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35 Years after Prop 13, Has It Worked?

Thursday, June 6, 2013

Often described as the opening shot in the Reagan-era tax revolt, Prop 13 limited California’s property tax rates, but has it yielded greater fiscal discipline? What about tax and expenditure limits in other states?

Today is the 35th anniversary of the passage of Proposition 13. The California ballot initiative limited the state’s property tax rates and transferred responsibility for allocating local property tax revenues to the state legislature — but did it yield an increase in fiscal discipline?

During the 1970s, California property values, and thus the assessments used to compute property tax liabilities, doubled in real (inflation-adjusted) terms. The political class, enjoying the resulting torrent of new property tax revenues, largely refused to reduce property tax rates. (The assessment times the rate equals the tax bill.) One enormous problem was that individual government agencies — school districts, flood districts, etc. — imposed their tax rates independently, and the total tax rate was the simple sum of all of the above. Any effort to exercise fiscal discipline was a collective good from the viewpoint of any given bureaucracy: a reduction in tax collections by one simply left more dollars on the table for others. In any event, then as now, the bureaucracy and elected officials had powerful incentives to respond to the demands of concentrated spending interests rather than those of diffused taxpayers, and, then as now, government spending was blandly assumed to accomplish much good, with or without the support of actual evidence.

And then as now, it was ordinary people who had to foot the bills, in this case skyrocketing property tax liabilities, too often by selling their houses. Yes, a significant number of people literally were being taxed out of their homes, many of whom were the elderly on fixed incomes, a rather perverse situation to which the central response of elected officials and the bureaucracy was… silence.

One central problem is that such limitations emerge from the same processes of political competition that have yielded adverse fiscal outcomes in the first place.

Up to the plate stepped Howard Jarvis, a man whose philosophy of public finance was simple: don’t give the bureaucrats and the politicians the money in the first place. The result was a voter initiative, Proposition 13, the official title of which was the People's Initiative to Limit Property Taxation. Notwithstanding the Pravda-like title, Proposition 13 was a constitutional amendment approved by the voters on June 6, 1978, by a margin of about 65–35.

Prop 13 rolled assessed market values back to their 1976 levels and allowed annual increases in assessments of only 2 percent, unless a given property was sold; after a sale, a new market value was established, which then was limited to the 2 percent annual increase. Prop 13 limited the property tax rate to 1 percent of market value, with some add-ons for local bonded debt and various fees, a large reduction from almost 3 percent in effect beforehand. It transferred responsibility for allocating property tax revenues among local agencies to the state legislature and imposed a two-thirds requirement on each house for approval of any measure increasing state revenues. Increases in local taxes for specific purposes were also required to receive a two-thirds approval by local voters, a constraint that since has been reduced for some purposes to 55 percent.

Let us shunt aside the implications of Proposition 13 for local control versus a centralization of fiscal decisionmaking in California. (Centralization at the expense of local control has been a large and hugely adverse effect.) Let us shunt aside the issue of the change in the degree to which state and local spending reflects taxpayer preferences. (To a significant degree, the centralization has resulted in California governance of, by, and for the government unions.) Finally, let us shunt aside the “incidence” issue of who benefits from the limitation on property taxes. (The beneficiaries largely are those who owned property on the day that Prop 13 was enacted; since then, the limitations on tax liabilities must be reflected in the market value of real estate. Home buyers pay for Prop 13 protections upfront.)

Instead, let us ask whether Prop 13 has yielded an increase in fiscal discipline. The following figure presents the path of per capita state and local spending for California for the period 1970 through 2010, in 2011 dollars.

The compound annual growth rate in real per capita outlays in the 1970–79 period before the implementation of Prop 13 was 0.7 percent. After implementation, the same parameter for 1980–1990 was 2.4 percent. (For 1991–2009, it was 1.5 percent, and then there was a 3.7 percent decline in 2010 due to the revenue effects of the recession.) The respective average (not compound) annual growth rates were 0.7 percent and 1.7 percent. The data illustrated in the figure indicate that, at most, Prop 13 yielded some spending discipline until about 1984, after which per capita outlays grew rapidly for many years.

Whatever the virtues of Proposition 13 in the context of tax relief for sorely pressed property owners, there is no evidence that it imposed spending discipline writ large. For a detailed analysis of the ineffectiveness of tax and expenditure limitations in 30 states, see my recent AEI paper. One central problem is that such limitations, often assumed to provide a tidy answer to government profligacy, emerge from the same processes of political competition that have yielded adverse fiscal outcomes in the first place. Both houses of the California legislature now have two-thirds majorities of Democrats — elected by the voters — and there are no fewer than eight proposals to weaken the constraints imposed by Prop 13, for the most part by reducing various supermajority voting requirements from two-thirds to 55 percent. Let us return again to Pravda-speak: That is no accident, comrade.

This 35th anniversary of the passage of Proposition 13 — often described as the opening shot in the Reagan-era tax revolt — is a good time to return to first principles. In pursuit of fiscal discipline, we must emphasize true institutional reform — federalism and competition in the provision of public services — so as to impose constraints on the ability of officials and bureaucracies to satisfy the preferences of spending interests rather than those of taxpayers. Above all, we must undertake the hard work of public education on the virtues of market processes and limited government, and the freedom that both advance.

Benjamin Zycher is a visiting scholar at the American Enterprise Institute.

On June 12, Zycher will be among discussants at AEI’s event “Taming Leviathan: Do tax and expenditure limits work?"

FURTHER READING: Zycher also writes “Would a Carbon Tax Be ‘Efficient’?” “Earth Day and Four Decades of Fear,” and “Increasing Distortions and Feeding Leviathan: The Internet Sales Tax.” Steve Conover asks “What Does ‘Fiscal Responsibility’ Mean?” Michael Barone shows how “States Tackle Fiscal Problems while Feds Dawdle,” and James Pethokoukis connects “State Taxes and the Great Migration.”

Image Dianna Ingram/Bergman Group

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