How Proposition 13 Limited California’s Growth

In response to increasing dissatisfaction with property taxes, California passed Proposition 13 in 1978. The ballot measure, which won by a 2-1 margin, rolled back assessed home values to their 1975 levels, limited assessed value to a 2% increase each year unless the house was sold, and capped property tax rates at 1% of the value of the house. Later amendments allowed a homeowner to pass on his home to his children (or even grandchildren) without triggering a reassessment, letting the low property taxes be passed from generation to generation.

Proposition 13 did exactly what it said on the tin. Homeowner property taxes immediately fell by nearly 60%, reducing government tax revenues by roughly $7 billion annually (with “losses” even higher later as property values continued to climb). City tax revenue declined by 27% on average, and county tax revenue declined by 40% on average. While government spending had risen by 4.1% per year between 1957 and 1971 in inflation-adjusted terms, after Prop 13 it began to fall. One estimate suggested that by 1988, Prop 13 had saved taxpayers $228 billion. California fell from 7th in the nation in tax revenue per $100 of personal income to 35th.

Cuts in government services quickly followed:

“The first year all summer school programs were cancelled, sports and other extracurricular programs reduced, public library hours curtailed, and some branch libraries closed down altogether; maintenance of parks, playgrounds, and other recreation facilities was sharply curtailed, and fees increased… The summer school programs were restored in subsequent years, but the service reductions, the cuts in school programs, the reduced staffing in everything from park and recreation programs to school counsellors and mental health clinics, the perpetually deferred maintenance…became the pattern of the future… California’s public schools, which had been among the most generously funded in the nation, began a path of decline from which they have never recovered.” – Paradise Lost

And even before tax revenues were cut, California was spending less and less of the money it did have on infrastructure and capital spending. In part this was due to rising interest rates making bonds for large capital expenditures more expensive. There was also a falling willingness to pay the price for infrastructure spending. Between 1958 and 1964, San Francisco passed 83% of bond measures placed on the ballot. Between 1965 and 1971, that fell to 39%. And once Proposition 13 was in place, capital spending became even more difficult. Up through the late 1960s, capital spending represented 15-20% of the state’s budget, but by the 1980s that had fallen to less than five percent.

Via The California Economy: When Vigor and Frailty Collide | Newgeography.com

Perversely, Prop 13 in some ways acted directly against homeowners’ desire for more local control. The measure eliminated local control over property tax, redirecting it to the state legislature and governor. Local governments and school districts were forced to hire lobbyists to represent their interests in the state capitol in the hopes of getting a portion of reduced tax revenue.

Prop 13, along with the enormous number of growth controls passed by various jurisdictions, forced California into a vicious cycle. With reduced tax revenues (and inability to control the revenues that remained), residency became far more zero sum. Services allocated to new residents might easily come at the expense of existing residents, incentivizing jurisdictions to create further growth controls. Rising property values forced people to live farther and farther away from their jobs, exacerbating the problems of growth: longer commuting distances meant more air pollution, more traffic congestion, and more freeway. In “Tax Revolt,” authors Sears and Citron note that Prop 13 completely transformed the culture of California politics:

“Austerity and self-reliance replaced planning and social reform as symbols of legitimacy. Politicians increasingly came to speak the language of trade-offs and constraints rather than growth and progress. In the pre-Proposition 13 era, policy-makers could think first of what programs they wanted to expand and feel confident that revenues would be available. After 1978, the dominant mood forced officials to revise spending priorities to fit fixed revenues. New programs had to be ‘marketed,’ not merely announced, since they took money away from ongoing activities or necessitated raising fees or taxes.” – Tax Revolt

Conclusion

And with Prop 13, one potential benefit of growth — preventing high real estate prices and thus high property taxes — was achieved in other ways.