Prop 13: California Diminished by 1978 Tax Revolt

By Christopher Palmeri, ©2011 Bloomberg News

California voters approved Proposition 13 to rein in property taxes that had doubled in 10 years.

More than three decades later, that rebellion has mortgaged the state’s future, saddling it with the nation’s highest debt and lowest credit rating.

The measure led to reductions that dropped per-student school spending from seventh to 29th nationally, prompted cities to pursue sprawling retail development to compensate for lost revenue, and pushed the state into budget gridlock, including a $705 million revenue shortfall announced Oct. 10, by requiring two-thirds approval for any tax increase.

“Proposition 13 set up an unfair and dysfunctional two- tiered system of property taxes,” said Kevin Starr, a history professor at the University of Southern California and the author of a series of books on the state. “It choked off a source of revenue, and the lack of that revenue has brought California to the edge.”

The measure, approved in 1978, was the inspiration for an antitax movement that has taken hold of the public discourse in Washington and in state legislatures throughout the country. It caps real estate levies at 1 percent of a property’s most-recent sale price. Before it passed, local governments could raise revenue as they saw fit.

Spread to Washington

In July, antitax fervor fed by the Tea Party movement led Republicans in the U.S. House of Representatives to dig in against any increase in the nation’s debt ceiling that included raising taxes. The compromise that resulted threatens automatic spending cuts across the government if a congressional supercommittee can’t agree on ways to cut the federal deficit by more than $1 trillion.

In his 1990 autobiography, “An American Life,” former President Ronald Reagan called Proposition 13 “a prairie fire” sweeping the nation. In just the past two years, New York and New Jersey enacted laws inspired by it. At least 20 states now have some sort of property-tax cap, according to the Lincoln Institute of Land Policy, a Cambridge, Massachusetts, foundation that researches property issues.

In California, where Proposition 13′s tax ceiling has long shaped public policy, the effect of that movement is clear.

Universities Cut

In addition to the effect on elementary schools, the most- populous state cut support for its public universities by 18 percent to $4.5 billion this year, according to the California finance department. The world’s ninth-largest economy’s general- fund backed debt has risen to $82.6 billion from $2.25 billion in 1978, state figures show. California carries more debt than any other state and ranks eighth on a per-capita basis, with $2,542 for each resident, Moody’s Investors Service has said.

Proposition 13 created disparities in tax payments that amaze Larry Stone, the assessor in Santa Clara County, home to Silicon Valley and companies such as Apple Inc. and Intel Corp. Stone’s new neighbor in Sunnyvale will pay almost $18,000 in annual taxes and special assessments compared with the $3,000 Stone pays for the house he bought in 1975.

“You couldn’t invent a crazier system,” Stone said in a telephone interview.

The measure also created loopholes that businesses exploit to avoid paying their fair share, says San Francisco Assemblyman Tom Ammiano, a 69-year-old Democrat who has sponsored legislation to tighten rules on business-property transfers.

Dell’s Deal

For instance, billionaire Michael Dell structured the 2006 purchase of an ocean-view hotel in Santa Monica, a Los Angeles suburb, to avoid the automatic tax increase that comes with acquisition of more than a 50 percent interest in any property, Los Angeles County officials said in a statement filed in court.

The founder of Texas computer maker Dell Inc. and his wife, Susan, bought shares in Ocean Avenue LLC, the corporation that owns the 302-room Fairmont Miramar hotel. They did it through a partnership, a limited liability corporation and a trust, none of which bought more than half of the hotel’s stock.

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Tags: california voters, debt ceiling, featured, federal deficit, former president ronald reagan, kevin starr, local governments, more than three decades, prairie fire, proposition 13, public discourse, revenue shortfall, state legislatures, tax cap, two tiered system, university of southern california

Category: The Economy