Zack Hill

Govt 184
Oden
12/13/14
The Unintended Consequences of CA Prop 13
On June 6th, 1978, almost two thirds of California voters passed Proposition
13, a watershed moment for proponents of low-to-no taxes. Prop 13 is one of the
most famous examples of California passing state legislation that would lead to
other states following suit. Nearly half the states did just that. Its even considered
by some to be the start of the Reagan conservative movement out of California. iThe
rippling effects of Prop 13 have come with an unfortunate wink and a nod, requiring
a slightly deeper understanding for the complete picture; the shift in revenue
sources has led to reduced local control, and housing is less affordable than ever
before despite that being an explicit goal of Prop 13.
Prop 13 contained six specific features, the first being a cap on ad valorem property
taxesii. Ad valorem taxes are based on the assessed value of the property, so as it
rises so does the tax, and vice versa. At the time of passage, Californians were
facing rapid increases in property values causing their property taxes to rise when
they were reassessed every year. Before Prop 13, localities established and set their
own tax rates. Some areas had high taxes and some had low taxes, and it allowed
for towns and cities to adjust the tax burden based on local needs, and lent a true
local control to public schools. A cap of one percent (1%) of the full value at time of
acquisition was established. At the same time, the annual increase was set to

inflation, not to exceed two percent (2%) increase per year. Another key piece of
Prop 13 was the rolling back of assessed values to 1976, two years prior to the
passage of the proposition.
One of the greatest changes contained in Prop 13 was the shift in the
responsibility of allocating funds. Because local jurisdictions set their own rates
before 13, they also oversaw the allocation of that revenue. After 13, state
lawmakers were the ones to decide how to divide up the funds.
Prior to the adoption of Proposition 13, local agencies established their
own separate property tax rates and received the proceeds of the tax. For the
first time in the state's history, the state was put in charge of allocating the
proceeds of the locally levied property tax, with the rate and base defined by
the statewide initiative.iii
In 1978, property taxes made up 33% and state funds were 24% of revenue sources
for counties in California. By 1996, property taxes accounted for only 12% of
funding, while state money had grown to a whopping 42% of county revenue.
California cities saw similar revenue shifts. Property taxes dropped from 16% of total
funding in 78 to only 8% in 1996. During the same period, service charges grew
from 6% to 11% and enterprise income rose from 26% to 29%.
It is reasonable to conclude that city residents are paying for a
substantial portion of their services through the price system composed of
fees and charges rather than through general citywide taxes such as the
property tax. iv
In addition, Prop 13 altered how property taxes were assessed. No longer would
they be annually reassessed at market value, but would instead be assess at a time

of sale, then pegged to inflation but not exceeding two percent increase each year.
The final parts of Prop 13 have had arguably the largest impact on the state as a
whole. With the passage of Prop 13, any measure crafted to increase state revenue
must be approved by a two-thirds vote of both houses of the state legislature. In
addition, any taxes raised by local governments for a designated or special
purposev needs to be approved by two-thirds of the voters.
The Prop 13 Lock-in, as it is known, has had a number of unforeseen after effects.
Due to the tax rate locking in at one percent of the sales value at time of purchase,
it incentivizes remaining in ones home instead of purchasing a new residence and
requiring a possible increase in taxes. Because Prop 13 restricts the rate increase to
only two percent a year, if a homes value increases more than two percent a year
the taxes actually start to diminish relative to the value of the home. From the
National Bureau of Economic Research:
As a result of Proposition 13, there are obvious distortions in the real
estate marketplace. For example, in 2003 financier Warren Buffett announced
that he pays property taxes of $14,410, or 2.9 percent, on his $500,000 home
in Omaha, Nebraska, but pays only $2,264, or 0.056 percent, on his $4
million home in California. Although Buffet is known as an astute investor, the
low property taxes on his California home are not attributable to his
investment prowess, but rather to Proposition 13. vi
Ask any long time California resident and they can describe the rocketing home
prices over the past few decades. Rapidly increasing home values and the annual
reassessment were one of the major causes for the widespread support of Prop 13.
In 1970, the median home price in California grew from $24,640 to $70,890 in 1978

at the time of Prop 13s passage, a 35% increase in eight years. Similarly, in 2012,
the CA median home price was $319,340vii, a 450% increase since the passage of
Prop 13. While the lock-in has protected homeowners from drastic rate increases
each year, it has deprived cities and counties across California of much needed
property tax revenue. California has seen an average annual increase of 18.75%
(450% over 18 years) to property values from 1978 to 2012, while the tax rate has
only increased two percent each year. In addition, city and county fees have
increased to compensate for the lack of revenue, while general government style
services have either been reduced or made less efficient.
The reduced mobility caused by Prop 13s lock in has effected all parts of society,
from the first time buyer to senior citizens. During the lead up to the election, many
claims were made describing how Prop 13 would save seniors from rapidly rising
property taxes.
By the mid-1980s this argument had completely reversed; senior
citizens could not afford to sell their homes because they could not afford the
increased property taxes on new, though smaller homes. To address this new
concern, Proposition 60 [and 90] essentially remove the lock-in effect after
age 55.viii
Prop 60 (1986) allowed people 55+ to transfer the assessed value of their homes to
a replacement home in the same county, of equal or lesser value, without a change
in ownership reassessment. This exemption was only available once per lifetime, so
Prop 90 was passed in 1988 to expand and allow seniors to move to a different
county and not incur the change of ownership reassessment.

The efficiency consequences of reduced household mobility [caused

by Prop 13] include the excess burden on households from suboptimal
housing consumption, inefficient labor market outcomes, longer commutes
with associated environmental and congestion costs, a reduction in the
supply of smaller homes for young and old homebuyers, and reduced
incentives for households to vote with their feet, thereby impeding the
efficient provision of local public goods.

ix

At the same time Prop 13 was reducing the ability of local governments to provide
services to citizens, Prop 13 has caused a much larger share of the property tax
burden to fall onto homeowners.x

Moore, Stephen. "Proposition 13 Then, Now and Forever." Cato Institute. 30 July 1998. Web. 3 Dec. 2014.
<http://www.cato.org/publications/commentary/proposition-13-then-now-forever>.

ii

"What Is Proposition 13?" California Tax Data. Web. 3 Dec. 2014.

<http://www.californiataxdata.com/pdf/Prop13.pdf>

iii

Chapman, Jeffrey. "Proposition 13: Some Unintended Consequences." Public Policy Institute of California 24
Sept. 1998. Print.

iv Chapman see iii

v See Cal Tax Data ii
vi

Picker, Les. "The Lock-in Effect of California's Proposition 13." National Bureau of Economic Research. Web. 4
Dec. 2014. <http://www.nber.org/digest/apr05/w11108.html>.

vii

"California Home Prices: A History." California Association of Realtors. Web. 4 Dec. 2014.
<http://www.car.org/aboutus/onecoolthing/cahomeprices/>.

viii

Citrin, Jack, and Issac Martin. After the Tax Revolt: California's Proposition 13 Turns 30. Berkeley, Calif.:
Berkeley Public Policy, 2009. Print.

ix See Citrin and Martin viii

x

Marshall, Phil. "Reforming Proposition 13."East Bay Express 10 May 2010. Web. 8 Dec. 2014.
<http://www.eastbayexpress.com/SevenDays/archives/2010/05/10/reforming-proposition-13>.