How Big Corporations Became Proposition 13’s Biggest Winners

The Summer that Elvis Died and Proposition 13 Was Born

by Jim Shultz

Proposition 13 Pop Quiz

Who among the following opposed Proposition 13 when it was voted on in June 1978?

a)Governor Pete Wilson e) Former Governor George Deukmejian
b) The California Taxpayers Association f) The Bank of America
c) Atlantic Richfield g) Southern California Edison
d) Southern Pacific Railroad h) Standard Oil of California
answer: all of them

In case you didn’t watch any television or read any newspapers for the past few months, this summer marked the 20th anniversary of the death of Elvis Presley. TV Guide published three different Elvis covers. In Memphis, his widow, Pricilla, opened a chain of Elvis restaurants. This month California will mark its own anniversary from the summer of 1977, of an event at least as well worth remembering. It was exactly twenty years ago that California lawmakers tried and failed to head off the great California property tax revolt. It was twenty years ago this summer that Proposition 13 was born.

Elvis, by most reports, is still dead. Proposition 13, however, still shapes the basic outlines of California government and politics nearly two decades later. For that reason alone, the story of its birth is an important one. It is the story of how, by political fluke, California ended up creating a perpetual, multi-billion dollar tax cut for the state’s wealthiest corporations – a tax cut that California’s corporate leaders not only didn’t ask for but which, at the time, they tried very hard to torpedo.

I spent the summer of 1977 as a student intern in the office of Assembly Speaker Leo McCarthy, watching from a front row seat as the events of the tax revolt unfolded. Back at Berkeley in the fall, along with two other interns, I wrote a student paper about what we saw – the summer when the attention of the nation turned from Elvis to Jarvis.

The Roots of Rebellion

In California in the mid-1970s housing prices were skyrocketing. The state’s population was growing, families wanted homes, and supply could not keep up with demand. In the course of just a few years the jump in home prices went from 5% per year to as much as 5% per month. For local governments the explosion in home prices was a money machine. Local property taxes are based on a simple formula – the “assessed value” of a property (what the county assessor says it’s worth) multiplied by the percentage “tax rate”. As prices boomed, so did local property assessments and, in turn, homeowners’ property tax bills. While local governments raked in the cash, homeowners were staring at tax increases of $600 to $1,000 dollars per year and getting more angry by the day. By mid-1976 a fledgling tax rebellion had begun.

City and county leaders sought to shift the blame to Sacramento – calling for a special session of the Legislature to enact tax relief. The rebellion turned its attention to the Capitol, where Governor Jerry Brown was soon deluged with 200,000 protest letters delivered in brown paper bags (a.k.a. the “Brown bag campaign”). California state government made an easy target. In the mid-1970s it had its own money machine – double digit inflation. High inflation led to “cost of living ” pay raises which boosted Californians’ incomes but gave people no real increase in buying power. Inflation raises did, however, shove taxpayers into higher tax brackets. By early 1977 this “bracket creep” led to a whopping $2.5 billion state budget surplus.

When lawmakers returned tp the Capitol in January 1977 they were under enormous pressure to use the surplus for property tax relief. Veteran Sacramento Senator, Al Rodda, was prophetic when he told reporters, “If we do not achieve some degree of (property) tax relief the taxpayer revolt is going to be of such a magnitude that they may sign initiatives, qualify those initiatives and vote for them.”

Tax Relief Yes – but what kind?

On the basic question – should the state use the surplus to help provide relief to angry homeowners – there was no disagreement. Legislative leaders in both parties, as well as Governor Brown, all put tax relief at the top of their 1977 agendas. However, what form that relief should take was the subject of a heated debate. Democratic liberals wanted a tax relief program which targeted its aid to low-income homeowners and renters. Democratic moderates, led by the Governor, wanted a program aimed more at middle and high-income homeowners and also demanded new statutory limits on state and local spending. Republicans, heavily outnumbered in both houses, proposed returning the surplus to Californians through an income tax cut, which targeted its benefits to taxpayers with the highest incomes. All of the plans focused on providing relief to homeowners and renters. None of the plans proposed any form of sweeping tax cuts for corporate property.

Throughout the spring the rival plans worked their way through the Legislature. In the Assembly the liberal package carried by Willie Brown and Bill Lockyer was slowly compromised until it was acceptable enough to moderates to win passage from the full house. The Senate, on the other hand, couldn’t make up its mind. Through one committee, then another, and finally with approval on the floor the Senators kept advancing two completely conflicting liberal and moderate tax plans. It was a preview of legislative schizophrenia that would come back to haunt lawmakers continuously for almost a year.

Try, Try and Fail Again

As Sacramento settled into a molten summer, an Assembly/Senate conference committee was convened to come up with a compromise that would be acceptable to majorities in both houses, to a Governor with re-election on his mind, and to an uprising of angry California homeowners. On July 5th the pressure heated up considerably when two conservative activists, Howard Jarvis and Paul Gann, announced plans to take the property tax rebellion to the ballot.

What Jarvis and Gann proposed (the initiative that eventually became Proposition 13) was far more radical than any proposal that had been floated in Sacramento. The legislative tax relief plans all had price tags between $500 million and $1 billion per year. Jarvis/Gann proposed a mammoth tax cut of $6 billion – a full sixth of all state and local revenues combined. It mandated that the “assessed values” on every property in the state be rolled back to what they had been in 1975. It put a 1% cap on all local property tax rates. It required that all new tax increases had to be approved by a two thirds vote, both in the Legislature and among local voters.

Finally, unlike all the plans in the Legislature, Jarvis and Gann made no distinction between residential and business property. As a result of a simple drafting choice made by two gadfly tax activists, two thirds of the $6 billion tax cut would go, not to homeowners, but to commercial and income property. At stake was an unprecedented, multi-billion dollar tax cut that California’s corporate leaders hadn’t even asked for, but one with colossal, long-term implications for California’s schools and other public services.

At the Capitol the conference committee’s compromise efforts dragged on for two months and peacemaking took many forms. In August Governor Brown, a born-again space enthusiast, invited lawmakers and staff from both parties to a special showing of “Star Wars” at the downtown Crest theater. With Jarvis and Gann looming like two petition-carrying “Darth Vaders”, Brown and legislative leaders labored to get tax relief back on track. Finally, the committee decided to cut the baby in half, blending tax relief with local spending limits and other concessions insisted on by the Governor. When it came to a vote in late August the Assembly approved the relief compromise quickly, but in the Senate, it started to unravel. Senate liberals complained that too much had been given away and decided to hold out for more by joining with Republicans to defeat it.

That August as thousands of Elvis fans lined the roads to Graceland to pay their last respects, thousands of angry California homeowners lined up at card tables in front of supermarkets to sign Jarvis’ and Gann’s petitions. With just two weeks left before the end of the legislative session lawmakers began a last frenzied effort to head off the initiative.

A second conference committee worked right up to the September 15th deadline for Legislative adjournment. To appease Senate liberals the committee beefed up aid to homeowners and renters and crafted a bill that would put tax rebate checks in voters’ mailboxes while Jarvis and Gann were still collecting their signatures. The new compromise was brought to the floors of both houses on the last night of the session.

With the clock ticking toward adjournment the tax relief bill once again won approval in the Assembly and, once again, it went down in flames in the Senate, falling just two votes short. This time it was the Senate moderates who balked, complaining that the relief plan had become too liberal and also so complicated that they couldn’t explain it easily enough to the voters at home. Senate Republicans also withheld their support, smelling a potentially powerful campaign issue for the 1978 campaign. Many blamed Governor Brown for failing to provide the leadership needed to bring the warring factions together.

The next morning’s Sacramento Bee reported on an end of session marked by toasts with wine, dancing on the Assembly floor, and a normally staid Assembly Speaker McCarthy letting members sit in his lap to pose for photographs. Amidst the antics, few present probably understood the significance of the moment. When lawmakers went home empty-handed the fate of Proposition 13’s passage had been sealed.

Too Little Too Late

Legislative leaders called on the governor to convene a special session to take up tax relief again but a frustrated Brown refused. “It’s like a shotgun wedding and the bridegroom isn’t quite ready to go to the altar,” said the bachelor Governor. “The Senators should go home and meditate.” With lawmakers failing to deliver, the Jarvis/Gann juggernaut picked up speed. In southern California, Jarvis recruited supporters with appearances on conservative radio shows and his wife Estelle organized armies of housewives to gather signatures. Paul Gann rallied troops with car trips through the rural counties of the north. In December the campaign turned in 1.2 million signatures, more than double the 500,000 they needed to qualify for the ballot.

When lawmakers returned to Sacramento in January 1978, tax relief was again topic number one. Speaker McCarthy’s chief of staff outlined bluntly the leadership’s only two criteria for a tax relief bill – it had to be able to pass the Senate and it had to be able to beat Proposition 13 on the June ballot. For two more months supposed compromises on tax relief came and went. Ultimately, lawmakers seized onto a bill by moderate Republican Peter Behr of Marin, which was shaped into a $1.6 billion, 30% cut in homeowner property taxes and a basic tax credit for renters, all paid for by a spending down of the surplus and some limited new taxes on business. The compromise passed both houses on strong bipartisan votes and went on the June ballot as Proposition 8.

Proposition 13 was opposed by every major Democratic leader in the state and also by a long list of prominent Republicans including two future GOP Governors, Deukmejian and Wilson. Then mayor of San Diego and a candidate for governor, Wilson campaigned against the initiative, calling it “a meat ax approach.” Proposition 13’s opponents also included the pro-business California Taxpayers Association along with The Bank of America, Atlantic Richfield, Southern California Edison, Southern Pacific Railroad and Standard Oil of California. The corporations not only not only opposed Proposition 13 but gave huge cash donations to the campaign to defeat it. The executive vice president of Southern California Edison explained to reporters, “Although business stands to receive at least $4 billion of the anticipated $6 billion in property tax relief, we felt it was time for the private sector to stand up for principle and fight this measure as financially unsound.”

Despite opponents’ warnings that 2/3 of the tax relief would go to business and landlords, that funding for public schools would be slashed, and that the state would take control over local decisions – voters were angry and extremely distrustful of an alternative drawn up by politicians. On June 6th Proposition 13 passed by a vote of two to one, carrying nearly every county in the state with wide support across both parties. Proposition 8 lost by a vote of 47% to 53%.

The Aftermath

Overnight Proposition 13 slashed local property tax revenues by more than half. School districts, counties and cities immediately turned to the state and its then $3.8 billion surplus to fill the gap. Lawmakers approved a $2.7 billion “bailout” plan to help schools and local governments weather the storm but the steady trend of cuts in services was set in motion. In the two decades since, the cuts instigated by Proposition 13 have only grown deeper. California spending for schools went from being near the top in the nation to almost last. Fees at public universities have shot up, public libraries have shut-down, and other services from health care to transportation have all suffered from the same steady deterioration.

In the 1990s, when the recession blew a hole in the state budget, Proposition 13 finally came home in full force. In 1992 and 1993 lawmakers reversed the Proposition 13 bailout, like a vaccum cleaner switched from “blow” to “suck”, and grabbed $3.6 billion in local property tax revenue to help balance their own budget.

Twenty years later it is important to remember how the tax rebellion began. It was about people living in the little houses they bought in the 1950s for $15,000 who suddenly faced property tax bills based on real estate prices ten times that. They grabbed onto Proposition 13 for protection and two decades later they are still holding on. What we’ve forgotten, or never understood, is the massive corporate giveaway that tagged along for the ride.

Over time houses get sold and, under Proposition 13, get reassessed based on what they are actually worth today. Corporate skyscrapers, however, have a loophole. As long as the same corporation holds title, as long as the logo on the door remains the same, the building continues to be taxed based on what it was worth more than two decades ago. The respected Center on Budget and Policy Priorities has estimated that this one loophole in Proposition 13 costs California schools and local governments between $3.5 to $5 billion per year.

Twenty years ago California’s corporate leaders fought the corporate windfall in Proposition 13, like a bad drug they didn’t want to take. Today they guard their lucrative “skyscraper loophole” like a desperate addict. In 1991 when legislation was introduced to have corporate property (not homes) periodically reassessed to its current value, business leaders descended on it with all their political muscle and killed it in its nest. Two decades ago California’s corporate leadership was made up of people willing, “to stand up for principle”. Today our corporate leaders seem only interested in lobbying for more tax breaks.

What California really has are two Proposition 13s, the one that protects homeowners and the one that still doles out 2/3 of the relief to the owners of corporate and income property. Twenty years ago, we failed to make that distinction and it has cost California bitterly. Maybe, after two decades of crumbling schools, skyrocketing tuition, and painful cuts in public services, it is time to take another look.

This article first appeared in the Sacramento Bee in September 1997.

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