A crowded classroom in California in 2010, just before the end of the Great Recession.
A crowded classroom in California in 2010, just before the end of the Great Recession.
A new analysis of the lingering effects of Proposition 13, the 1978 initiative voters passed in response to rising property taxes, concludes that it has contributed to a widening wealth gap, serious housing shortages and decades of underfunding for public schools .
“Proposition 13 is just one example of what happens when a supposedly progressive state allows a privileged few to hoard opportunities and resources at the expense of the greater good,” concluded the Opportunity Institute’s Unjust Legacy report, published February 27, 2018 and Pivot Learning Wednesday. The institute is a nonprofit organization dedicated to achieving just outcomes for Californians; Pivot Learning is a consulting organization that works with schools in California and other states to improve performance.
The 45-page report did not recommend any specific fix for Prop. 13, although it presented several scenarios that could result in billions of dollars in additional K-12 funding. The remedy depends on which goal you are striving for, it was said: generate more sales or increase sales stability? Increase tax equity? Expand access to home ownership? Increase local control over taxation or give more control to the state legislature? The aim of the report was to provide policymakers and researchers with a broader understanding of Prop. 13’s legacy so that they could examine the angles in depth.
Inspired by Howard Jarvis, a Republican businessman and unsuccessful politician, Prop. 13 received 65% of the vote. Among its characteristics, Prop. 13:
- Reduce residential and commercial property valuations to 1975–76 values.
- Property tax rates capped at 1% of the purchase price of a property.
- Permissible estimates may not increase by more than 2% per year.
- Permitted a revaluation of a property only if it has been sold or if the owner has made significant improvements.
- Set a two-thirds majority instead of a 50 percent majority in local elections to pass a new “special tax”.
Prop. 13 coincided with rapidly increasing government spending, double-digit inflation, and soaring home prices, which in turn caused higher property valuations and higher property tax bills. Seniors on fixed incomes and workers whose pay rises have not been able to keep up with inflation complained that they were being taxed out of their homes and being priced in California.
But the report also suggests a darker motive. The 1970s was a decade of significant immigration by Latinos and Asians with children in schools, and the state’s population composition, then two-thirds white, was changing. For the first time there was talk of a future majority-minority California.
“Proposition 13 was also just one in a simultaneous wave of state referendums that had xenophobic and racist undertones,” the report said, citing several studies.
Prop. 13 was preceded by a series of court decisions known as the Serrano decisions, in which the California Supreme Court ruled that funding schools based on real estate values violates the rights of children in low-tax base school districts. The court did not rule out financing schools through property taxes; Income should be distributed more fairly. And that’s exactly what the legislature did with legislation pushed by Gov. Jerry Brown in 1976, said Michael Kirst, a Stanford University professor emeritus who was Brown’s state board of education president and advisor at the time. But then Prop. 13 was passed to forestall its passage, he said.
Funding for schools has been cut
The result was an erosion of school funding, with California falling from fifth to 47th nationwide in funding per student over the next two decades. In 1988, voters approved Proposition 98, guaranteeing that a portion of the general treasury — about 40 percent — would be allocated to K-12 schools and community colleges. Proponents of Prop. 98 envisioned the legislature treating the requirement as a minimum level of school funding, but for most years it served as a ceiling, not a floor.
Those counties whose real estate values generate per-student school funding in excess of state funds—primarily high-income communities—are exempt from Prop. 98. Today, they make up about 15% of districts, serving about 5% of students, the report says. High-income communities have supplemented state funding with parcel taxes, which required a two-thirds majority under Prop. 13 — a major impediment that contributes to inequalities.
But Prop. 98 funding levels for schools have risen since the end of the Great Recession (2007-09), bolstered by an income tax surcharge for top earners that voters made permanent in 2016. The top 1% of earners now fund half of that in state income taxes.
As the report noted, California’s funding per student in 2019-20, unadjusted for regional costs, reached the national average. And the Legislature is poised to pass a state budget in which funding per student is likely to far exceed the national average — with funding even higher for low-income counties, which receive additional money under the state’s local tax-financing formula.
At least for 2022-23. But the downside of tax progression is volatility; A government tax structure dependent on income from capital gains follows stock market fluctuations. During the Great Recession, government funding for schools fell by $7 billion, or about $1,200 per student.
“It’s a reminder that the boom and bust cycle is real. Property taxes are one piece of the puzzle to offset volatility,” said Carrie Hahnel, senior director of policy and strategy at the Opportunity Institute.
Should a recession hit this year, as some forecasters are predicting, school districts are better equipped to weather it than they were a decade ago, but the impact of a sizeable recession would still be staggering. Property tax revenues have been more stable and predictable — and still could be, depending on how Prop. 13 reform would be structured.
“I’ve always said that school funding should be a three-legged stool, with local, state, and federal involvement for stable and growing funding,” Kirst said. “We need to get local counties back in a way that goes beyond property taxes and developer fees.”
One possibility, briefly mentioned in the report, could be to phase out the 1% limit on property taxation or the 2% limit on the annual revaluation of property values and share some of the revenue to possibly to complement the tax increases of low-income counties in the same region or municipality. Failure to balance earnings could reignite Serrano-type lawsuits and court intervention.
Aside from education funding, the report documents other Prop. 13 inequalities. Capping property tax increases encouraged homeowners to hold on to their homes longer than other states, resulting in fewer homes on the market. Owners could factor in the market tightness when pricing a home and, until recently, could inherit the home to children and grandchildren at the same appraised value.
For decades, due to redlining, exclusion, and racism, blacks, Asians, and Latinos were unable to obtain mortgages or shop in many neighborhoods where they could build the same kind of intergenerational prosperity that high-income white families were able to Part through Prop. 13, the report said.
As the report noted, many factors — large-scale zoning, high land costs, government fees — contribute to the high cost of housing. By capping property taxes, Prop. 13’s contribution was to encourage cities and counties to zone land for retail and manufacturing rather than housing to generate sales tax and business revenue. The cities fought each other for large department stores and ignored the need for housing.
“Proposition 13 will continue to prevent us from having more equitable resources for housing and local government; it depends on how well we support families and children,” Hahnel said. “Therefore, we call for a re-examination of the implications of Prop. 13.”
Prop. 13 remains popular in polls — and has been considered politically untouchable for decades. But in 2020, a nationwide initiative to revaluate commercial real estate to market value to generate additional government funds was nearing completion with 47% approval, and another initiative passed. Proposition 19 requires that heirs to an inherited, low-valued property live in the home and not make money by renting it out.
In a statement Tuesday, the anti-tax Howard Jarvis Taxpayers Association, named for the father of Prop. 13, dismissed the Legacy report as “a thoughtless attack on California homeowners.”
“Out-of-touch researchers are wasting their time and yours issuing yet another report on how much more money the government could raise if only it were allowed to take it,” it said.
Kirst acknowledged that convincing voters to raise property taxes for more government revenue might be difficult, but hailed the report as “a first analysis of a kind focused on equity that hadn’t been analyzed well.”
“It’s an important contribution to school funding in California,” he said.
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