Proposition 13, officially titled the "People's Initiative to Limit Property Taxation," was a ballot initiative to amend the constitution of the state of California. The initiative was enacted by the voters of California on June 6, 1978. It was upheld as 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 California Constitution.

The most significant portion of the act is the first paragraph, which capped real estate taxes:

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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.

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The proposition's passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. In addition to lowering property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates. It also requires two-thirds vote majority in local elections for local governments wishing to raise special taxes. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States.

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 in 1980. However, of 30 anti-tax ballot measures that year, only 13 of them passed.

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

Background

Proposition 13 drew its impetus from 1971 and 1976 California Supreme Court rulings in Serrano v. Priest, that a property-tax based finance system for public schools was unconstitutional. 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 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 lower tax rate than the rate a less affluent district would have to set in order 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. Although this was more equitable, 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 fueled increased demand for housing, resulting in higher property values and, consequently, higher taxes. Although the revenues supported the costs of growth, such as new schools, roads, and the extension of other municipal services, older Californians on fixed incomes were especially hard hit by rising property values. Due to inflation, reassessments on residential property drove property taxes so high that some retired people could no longer afford to remain in homes they had purchased long before.

In the early 1960s, several scandals erupted through California involving county assessors. These assessors, who had traditionally enjoyed great latitude in setting the taxable value of properties, were found rewarding friends and allies with artificially low assessments, with tax bills to match. These scandals led in 1966 to the passage of AB 80, which imposed standards to hold assessments to market value. However, assessors, who are elected officials, had traditionally used their flexibility to aid elderly homeowners on fixed incomes, and more broadly to systematically undervalue vote-rich residential properties and compensate by inflating commercial assessments. The return to market value in the wake of AB 80 could easily represent a mid-double-digit percentage increase in assessment for many homeowners.

As a result, a large number of California homeowners experienced an immediate and drastic rise in valuation, simultaneous with rising tax rates on that assessed value, only to be told that the taxed moneys would be redistributed to distant communities. The ensuing anger started to form into a backlash against property taxes which coalesced around Howard Jarvis, a former newspaperman and appliance manufacturer, turned taxpayer activist in retirement.

The measure

Howard Jarvis and Paul Gann were the most vocal and visible backers of Proposition 13. Officially titled the "People's Initiative to Limit Property Taxation," and popularly known as the "Jarvis-Gann Amendment," Proposition 13 was placed 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 placed before the voters if backers collect a sufficient number of signatures on a petition. Proposition 13 passed with 65% of those who voted in favor and with the participation of 70% of registered voters. After passage, it became article 13A of the California state constitution.

Under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This "assessed value," however, may only be increased by a maximum of 2% per year, until and unless the property undergoes a change in ownership. At the time of the change in ownership the low assessed value may be reassessed to full 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 detached dwellings in California have appreciated at annual rates averaging more than 10% over the course of several years) or if inflation exceeds 2% (common), the differential between the owner's taxes and the taxes a new owner would have to pay can become quite large. If a property is reassessed to full market value, the increase in taxes can also be quite large.

The property may be reassessed under certain conditions other than a change in 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 in property valuation were not provided for in Proposition 13 itself, but were made possible by the passage of Proposition 8 in 1978.

Outcome

Proposition 13
Result		Votes	Percentage
Yes		4,280,689	64.8%
No		2,326,167	35.2%
Invalid or blank votes		236,145	5.0%
Total votes		6,843,001	100.00%
Voter turnout		68.9%

Analysis

Negative effects

On the housing market

It could be argued that Proposition 13 contributes to an inefficient housing market because it provides dis-incentives for selling property in favor of remaining at the current property and modifying or transferring to family members in order to avoid a new, higher assessment. 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 in owned homes increased by 10% and in renting by 19%, and attributed this change to Proposition 13. (Other studies have found that increased tenure in renting can be attributed in part to rent control.) 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) If these policies favor remodeling or modifying over buying, the policy would have efficiency implications because it limits individuals' mobility from one community to another and other private economic activity.

Moreover, some believe that because homeowners would allegedly keep their homes for longer, young households often rent for longer before buying a house. 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 higher prices for existing housing. Because of geographical limits and enacted environmental and growth legislation from cities and counties, new development is increasingly expensive. California also has high rates of migrants from other countries and a high birth rate, which has contributed to higher 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.

This same policy has had a higher effect on migrants and African-Americans than whites, with both groups staying longer in their homes or renting for longer than whites.

Similarly, Proposition 13 greatly benefited homeowners whose homes have appreciated in value since it was passed, particularly those (such as the elderly) whose incomes have not risen as fast as property values. In cities with many older residents, this has led to a severe shortage of affordable housing, since new developments must often be far above the state's median home price in order to provide enough tax revenue to pay for the services they require. Impact fees have offset this problem somewhat, but are limited by developers' ability to go "jurisdiction shopping" for localities with low impact fees.

One complaint of first time home buyers is the issue that people who have retained their houses for several years have not only had the benefit of paying low property taxes but also are able to sell their property for a big premium.

Owners of commercial real estate have also benefited: if a corporation owning commercial property (such as a shopping mall) is sold or merged, but the property stays technically deeded to the corporation, ownership of the property can effectively change hands without triggering Proposition 13's provision that fixes the amount of tax based on the property's resale value. Since many properties owned by large companies are nominally owned by shell companies whose sole assets are the properties in question, this has led to situations that have struck many commentators, such as Steve Lopez and Michael Hiltzik of the Los Angeles Times, as absurd and unfair, with companies taking a lesser percentage of the overall tax burden than private homeowners. Smaller property owners do not have the "shell company" advantage that large property owners do. As an example, the Times has reported that the property tax bill of the historic Capitol Records building in Hollywood is approximately five cents per square foot, while a small house assessed at $300,000 may pay up to 60 times that on a per-square-foot basis. Critics of Proposition 13 have argued that this situation unfairly benefits commercial property owners and should be changed, but recent attempted ballot initiatives have not succeeded in altering assessment formulas. Tim Taylor at the University of Minnesota has analyzed Prop 13 as part of a problem of "Generational Justice" and a pattern of specifically providing tax breaks and benefits to one generational cohort-and tax increases and reduction in services to another generational cohort.

Local governments now use imaginative strategies to maintain or increase revenue in the face of 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 that would levy new taxes earmarked for services that used to be paid for entirely or partially from property taxes: road and sewer maintenance, school funding, street lighting, police and firefighting units, and penitentiary facilities. Sales tax rates have increased from 5% (the typical pre-Prop 13 level) to 8% and beyond.

On the State tax structure

Proposition 13 has introduced major problems of equity and efficiency into the state's tax structure. An analytical approach to examining a tax policy is to apply the traditional principles of taxation, including equity, allocative efficiency, revenue yield/elasticity and administrative and political feasibility. Equity reflects the basic values of how society determines different groups should be treated; these values include horizontal and vertical equity, ability to pay and benefits received. Allocative efficiency refers to the ways in which a tax policy influences changes in private consumption behavior. Revenue yield and elasticity refer to whether a revenue policy has the capacity to increase in the future in order to continue enabling government agencies to meet the demands of its residents. Lastly, administrative and political feasibility refer to whether a tax policy can be implemented and enforced with relatively little effort and is politically possible.

Proposition 13 freezes 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. Assuming that the price of a house is somewhat a determinant of a person’s wealth (and therefore ability to pay) and benefit received, this feature would lead neighbors or business owners who purchased a property at different periods of time to pay a different assessment, without any relationship to ability to pay or benefits received. Overall, these qualities create serious inequities and potentially introduce some amount of regressivity into the tax structure. The state sales tax was increased as a result of Prop 13. The imbalance between state spending and state tax revenues had contributed to near constant budget crisis that has pushed the state to near bankruptcy and deadlocked the political system.

On cities and localities

Proposition 13 disproportionately affects coastal areas, such as Los Angeles and the Bay Area, where housing prices are higher, over inland communities, where housing prices are lower. According to the National Bureau of Economic Research more research remains to be done on whether the benefits of Proposition 13 outweighs the redistribution of tax base and overall cost in lost tax revenue.

Cities and localities have become more dependent on funds from the state, which transferred to the state more power over local towns and cities than they otherwise would have had. The state provides money in "block grants" to cities to provide for services and totally bought out local county health and welfare centers. It is unknown whether this has created additional administrative overhead. Local governments have also become more dependent on sales taxes for funds, which some have said has resulted in poor land planning and encourages cities to encourage more retail stores and "big box"-type outlets and the jobs and ongoing sales tax those stores provide, rather than encouraging the growth of other sectors and types of jobs that may provide better opportunities for residents. In addition, cities have turned to an increase in fees to make up for the shortfall, with particularly high fees levied on developers creating new houses or industrial outlets. These costs are transferred to the building's buyer, who is often unaware of the thousands in fees paid because it is hidden within the building's cost.

California public schools, which in the 1960s had been ranked among the best nationally in student achievement, have fallen to 48th in many surveys of student achievement. Some have disputed Proposition 13's direct role in the move to state financing of public schools, because schools financed mostly by property taxes were declared unconstitutional in Serrano vs. Priest, and Proposition 13 was then passed partially as a result of that case. California's spending per pupil was the same as the national average until about 1985, when it began dropping, which led to another referendum, Proposition 98, that requires a certain percentage of the state's budget to be directed towards education.

Public libraries have seen a decrease in funding from cities. Fire departments were gutted because of a drastic loss of funds. Police departments received generally the same amount of funding, from 15% in 1978 to 16% in 1995. Cities also cut water, gas and electricity expenses.

California localities have taken measures to offset Proposition 13 revenue losses. Some newer cities or established cities experiencing rapid population growth such as Irvine and Roseville have carefully incorporated sales tax revenue generators into their city's general zoning plan, while others have used eminent domain and redevelopment laws to condemn blighted residential and industrial properties and convert them into sales tax generators such as shopping malls, multi-dealer "auto malls" such as the Cerritos Auto Square, and strip malls anchored by big-box stores such as Costco and Wal-Mart. Cities that have been notably successful with this strategy include Cerritos, Culver City, Emeryville, and Union City. However, the spread of big box retail is considered another major factor behind California's severe housing shortage, as cities have routinely rezoned vacant parcels and "blighted" neighborhoods for retail in an attempt to increase their share of the sales tax pie. With developable land made scarce by open space preservation laws and by the resistance of single-family homeowners to up-zoning, the resulting market pressures have led to urban sprawl that has brought formerly rural areas like the Antelope and northern San Joaquin Valleys into the urban areas of Los Angeles and San Francisco, respectively.

Positive effects

Supporters argue that Proposition 13 has provided predictability for property owners, and increased community stability. They argue that, while the progressive income tax take 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, when taxpayer resistance movements started due to property taxes that unemployed workers could not pay. The largest tax protest in the history of Los Angeles County occurred in 1957 over rising property taxes . 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%.

In addition, supporters state that the passage of Proposition 13 had the immediate impact of bringing the state out of stagflation, with California outperforming the national economy. State and local spending, in constant dollars, has continued to grow, although much of that is due to increases in income, sales, and excise taxes enacted by the State Legislature.

Estimates are that Proposition 13 has saved California taxpayers over 528 billion dollars (value retrieved 5/31/2009).

In addition, contrary to predictions by opponents, the restriction of tax increases for previously owned property has decreased volatility of funding for municipalities. Property tax revenue has continued to increase the inflation rate as a result of property changing hands. 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 have cut spending more severely when the housing market came down.

According to the California Building Industry Association, construction of a median priced house results in a slight positive fiscal impact, as opposed to claims 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. In addition, 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.

Proposition 13 remains popular among Californian likely voters, who are mostly homeowners. Among likely voters, 53% described Prop 13 as "mostly a good thing" while 33% claimed 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.

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

Aftermath

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 than new owners. If one objected to the rules, they could choose not to buy.

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. Schwarzenegger, believing that taking such a step would be to touch a political third rail that could end his gubernatorial career, said, "I told Warren that if he mentions Proposition 13 again he has to do 500 sit-ups." A 2004 Los Angeles Times Magazine cover story that detailed the proposition's alleged damaging effects and advocated its repeal drew heavy criticism from its supporters.

Further amendment

On November 7, 2000, voters in the state approved Proposition 39. This initiative state constitutional amendment and statute lowered the threshold for electoral passage of local school bond acts from Proposition 13's required 2/3rds super-majority, to a super-majority of 55 percent. Proposition 39 passed with 5,402,822 votes in favor, or 53.3 percent of the total votes cast.

The geopolitical landscape in the United States

The initiative system, which gives voters the power to legislate, is not available in all states. In states that lack the initiative process, advocates of lower property taxes have been unable to advance measures like Proposition 13. In states that do allow citizen initiatives (24 in all), measures similar to Proposition 13 have been passed.

The Howard Jarvis Taxpayers Association continues to lobby for lowered and limited taxes in California and has been the most ardent defender of Proposition 13.