My critique of Prop 13

Here’s what I thought of Proposition 13 going into writing this article:

  • It keeps property taxes artificially low on valuable homes that were bought a long time ago
  • It has led to the underfunding and ultimate demise of public education in many CA counties
  • It was written, funded, and ultimately passed by a group of fear-mongering tax haters

So you could say I’ve held a healthy bit of skepticism on this measure and its 40 years of aftermath. Because affordable housing is such a hot-button issue in Assembly District 16 and Contra Costa County Supervisor District 2, I decided it was time to educate myself once and for all on this issue. Here’s what I’ve learned. 

Prop 13 was approved by California voters in 1978. To get at the heart of why Prop 13 still matters 40 years later, it’s important to understand why its biggest change, the uniform property tax and state control of its allocation, was so disruptive. 

Prior to 1978, the relationship between the state and local (city and county) governments was governed by two key principals: home rule power and the separation of revenue sources. It’s important to understand what these mean.

Home rule power states that local governments can make land use decisions and build and operate the public works required to execute on those decisions. Separation of revenue sources goes back to the 1910 Separation of Sources Act which gives local governments the authority to levy their own taxes and spend the receipts as they (and the voters) wish. It is the essence of the parent-child relationship of state and local governments. As citizens, we are simultaneously Californians and residents of San Diego, Humboldt, or unincorporated Walnut Creek (a.k.a. Contra Costa County). This dual citizenship, so to speak, had been maintained peacefully through the principles of home rule power and separation of sources because the boundaries were explicitly drawn and all parties adhered to them. 

So between 1910 and 1978, California cities had the right to make land use decisions and acquire the revenue (primarily through property taxes) to carry them out… ​And then along came Proposition 13.  

The most widely-known impact of Prop 13 was its capping of the property tax rate, so let’s take a closer look at that first. The property tax rate is like gas or milk prices in a sense that it’s a very public, recurring payment, for a staple need. I buy milk and gas and I get nutrition and the means to drive. I pay property tax and I get pubic schools, paved roads, and other services. The big difference, of course, is that I have no way to avoid paying property taxes. The only way out is to be a renter or move into a smaller house with a lower tax basis. 

This is why voters responded so favorably to Prop 13. Although they understood why property taxes were needed, they were reacting to government spending deficits and mismanagement. Since the property tax for many families is the highest tax they pay in absolute value, it was easily made a scapegoat. 

Prop 13 set a uniform statewide property tax rate of 1 percent and gave control of the revenue to the state government. Most people don’t appreciate this fact. Prop 13 took what was previously locally collected and distributed revenue and gave it to Sacramento, chewing up the Separation of Sources Act of 1910 that held the peace for so many decades. 

The fiscal result was dramatic: in 1977, the last year before Prop 13 was enacted, property taxes formed 28% of revenue in California. Since then, this revenue source has fallen by half, creating a roughly 14% drop in state revenues. A temporary budget surplus was used to smooth out the immediate losses, but a key long-term change has held in the way the property tax revenues are distributed locally.

If you think about it, there’s no way for Sacramento to know at school district level how to distribute the property taxes. It’s all in one big pot and needs to get broken into hundreds of buckets, so to solve this problem, legislators did something very logical. They took the pre-Prop 13 allocations to these local districts and re-used them. They would do this again and again for thirty years. Even as those districts grew, shrunk, or morphed, the 1977 proportions were codified and local authorities were not able to change them. It’s a ridiculous way to run things.

To hammer this ridiculousness down more concretely, let’s consider what happens in our Prop 13 system when new cities get incorporated. It’s not an infrequent occurrence — California has created at least one new city per year for the last several decades. New cities, by definition (since under home rule they get to keep local revenues), reduce income to the county. Under Prop 13, counties aren’t able to adjust property taxes to make up for the lost revenue. As a result, counties are having to manage the creation of new cities to ensure that they are revenue neutral. It’s added unnecessary headache to grant communities the ability to exert more local control by incorporating.

With property tax rates fixed, both cities and counties are having to come up with other ways to raise needed funds. These includes special school bonds and other fees. The need for funding to pay for essential services doesn’t simply go away. Demand creates supply: sources of revenue will eventually match the uses. It’s like that old business saying: scarcity breeds creativity. 

And this is essentially my beef with Prop 13. The more I read about and see counties in action, the more I have come to believe these civic workers really do their best to keep costs down, respect the public trust, and deliver the services we all want to have in our communities. Tightening the spigot of revenue doesn’t change anything, certainly not in the long run. 

Prop 13 wasn’t necessary to address the perception of excessive government spending. Communities could have rallied around elected leaders who would do away with unpopular programs, enact more transparency or regulations around spending. The local governments should have been given the autonomy to set their own budgets. Those that continued to be mismanaged could have been addressed at the state level rather than hammering down a blanket, restrictive rule that punished even those localities that were doing fine. 

It’s clear that reform is needed. I will continue reading about this issue and put together my own platform around what sources and uses distributions between state and local governments should look like for the rest of this century. 

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