Volume 8 - February 4, 1998
Dear Readers:
Since we started publishing this e-mail version of our newsletter last fall we have experimented with an eclectic mix of political analysis and just plain humor. Since our readers are pretty darn diverse, some articles appeal to some folks more than others. The beauty of e-mail is if you see from the title that the current issue isn't your cup of soup, you can just click that trash can and move on. If the current issue does turn you on you can forwarded to your friends.
This issue focuses on Proposition 13, that turning point in California politics and policy that was approved by voters exactly 20 years ago this Spring. To help people remember what this event was really about we reprint here an article that appeared both in our fall newsletter and as an August opinion article in the Sacramento Bee. It is a story that needs to be remembered and retold by all those who care about not just California's past but its future.
Happy reading!
Jim Shultz
The Democracy Center
By Jim Shultz
Last summer, as America marked the 20th anniversary of the death of Elvis Presley, California marked another 20th anniversary - the birth of Proposition 13. Elvis, by most reports, is still dead. Proposition 13 however, still shapes the basic outlines of California government and politics. Twenty years ago, as a summer intern in the Assembly Speaker's office, I watched from a front row seat as the California tax revolt unfolded. This is the story of how Proposition 13 was born and how, by political accident, California gave the state's wealthiest corporations a multi-billion dollar tax cut that they never even asked for.
Housing prices in California were skyrocketing in the mid-1970s. As a growing population demanded homes the jump in home prices went from 5% per year to as much as 5% per month. For local governments the increases were a money machine. As home prices jumped so did local property assessments and, in turn, homeowners' property tax bills. While local governments raked in the cash homeowners were facing tax increases of $600 to $1,000 dollars per year and getting angry. By mid-1976 a fledgling tax revolt was underway.
The rebellion soon turned its attention to the Capitol where state government had a money machine of its own - double digit inflation. Inflation-driven "cost of living" pay raises gave taxpayers no real increase in their incomes but did shove them into higher tax brackets. This "bracket creep" produced a whopping $2.5 billion surplus in the state's budget. As lawmakers returned to the Capitol in January 1977 they found themselves under enormous pressure to use the surplus for a property tax cut.
Republicans and Democrats all agreed that the state surplus should be used to provide relief to angry homeowners. However, what form that relief should take was the subject of a heated debate. Democratic liberals wanted a tax relief program targeted to low-income homeowners and renters. Democratic moderates, led by Governor Jerry Brown, wanted to aim relief more to middle and high-income homeowners and wanted limits on state and local spending. Republicans wanted an income tax cut which targeted relief to high income taxpayers. All of the plans focused on aiding homeowners and renters. None of the plans proposed any sweeping tax cuts for corporate property. Throughout the Spring of 1977 the rival plans made their way through the Legislature and as summer began an Assembly/Senate conference committee was assigned the task of coming up with an acceptable compromise.
In July two conservative activists, Howard Jarvis and Paul Gann, announced plans to take the property tax rebellion to the ballot. What they proposed (Proposition 13) was far more radical than any proposal floated in Sacramento. In contrast to legislative plans that cost $500 million to $1 billion per year, Jarvis and Gann proposed a mammoth tax cut of $6 billion - one sixth of all state and local revenues combined. It promised a roll back on "assessed values" on every property in the state to what they had been in 1975. It also put a 1% cap on all local property tax rates and required that all future tax increases be approved by a two thirds vote, both in the Legislature and among local voters.
Most importantly, Jarvis and Gann made no distinction between residential and business property. As a result 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.
In Sacramento legislative negotiators crafted a compromise which combined tax relief and local spending limits. It was approved in the Assembly but unraveled in the Senate when liberals complained that too much had been given away. A second compromise added more aid for homeowners and renters but this time Senate moderates balked, calling the plan "too liberal" and "too complicated" to explain to voters back home. On the last night of the legislative session the second compromise failed by just two votes.
Legislative leaders asked the Governor to call a special session to take up tax relief again. Brown refused saying, "The Senators should go home and meditate." In December Jarvis and Gann turned in more than double the signatures needed to qualify for the June 1978 ballot. Lawmakers returned to the Capitol in January 1978 under enormous pressure to come up with an alternative. After two months of haggling they approved a $1.6 billion, 30% cut in homeowner property taxes that went on the June ballot as Proposition 8.
In the campaign Proposition 13's opponents included two future GOP Governors, Deukmejian and Wilson, the California Taxpayers Association, Bank of America, Atlantic Richfield, Southern California Edison, Southern Pacific Railroad and Standard Oil of California. The corporations gave huge cash donations to NO on 13 effort. Southern California Edison's executive vice president explained, "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." On Election Day however, all the opposition and warnings were unimportant. Angry voters passed Proposition 13 by a vote of two to one with wide support all across the state.
Overnight Proposition 13 slashed local property tax revenues by more than half. Lawmakers came to the aid of schools and local governments with a $2.7 billion "bailout" but the trend of deep cuts was set in motion. In the two decades since, California spending for schools has fallen from among the top in the nation to almost last. Fees at public universities have shot up, and services from health care to libraries to transportation have all suffered from the same steady deterioration. In 1992 and 1993, when a recession blew a hole in the state budget, lawmakers reversed the bailout and grabbed $3.6 billion in property tax revenue from the counties to help balance their own budget.
Twenty years later it is important to remember how that California's tax revolt 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 to what they are actually worth today. Corporate property, on the other hand, changes title much more rarely and many corporate buildings continue to be taxed today based on what they were worth more than two decades ago. This corporate loophole in Proposition 13 costs California schools and local governments between $3.5 to $5 billion per year. In 1978 corporate leaders opposed this loophole. Today, like an aging Elvis, they've become addicted.
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. After twenty years of crumbling schools and public services it is time for California to take another look.
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