Bill Coming Due on Prop. 13 Tax Revolt : Finances: After property levies were cut in 1978, the state propped up local governments. Now, that subsidy is being cut 45%. Increased fees and deep cuts in services are the legacy.

As never before, the bill is coming due on the most famous taxpayer revolt since the Whiskey Rebellion, when Pennsylvania farmers rose up against a federal liquor tax in 1794.

Fourteen years after passage of Proposition 13, and just two months after the U.S. Supreme Court pronounced it constitutional, residents from Yreka to San Ysidro will feel the strongest jolt yet from their 1978 decision to roll back property taxes.

For years, state government has cushioned the blow of Proposition 13 by assuming the role of co-provider, propping up cities, counties, schools and special districts with billions of dollars.

The state budget approved last week will slash that subsidy by 45%, taking away $1.3 billion in 1992 property tax supplements from local governments. The pain is being spread among 58 counties, 470 cities and more than 5,100 special districts that do everything from keeping down the population of mosquitoes to keeping up cemeteries, putting out fires and delivering water.

The near-certain result: Increased fees and taxes, as well as a round of deep cuts in services such as police, fire protection and libraries.

“For government in California, Proposition 13 turned out to be a time bomb,” said former Sen. Jim Mills of San Diego, who helped put together the bailout in the frantic days after passage of the measure. “It didn’t go off right away, but it is going off now.”

In Los Angeles County, the shrapnel will take a $259-million hunk out of an already stretched budget. On top of that, the county expects to lose another $328 million because of other state budget cuts. County officials say the cuts translate into a 10% across-the-board budget reduction and an estimated loss of 8,000 to 12,000 jobs--even with fee increases.

Anti-tax advocates say they have little remorse over the consequences of Proposition 13 and little patience with the doomsday scenarios. They say Sacramento should have pulled the plug long ago and allowed Proposition 13 to take its course.

“I don’t want to hear anymore songs about how government is suffering,” said Richard L. Gann, who directs a Sacramento-based taxpayer group named for his late father, Proposition 13 proponent Paul Gann.

“The people have to come to grips with the fact that what we have is a squealing pig and the tighter we squeeze it, the louder it will squeal.”

While some local officials have characterized the $1.3-billion reduction as a raid on their treasuries, the view from the Capitol is much different. State officeholders say they are only taking back what is rightfully theirs--and much too late.

The shift marks an ongoing realignment of California government, which has been dominated for years by the purse and will of Sacramento. With the state down on its financial luck, Gov. Pete Wilson and the Legislature are eager to cut their losses by sending the responsibility for programs back to city councils and county boards of supervisors.

“It’s what I call disengagement,” said Sen. Frank Hill (R-Whittier).

It was largely because of Proposition 13 that state government has become so engaged in the affairs of local governments to begin with, said Hill and former and current lawmakers. The historic tax-cutting measure, passed by 65% of voters in June, 1978, promised to have such a devastating effect on local governments that Sacramento rushed in to help.

The constitutional amendment limited property taxes to 1% of assessed value, rolled back property valuations to 1975 levels, limited increases to 2% a year, and allowed for reappraisals of homes and businesses only when they changed hands. It further restricted general tax increases by requiring a two-thirds vote of the people.

The immediate effect was to give $7 billion in collective relief to property owners, many of them retired or middle-class homeowners who, before Proposition 13, had watched helplessly as their property tax bills doubled or tripled during the 1970s real estate boom. Proposition 13 translated into a $750 drop in the property tax bill for the owner of a $50,000 home, statistics showed.

But the general goal of the tax-cutting movement was to put government on a crash diet. The branches hit hardest were those most dependent on property taxes--school districts, counties and cities, in that order. They had become accustomed to property tax revenues that routinely grew 11.5% a year during the 1970s. Proposition 13 would cut off more than half of their property tax receipts.

Frantic local officials scrambled to Sacramento, where then-Gov. Edmund G. Brown Jr. and state lawmakers were sitting on a $5-billion surplus, thanks to an abundance of sales and income taxes taken in during a booming economy. The failure of state leaders to refund or cut taxes with this surplus as local property taxes shot up had infuriated many voters.

“The state had a big surplus, the voters had taken property taxes away from local government and we all came here and said give us your money, and they did,” said Assemblyman Phillip Isenberg (D-Sacramento), who as then-mayor of Sacramento was among the pleaders.

Within months after Proposition 13, state government went on a spending spree. It took over $1.5 billion in health and welfare programs from the counties and injected another $2.5 billion into schools. It also gave $896 million worth of block grants to cities, counties and special districts.

In 1979, the state reduced the relief to counties, cities and special districts to $781 million. The amount was forwarded to those governments indirectly with property taxes destined for the schools; the state then backfilled the amount by reimbursing the schools from the general fund.

The bailout was a safety net for local governments, which were still forced to scale back services between 10% and 33%, according to some estimates. Although more than 102,000 public jobs were eliminated within a year, the robust economy picked up the slack. The headline on a Times story marking the one-year anniversary of the measure captured the mood: “Proposition 13: Change but Not Disaster.”

Although state government bailout played a big part in that smooth transition, it also carried the seeds of it own problems. It was a shotgun marriage between incompatible partners.

“I think we all made a mistake, us--meaning cities--included,” Don Benninghoven, executive director of the League of California Cities, said about taking the state’s money.

“We knew it at the time, we talked about it then. We said that as soon as you get into a (funding) formula, then the state makes the decisions for us. . . . But there really wasn’t a choice because you wanted to make Proposition 13 work and you wanted to make local government work,” he said.

For their part, state officials had intended the subsidy to be temporary, not a way of life. Mills, who was Senate president pro tem at the time, helped create the bailout package and said it was designed only to give cities, counties and special districts enough breathing room to get used to the new realities of life.

Fourteen years later, those local governments are still taking the subsidy. The subsidy has ballooned to nearly $2.9 billion and has been increasing at 9% a year, second only to the 12% rate of growth in the budget for Aid to Families With Dependent Children, Hill said.

Assembly Speaker Willie Brown (D-San Francisco) has become so irked by the arrangement that he recently likened the local governments to junkies.

“They became like heroin addicts. You have to keep feeding them,” he said.

Research by the California Taxpayers Assn. in Sacramento indicates that, despite Brown’s complaints, local governments have been trying to regain their financial footing by raising fees and discretionary taxes.

Since the passage of Proposition 13, they have enacted more than $5.2 billion in new charges, a 298% increase in fees and taxes for hotel rooms, retail sales, business licenses, dog tags, utilities, permits and filing deeds.

Cities have been much more successful at making up lost ground this way than counties and special districts, the experts say.

Still, that was not enough to free them from the subsidy, so they took hits when state officeholders decided this was the year that the Proposition 13 bailout had to be shrunk and, according to some, perhaps eliminated in the near future. To help close a huge $10.7-billion shortfall this year, the state rewrote property tax allocations so that cities, counties and special districts now have to give $1.3 billion to schools. The schools then give up that amount in state funding.

Some local governments claim that they are unfair victims of the $1.3-billion cut. The newly incorporated city of Moreno Valley says that very little of the $225,000 it is being forced to give up in property taxes represents bailout money. The Assn. of California Water Agencies says only $4 million of the $74 million in property taxes its members will lose represents a Proposition 13 subsidy; the rest are “historic property taxes” that voters imposed upon themselves before Proposition 13 for construction projects and water delivery, a spokeswoman for the group said.

Despite those problems, Hill, who has become one of the Legislature’s leading budget negotiators, predicted that Wilson and lawmakers will trim more if not all of the remaining $1.6 billion in Proposition 13 subsidy next year, when they expect to wrestle with yet another multibillion-dollar shortfall.

That will finally lay bare the full effect of Proposition 13. Hill, a fiscal conservative, said he believes that will lead to further cuts in local governmental services by local officials who will be loath to raise taxes.

“I don’t think the city councils and boards of supervisors have the will or the guts to keep services at the same level,” Hill said.

Mills added: “It means (cuts in) police service, fire service, libraries, schools, transportation, parks--everything you can think of. There isn’t anything that won’t be affected in the long run.”

After nearly a decade and a half, the full force of Proposition 13 will be felt, said Dan Wall, lobbyist for the County Supervisors Assn. of California. “The chickens are coming home to roost, there’s no question.”