Prop 13

Once upon a time, there was a state called California, where the public colleges were among the nation's finest. Students could afford to attend them or get aid through state grants. Classes and services were plentiful, and students could hope to graduate within five years and even find a job afterwards.

   Sounds like a fairy tale, doesn't it? Today, students are fortunate if they can get into classes at all, as budget cuts eat into course offerings. Overcrowded public universities forestall transfer hopefuls, forcing them into longer stays at community colleges, delaying graduation dates and delaying California's economic recovery.

   The outlook for the state's educational system is bleak even as the rest of the nation begins to recover. Why? How did California's education system fall victim to gridlocked state government?

   Every fairy tale has its dark side. In the pre-Reagan era, California's property values were tied to market values — as values climbed, so did taxes. The victims of this scenario were California's elderly. Widows and retirees on fixed incomes were unable to keep up with escalating property taxes, often forcing them from their homes.

   Enter Howard Jarvis, an anti-tax crusader who, in 1978, championed Proposition 13, the "People's Initiative to Limit Property Taxation." Jarvis' formula was simple –taxes would be fixed to acquisition values; that is, property taxes would be capped at 1 percent above the level at which they were when the property was purchased, even as home values increased.

   California voters passed the initiative overwhelmingly, amending the state constitution and reducing property taxes by about 57 percent.

   Three decades later, many point to Prop 13 as the beginning of the Golden State's unhappy ending.While the amendment had its desired affect of protecting homeowners, it triggered side effects that have left California in a quagmire.

Local Government Rely on Sacramento

    Don Gilchrist, former chief of staff to Senator John Lewis (CA-R), was involved in local politics prior to the passage of Prop 13.

   Now in his 80s, he recalls a time when local governments and school districts would adjust taxes annually based on community needs. This "resulted in certain inequities," Gilchrist said.

   Wealthier areas with higher tax revenues could provide better opportunities than adjacent, lower-income areas. "You started to see ‘equalization measures,' where the idea would be to redistribute wealth. That has a certain familiar ring to it, I suspect.""If local agencies had honored the theory that Prop 13 had in mind, everything would be great. There would have been a gradual reduction in expenses, and maybe in services, to line up with tax revenues generated by each community. But that didn't happen. Two years later, they all headed to Sacramento to get bailed out."

Tax Break for Business, Too?

   Writers of Proposition 13 provided a tax break for all property owners, without differentiating for use of properties.

   While the elderly stayed in their homes without tax hikes, business owners stayed in their properties, too. Communities redeveloped older business areas and maintained commercial districts, but property taxes weren't increased to raise capital for improvements, resulting in a drain on public funds that couldn't be replenished with tax revenue.

   While Prop 13 was intended to benefit homeowners, it has had the converse effect of placing the property tax burden more heavily on residential home owners versus business property owners. Because sale prices increase over time and residential properties change hands more often than business properties, residential property taxes have risen more rapidly than business taxes over the years.

   Now referred to as a "split-role," the notion of increasing taxes on business properties is opposed by the business community.

Two-thirds Majority for Tax Increases

   When the writers of Prop 13 established tax limitations, they included a provision that would make it difficult to reverse them – the two-thirds majority rule.

   It now requires two-thirds majority of voters to enact a tax increase. Budget initiatives must appear on voter ballots, slowing down the process, making it all but impossible to pass laws that increase tax revenue. As a result, initiatives on ballots present piecemeal changes to the budget, so balancing the budget becomes bogged down in political process.

What's next?

   Not everyone agrees that Prop 13 is the villain in the story of California's ailing economy.

   Taxpayer watchdog groups, especially The Howard Jarvis Taxpayer's Union, fight the measures that would counter or overturn Prop 13. In a recent blog, Jarvis union president Jon Coupal said, "And what would life be like if Proposition 13 were not enacted to stabilize property taxes and revenues in California? How many people would have lost their homes and businesses during the last real estate spike when property values quickly - and artificially - skyrocketed? Conversely, how much worse off would the state be if, during this real estate plunge, it could not count on base value property taxes ensured by Proposition 13?"

   Whether or not Prop 13 is to blame, the current shortage of revenue and immobilized state legislators have forced players on both sides of the political divide to recognize the urgent need to restructure the state's tax system.

   Governor Schwarzenegger created the Commission on the 21st Century Economy to examine the current tax situation and recommend improvements to ensure long-term economic growth.