State Still Staggering From the Prop. 13 Earthquake : Government: Cities, counties lose ground as the fiscal landscape changes. The tax system is virtually gridlocked.

Fifteen years after property tax rebels scored the ballot-box triumph known as Proposition 13, shock waves from that voter revolt continue to remake--and distort--the fiscal and governmental landscape of California.

Proposition 13 has indeed fulfilled its major promise to those who voted for it in June of 1978: lower, stable property tax bills for homeowners.

At a stroke, California property tax bills were slashed by an average 57%, a total of $6.6 billion statewide in the first year.

But the costs have been staggering, some neither intended nor anticipated. They include:

* A massive shift of power from city councils and county boards of supervisors to state government in Sacramento, which is mired in a crisis of public confidence and three years of fiscal chaos.

* The creation of separate classes of Californians who own residential property, with some of them paying 10 times more property tax than neighbors owning houses of equal value.

* The granting of a competitive tax edge to older businesses over newer firms, which are often the sort of entrepreneurial businesses California wants to develop in the post-Cold War era.

* A tax system that rewards cities and counties when they attract high-volume retail businesses such as Wal-Mart and giant auto malls with minimum-wage jobs. The system offers local governments little or no incentive for soliciting industry with high-paying positions, or even new housing construction.

* A fiscal structure dictated by voter initiative that virtually assures gridlock. On one side, Proposition 13 curbs the state’s ability to raise new money with its requirement of a two-thirds vote for any tax increase. On the other, Proposition 98, a 1988 initiative, mandates that a precise, growing amount of money be spent on public education each year.

Public policy analysts fear that California’s state-local government structure will have to face a huge crisis--such as severe cuts in police or fire service--before there will be any serious effort to fix it.

The maze created by Proposition 13 has blurred the lines of fiscal and governmental responsibility. In the past, the state generally used certain tax money to take care of its functions and local governments had other taxes to do their job.

Today, the traditional links between taxpayers, their tax dollars and the public officials who spend those dollars for well-defined services have broken down and are now incomprehensible to most voters and taxpayers.

State Sen. Ken Maddy of Fresno, the Senate Republican leader, has watched the system unravel during his 23 years in the Legislature.

“Everyone needs to understand the responsibilities of each entity of government,” he said in an interview. “Give them a revenue source and then let them raise their own taxes and carry out their responsibilities.

“What we have now is a procedure that calls on us to raise the money and for them to spend it and for every major decision to come back here in our lap,” Maddy added.

One of the more pernicious spinoffs of Proposition 13 has been the state’s decision to put local government on an increasing diet of sales tax revenues in place of property taxes. Sales tax proceeds are distributed to cities and counties in proportion to sales within their borders.

As a result, local governments compete fiercely for high-volume retail outlets such as discount warehouses, electronics stores and auto dealers. For every dollar of sales within their boundaries, they get a penny back from Sacramento in tax revenues.

There is little incentive to lure new manufacturing or service industries because the property taxes they pay often do not offset the increased demands for such services as police and fire protection, municipal government experts say.

“All we’re doing is sitting on a tax system the last few years that creates $5-an-hour jobs and not $15-an-hour jobs,” said Democrat Johan Klehs of San Leandro, the chief tax writer in the state Assembly.

One of California’s most respected planners, Janet M. Ruggiero of the Sacramento Valley city of Woodland, said the tax system undercuts the ability of local governments to attract business or housing developments.

“If we try to raise our property tax base (through construction and development), a portion of that just goes back to the state,” Ruggiero said.

Woodland conducted a study of five proposed housing tracts in 1990 to determine the relative costs and benefits to the city of the 267 homes, which would cost an average of $150,000. For at least the first 10 years of the development, it would cost the city more to provide fire, police, water, sewer and other services than the city would get back in tax revenues, she said.

The situation now is worse because nearly $4 billion in property tax revenue was shifted away from local government in the 1992 and 1993 state budget agreements, Ruggiero said.

Even malls and big retailers are not the gold mines they were perceived to be because they too add to fire, police and other costs, Ruggiero said.

With the system as it is, she added, “you start questioning whether any land use” pays for itself.

Gov. Pete Wilson and the Legislature have proposed turning even more sales tax revenues back to local government in exchange for the lost property taxes, subject to voter approval in a special election Nov. 2. But for every dollar the cities and counties have given up in property tax revenues, they will get less than 50 cents back in new sales taxes.

The 58 counties are even worse off than the cities because they were more dependent on the property tax.

Contra Costa County Supervisor Sunne Wright McPeak said: “Why should we be voting for new land uses when that land use does not pay? Economic investment comes back to a decision in some city or some county to say yes or no to some land-use permit.”

Symbols of the unintended legacy of Proposition 13 can be found along almost any Southern California freeway. One is the 85-foot-tall sign tower recently erected beside the San Diego Freeway by the City of Huntington Beach.

The sign, which cost the city $361,000 and violates the municipality’s own sign control laws, seeks to entice potential auto buyers off the freeway and onto the Huntington Beach “Boulevard of Cars.”

The 12 Beach Boulevard auto dealers have assured city officials that the sign will pay for itself with additional sales tax revenue, which the dealers noted pointedly is the city’s “life’s blood.”

One of the few who anticipated the race for sales tax dollars back in 1978 was UCLA land use expert Donald G. Hagman.

On the Sunday after the balloting, he told The Times: “The competition for development of new shopping centers and other retail development . . . will become frenzied. A developer of retail outlets will have gold carpet treatment in almost any community.”

Such details were of little concern to the angry voters who followed self-styled populists Howard Jarvis and Paul Gann to the polls to vote for the Jarvis-Gann initiative.

They wanted to halt--and reverse--the runaway property tax bills they had been getting during a period of hyperinflation in home values and local government costs.

That they did, by a 2-1 margin. Written into the California Constitution as Article XIII-A, Proposition 13 froze then-existing property tax assessments at 1975-’78 levels and set the tax rate at 1% for all residential and business property in California. The assessment is the value on which a tax is levied.

California’s levy plunged from one of the highest property tax levels in the nation to 29th, based on taxes paid as a proportion of personal income.

Proposition 13 provided that property would be reassessed when a house was sold. The sales price would become the new assessed value.

The new owners would pay a bigger property tax than the sellers had. But at least they would know that the assessments, and their tax bills, could not take off on another rampage. The constitutional amendment limited assessment increases to 2% a year.

They knew that if they bought a house for $200,000, they would pay $2,000 in property taxes in the first year. The next year, with the capped 2% increase, the assessment would rise to a maximum $204,000 and the tax would be $2,040.

In the spring of 1978, the raucous Proposition 13 debate focused on public officials’ cries of alarm that the tax cut would devastate local government services. Jarvis and Gann scoffed that the officials were crying wolf. The answer was simple, they said: The state simply could rescue local government with the nearly $10-billion budget surplus built up during the 1970s.

That is just what happened--until the 1990s arrived with the thud of recession and a state government that no longer could afford the bailout.

There was less attention in 1978 to other potential Proposition 13 side effects, such as the impact on land use or the potential warfare between taxpayers who paid different levels of taxes on look-alike houses.

Latter-day home buyers don’t like it, but so far they have failed to come together in any sort of organized counterrevolution. As grating as it is to have a higher tax bill than the neighbors, the newcomers still know what their taxes will be from year to year. And they can take some comfort in the fact that, as time passes--if home values rise--they will enjoy a lower tax bill than subsequent newcomers to the block.

Today, Californians are generally ambivalent about Proposition 13, Los Angeles Times Poll Director John Brennan said. In a Times Poll conducted a year ago, 37% of the respondents thought that the initiative had been a good thing for California, 25% said it was a bad thing and 21% thought it had had little effect. Another 17% were not sure.

Proposition 13 has not triggered a relative decline in property taxes paid by businesses compared to homeowners, as many public officials--assuming that businesses would turn over less frequently than homes--had predicted.

The ratio of property tax revenues from businesses and residences is about the same statewide as it was in 1978, several studies have found.

But a recent study by UC Davis professors Arthur O’Sullivan, Terra A. Sexton and Steven M. Sheffrin contended that Proposition 13 did create disparities within the California business community that have hurt the state’s economy.

“In effect, new business is taxed at a substantially higher rate than existing business,” the study said. “This is precisely the opposite of the incentive system that we would like to create. Taxing new activity at a higher rate than existing (business) is not sound tax policy and has no policy rationale.”

One of the most frequently proposed reforms of Proposition 13 is to create separate assessment rolls for homes and businesses. The present system for assessing residences would remain just as it is now. But all business property would be reassessed periodically, perhaps annually.

Such a move, depending on how it was structured, could increase property taxes on businesses by $6 billion a year, the UC Davis study projected. In arguing for a split roll, economists say business property should be taxed on the basis of its income-generating potential only--not based on when it was bought or sold.

Meanwhile, buyers of new homes have suffered something of a double whammy since Proposition 13.

While taxes were cut on existing homes, new houses were assessed at their full construction cost and new building fees have been tagged on to pay for streets, schools, parks and other facilities that used to be financed by the property tax.

The fees have averaged $10,000 per house, by some estimates, and can run to $30,000 or more on costlier homes. But the fees do not buy the newcomer any services that the pre-Proposition 13 homeowner does not already get.

The result is that fewer people, especially newcomers and the young, can afford new houses. One tax official dourly called it the “welcome to California” effect.

The official, former state Finance Commission Chairman Kevin Scott, said: “We almost have a caste system. . . . We charge the last person (to come to California) the most possible.”

Sales vs. Property Taxes

There has been a major shift in the makeup of municipal finance in California since the passage of Proposition 13 in 1978. Local governments have sought other sources of income to compensate for the loss of property tax revenue. Here is the trend for all California cities and for Huntington Beach, one of those that suffered a major loss of tax revenue from Proposition 13 and has increasingly turned to sales taxes and other levies.

STATEWIDE TAXES

Before Proposition 13, 1977-78 Property: 46.1% Sales and Use: 32.4% Other: 21.5% After Proposition 13, 1990-91 Property: 27.0% Sales and Use: 32.4% Other: 40.6% *

HUNTINGTON BEACH TAXES

Before Proposition 13, 1977-78 Property: 46.3% Sales and Use: 25.7% Other: 25.9% After Proposition 13, 1990-91 Property: 33.8% Sales and Use: 28.0% Other: 38.1% Researched by Times researcher NONA YATES

Source: State Controller’s office