of the Proposition 13 era, author Peter Shrag points out that until the 1960s, California - like most other states - was rife with shady assessment practices that led to jail time for more than a few local assessors. California's first attempt to deal with the property assessment problem came in the 1960s, when a new law was passed that required all property to be reassessed every three years at 25% of market value. The irony, according to Shrag, was that even the crooked assessors had always been smart enough to assess residential property too low and business property too high. Such a skew was only good politics, because voters were far more likely to be homeowners than business owners. By standardizing assessment practices, however, the new law ended this favoritism and shifted the taxation burden away from businesses toward residences. Little wonder that in San Francisco and elsewhere a popular bumper-sticker of the time read: BRING BACK THE CROOKED ASSESSOR. When real estate prices skyrocketed in the 1970s, the tax burden on residential property only became more of a political target. Millions of middle-income homeowners saw their home values and their property assessments increase 30% per year or more. As a result, many property-tax bills doubled virtually overnight, quickly outstripping the ability of salaried workers and retired homeowners to pay them. It was this phenomenon - the portrait of the retired widow forced to sell her house to pay the property-tax bill - that captured the public's imagination. Proposition 13 was popular partly because of the salesmanship of its co-author Howard Jarvis, a longtime political activist who was himself 75 years old at the time. But the annual fight with the assessor was only half of the reason that property taxes were politically vulnerable, because the assessed value of any individual's house is only part of the equation that yields the final property tax bill. Just as important - though harder to combat for the average taxpayer- was the question of the property-tax rate, which was set every year by local officials. This was especially true in suburban areas - including most of California - where the typical homeowner might be subject to a separate property tax rate from the county, the city, the school district, the water district, the park district, the fire district, and three or four other taxing districts. Each government agency set its own rate, but no one was politically accountable for the "bottom line". Typically, no single agency imposed a property-tax rate of more than one-half of 1%, but the cumulative total could easily add up to 2.5% or 3% - on an assessment that, in the late 1970s, was rising dramatically every year. That's why the 1% cap on the property-tax rate was just as important as the reassessment provisions. During the run-up to the June 1978 election, Proposition 13 was opposed by almost every element in the state's political and business establishment - not just public unions and government officials, but also the state Chamber of Commerce and the California Taxpayers Association. (Most backed a competing ballot measure, Proposition 8, that would have permitted a split roll taxing owner-occupied residential property at a lower rate.) Nevertheless, Proposition 13 was approved by approximately 65% of the state's voters in the June 1978 election. Throughout the country, Proposition 13 is widely viewed as the bellwether event in what became a widespread and enduring nationwide revolt against high taxes. Ronald Reagan quickly picked up on Proposition 13's themes in shaping his successful presidential campaign in 1980. Most other states now have some form of property-tax limit. And the rhetoric of limited taxes and limited government is now a staple of American politics. The Zero-Sum Culture While Proposition 13 has become an icon of America's political culture, it has also become an important lesson in the politics of unintended consequences. Like most citizen initiatives, Proposition 13 was not finely crafted legislative surgery. It was a harsh blow with a blunt instrument. As such, it sent California government - and, by extension, California planning and development trends - spinning in unpredictable directions. The immediate impact of Proposition 13 was pretty much as predicted. All local government agencies had less money. But over time, the unintended consequences emerged, and they had a major impact on the distribution of political power and governmental resources. For the vantage point of planning and development, Proposition 13 had two major impacts that were not foreseen at the time of its passage. o First, it transferred a great deal of power from local governments to the state government in Sacramento. o And second, it led local governments on an endless quest for forms of revenue other than property tax - a quest that has benefited some local agencies (such as cities and redevelopment agencies) far more than others (such as counties and special districts dependent on property tax.) It is difficult to imagine that either Howard Jarvis or Paul Gann intended to remove power from local governments and give it to the state. Yet that is what Proposition 13 did. In placing a cap on the overall tax rate, the initiative raised the question of who should allocate the property-tax revenues. Proposition 13 answered that question with a single sentence delegating that responsibility to the state government. Coincidentally, Proposition 13 passed only two years after the second of the two Serrano v. Priest decisions, which required the state to "equalize" the operating budgets of school districts across the state. Prior to the Serrano cases, a school district with a large property tax base had more money per student than a school district with a small property tax base. After the court rulings, the state had to make up the difference. The net effect of Proposition 13 and Serrano together was to convert the property tax into a state revenue source. Under Serrano, the state was required to commingle its own funds with school property-tax revenue to reach a statewide equilibrium. Under Proposition 13, the state had the power to allocate property taxes among local agencies however it wished. In 1979, when the state was flush with cash, it allocated most of the property taxes to cities and counties and made up the difference by increasing state outlays to schools. So perhaps it was inevitable that when the state ran into financial trouble in the early 1990s, the legislature would reverse the trend. In the 1992-93 and '93-94 budget years, the state did just that - shifting approximately 25% of the funds away from cities and counties back to school districts in order to balance the state's own budget. In this kind of environment, it is not surprising that local governments have become active lobbying groups in Sacramento. Under Proposition 13, one of their major revenue source depends far more on their lobbying ability in Sacramento than on their relationship with their own local residents and taxpayers. By restricting property tax, Proposition 13 also changed the strategic importance of all revenue sources in local government. Sales tax became far more important - especially for cities - and development fees and property assessments emerged as critical revenue generators. All these trends had an impact on urban development patterns. Proposition 13 essentially rewarded cities and counties for developing retail land uses, which generated sales tax, and punished them for developing land uses that generated only property tax - essentially, all low- and moderate-income housing. This is one of the main reasons for today's "fiscalized" urban landscape, with its plethora of shopping centers and auto malls and its paucity of balanced housing developments. While retail developments were subsidized because of their tax attractiveness, housing developments were essentially charged a premium in the form of development fees, which were required to pay for new infrastructure no longer obtainable through the increased property tax flows. Among other things, these trends have made local government budgets subject to far more volatility. Retail sales transactions and real estate development activity fluctuate wildly depending on market conditions, while property assessments are traditionally more stable. Many of the revenue-raising measures that resulted from Proposition 13 created their own backlash. For example, after the 1992-93 property tax shift, counties and special districts turned to assessment districts as an important source of replacement revenue - especially since districts could be formed and assessments levied without a vote. This trend led directly to Proposition 218, the 1996 taxpayer initiative that required, in essence, two-thirds approval from property owners for new assessments. And all across the board, local governments have taken advantage of complicated legal loopholes to gain an advantage in the "zero-sum culture". When Proposition 13 passed, for example, most experts assumed that declining property taxes spelled the end of redevelopment in California - because redevelopment finance plans depended heavily in increased property-tax flows. But redevelopment enjoyed a scandalously successful renaissance in the 1980s because it was an important zero-sum tool: Clever cities could use it to capture property-tax dollars that would otherwise have to be shared with counties, school districts, and special districts. Widespread use of redevelopment as a zero-sum tool led directly to the redevelopment reforms of 1993. Similarly, Proposition 13 sparked a renaissance in new city incorporations because cityhood could also be used as a zero-sum tool. Incorporations had waned in the late '60s and '70s because of opposition from taxpayers, who assumed creation of a new city also meant higher taxes. But with property tax increases "outlawed" by Proposition 13, political resistance to incorporations lessened. And cityhood proponents realized that incorporation was a good way to take property and sales tax revenue from a distant county treasury and return it to their community. Not surprisingly, this trend produced its own backlash: The so-called "revenue neutrality" bill, passed in 1992 at the insistence of counties, which has stifled incorporations by requiring that counties be made financially whole by new cities. Returning to Equilibrium? Curiously, after two decades, the world of local planning and development may be reaching a strange kind of equilibrium. Calls to repeal Proposition 13 used to be common among liberals and local government leaders. Now they're so rare they seem anachronistic. For example, Bill Press, the former state Democratic Party chair and current CNN "Crossfire" host, made just such an appeal last fall at the California Chapter, American Planning Association, conference last fall. And while he received a hardy round of applause, the audience's appreciation seemed more nostalgic than realistic. Everyone appeared to recognize that Press was giving a 1970s speech in the 1990s. Most local government officials in California seem resigned to working within the basic tenets of Proposition 13: the 1% cap, the reassessment on sale, and the two-thirds vote requirement. This acceptance has forced them to try to achieve traditional goals within the more rigorous framework of public acceptance that Proposition 13 imposes - and, in the process, they have begun to restore the faith of at least some voters in at least some government activities. Local school bonds backed by increased property taxes were originally banned under Proposition 13. Now they are permitted with a two-thirds vote - the same requirement that existed prior to 1978. And even though the percentage of voters who are public school parents today is only half what it was in the 1960s (20% versus 40%), most school bonds are now winning. School districts have made the case that good school facilities help everyone in the community. And in the process, oddly enough, they have reinforced the assumptions contained in the Proposition 13 culture. Attempts to lower the vote requirement in Sacramento (to 60%, 58%, or a simple majority) are met with strong resistance. Why lower the rate when the bonds are already passing at two-thirds? The local school bond, however, represents a rare instance in the post-Proposition 13 world where local voters can engage in the traditional task of determining whether what they are getting is worth paying for. If there is one lingering problem that results from Proposition 13, it is that the process of raising government revenue has been severed from the process of spending it - which isn't doing much to restore faith in government. Property tax revenues are received more or less automatically by local governments as the result of political decisions in Sacramento. Other revenue comes, essentially, from taxing either newcomers (development fees) or outsiders (sales taxes). For these reasons, the revenue base is simply an assumption, and the only political discussion that occurs in most California communities is how to spend the money. For better or worse, in the old days, the political debate had to do with both revenue and expenditure and with the relationship between the two. As UC Davis Professor Alvin Sokolow has so eloquently pointed out, prior to Proposition 13 the typical local budget debate focused on how much property taxation was politically tolerable - and this was inevitably tied to the question of who would benefit from spending the proceeds. In other words, localities controlled the entire debate, instead of only half of it, and they were able to debate the question in terms of the value received for the political pain inflicted. These days, local officials, homebuilders, open-space advocates, school leaders, and others involved in planning and development in California frequently debate the question of what the ultimate "fix" for Proposition 13 should be. After the property-tax shift of 1992-93, many local officials advocate running some kind of initiative that would guarantee local governments a certain share of the property tax - similar to Proposition 98 for schools. Indeed, Assemblyman Fred Aguiar, R-Chino, recently introduced ACA 42, a bill sponsored by the League of California Cities, which calls for just such a solution. This solution may be the best political alternative; it is clearly in keeping with California's budgeting trends of the last two decades. But it doesn't address Professor Sokolow's basic point about the need to have the revenue debate at the same political level as the expenditure debate. In a certain way, it simply gives local governments more "free" money - free in the sense that they need not engage in difficult political debates over how much money should be raised, or from whom. If local governments don't get a Proposition 98-type solution, then California is at a crossroads on the question of how to finance local government. Either the expenditure decisions will have to up to the state level, where revenue is allocated, or the revenue allocation decisions will have to come down to the local level where the expenditure decisions are currently made. Indeed, this is the guts of the debate that has occurred in Sacramento over the last year: Should the state government provide more money to local governments - but dictate what it should be used for? Or should the Proposition 13 system be reformed so that local officials (cities, counties, schools, special districts) can decide for themselves how to divvy up the available tax revenue? At first glance, this question may seem to be a long way from the question of planning and development, but the experience of the last 20 years suggests that it is not. Local land-use decisions will always be driven to some extent by revenue concerns. And it is clear that the more tangled local government finance has become over the last 20 years, the more difficult it has been for California's communities to engage in rational land-use planning. Neither of the two solutions described above may be ideal. On the one hand, a Sacramento-driven solution may strip local governments of much of their remaining power; on the other hand, the locals may not be able to work together well enough to allocate their own resources. But any solution that breaks the grip of the zero-sum culture on California's communities is better than nothing.