The City That Staged a Rebellion and Embraced Property Taxes

Proposition 13 hexed the property tax as a reliable source of government revenue. As voters around the country followed California’s lead and approved similar tax-cutting measures, hoping to lighten the burden of local taxation, politicians piled more and more restrictions on how property taxes could be used. The long-term effect has been to encourage the proliferation of other forms of taxation--user fees, franchise fees, utility taxes, special assessments--that are more regressive than property taxes, imposing a larger burden on all but the wealthiest taxpayers.

But the hex first cast in 1978 may be losing its power. Last month, given an unusual opportunity to choose among methods of taxation, voters in Sanibel, a bellwether Florida community, opted for property taxes by a margin of 7-1. Californians, take heed.

Sanibel is a barrier-island resort, the prime jewel in the nationally advertised Lee Island Coast of southwest Florida. It is staunchly conservative: 2.6 registered Republicans for every Democrat. Real estate prices here soared in the 1980s, along with property taxes. Politicians followed California’s example in trying to quell the outrage.

It was in Lee County that Florida’s counterpart to Proposition 13 was launched. The Save Our Homes amendment to the state constitution caps increases in real-estate assessments for year-round residents at 3% a year or the inflation rate, whichever is lower. By contrast, Proposition 13 limits assessment increases to 2% annually.

Even so, the state Legislature has made it virtually impossible to collect the revenue generated by the 3% annual rise. For example, all taxing authorities must notify voters of a tax increase whenever the new rate would result in higher overall revenue from the previous year. With no allowance made for inflation, and with county commissioners and city council members striving, at all costs, to avoid issuing tax notices, the outcome has been to diminish the availability of property taxes to local government. State law, moreover, requires counties and municipalities to hold a referendum to approve bonded indebtedness if the bonds are to be backed by property taxes. (Were bonds backed by any other taxes, no referendum would be necessary.) Not surprisingly, politicians have followed the path of least political resistance and shifted to special assessments or to new utility or consumption taxes to raise their revenues.

At least until Sanibel. The event that made property taxes palatable again to Sanibel residents was the prospect of a large tax increase to pay for improvement and expansion of the island’s sewer system. Because politicians had made a promise never to use tax revenue to pay for sewers, the entire cost of the project was assessed against individual homeowners, most of whom lived in interior neighborhoods and didn’t make a lot of money. Presented with notices of assessments of up to $13,000 apiece, they mobbed the City Council.

First, there was the issue of charging a hidden tax for public goods through private assessments. In effect, the residents of the interior neighborhoods were not only being charged for sewer improvements that upped their property values, but also for the portion that benefited all sewer users and, through protection of public health and the environment, the public at large. Since this was inconsistent with legal principle and standard practice in public-works projects, the Sanibel council assigned 50% of the cost to the public, in effect halving the assessments.

But that meant having to raise taxes to cover the 50% public share of the sewer expansion. The idea of holding a referendum to give voters the opportunity to pay through property taxes was resisted firmly. Confident that property taxes were always taboo, a majority of council members took the heretofore safe route and adopted new utility taxes and increased user fees.

The public rebelled. Every major civic organization and virtually every citizen who appeared before the council said the same thing: “Let us choose.” In December, the council consented, authorizing a referendum on property taxes that would result in an automatic repeal of utility taxes and user-fee increases should the voters approve it.

Several factors contributed to the 7-to-1 vote for property taxes. First, citizens calculated the costs and concluded that property taxes would be less burdensome for all but the most affluent. Second, the property tax is deductible from federal income taxes, which helped compensate more affluent taxpayers who itemize deductions. By opting to use property taxes, Sanibel would, in effect, be getting an indirect federal subsidy. Third, the property tax spreads the burden of taxation more widely by including vacant-lot owners and absentee landlords who would not have to pay utility taxes and user fees. Finally, voters liked having more control over taxation. The very fact that bond issues financed by property taxes must be submitted to the voters means the tax will disappear after the sewer system is paid for, and can only be reinstated by another referendum.

In Sanibel, the hex is off property taxes and on all local taxes created to avoid raising property taxes. Underlying this new consensus is the relative security provided by the Save Our Homes amendment. Assured that assessments cannot rise by more than 3% a year, citizens feel they now can rely on the property tax. Further comfort is provided by the state’s relatively high $25,000 homestead exemption, which makes the property tax even more progressive.

Florida’s and Sanibel’s experiences suggest some possible strategies for property-tax reform in California. With the safety blanket provided by Proposition 13’s 2% annual cap on increases in assessments, it may be possible to follow Florida’s lead in loosening the noose on local government by providing each county, municipality and school district with its own separate caps on property-tax rates, instead of the present unreasonable combined cap of 1%. Florida allows each separate taxing authority its own 1% cap. Were California to do likewise, Los Angeles County and the City of Los Angeles would each be able to raise their rates to a maximum of 1%, helping to free them from reliance on state funds, and restoring some of the fiscal home rule that has been lost to Sacramento.

Another flaw in Proposition 13 is its failure to distinguish between residential and commercial property. The freeze on residential assessments was intended to protect individuals from being priced out of their own homes by skyrocketing taxes. But that logic breaks down with commercial property, which should be subject to market forces. If we believe in free and competitive markets, it makes little sense to subsidize some businesses at the expense of their competitors--and of the public at large. Florida has solved that problem by limiting its protections to homesteads. By aping Florida’s solution, California could recapture huge subsidies to businesses, removing more of the burden of taxation from homeowners and further lifting the hex from the property tax.