Prop. 13 Still Has Lessons to Teach

When Proposition 13 passed June 6, 1978, I was city manager of Monrovia, in the San Gabriel Valley. That week Time magazine pictured Howard Jarvis on the cover and included an article about Monrovia as a case study--the only time I have ever been quoted in Time, and it said I “groaned” about the projected 30% cut in our budget. That quote drew lots of local jeers as Proposition 13 garnered more than 70% of the votes.

Twenty years have passed and I now look back from the perspective of a local government practitioner who had to deal with the nuts-and-bolts reality rather than political hyperbole or academic theories.

Surely, if Howard Jarvis were alive today, he would feel vindicated. Jarvis was never concerned about different theories of taxation or the finer principles of governance. He wanted plain and simple property tax relief for homeowners. He got it--and that success has passed the test of time. Some critics might still groan, but the bottom line is that Proposition 13 achieved its goal--real tax relief--and the sky did not fall.

The more cataclysmic pitfalls never materialized. As government administrators, we feared that five or 10 years down the road the new assessment rules would have identical homes paying wildly different tax bills and that a greater share of the property tax burden would shift from commercial to residential properties. To a certain extent, these results have occurred, but neither the courts nor the voters have found them to be enough of an inequity to justify change.

Although I consider Proposition 13 a resounding success, there are still lessons that can be learned.

A profound change has taken place between state and local governments during the last 20 years. The manner in which the state has implemented Proposition 13, rather than Proposition 13 itself, is probably more responsible for the negative aspects of this change. Most public services and infrastructure that people use every day--streets, sidewalks, police, fire, paramedics, parks and libraries--are provided by local governments. But most of the taxes people pay for all government services--property, sales, income, motor vehicle, etc.--are controlled in Sacramento. There is almost no nexus between services provided and taxes collected.

Before Proposition 13, city councils would look at their assessed property valuations each year and raise or lower the property tax to balance the budget. That system was flawed because property values were growing enormously and councils could lower the tax rate but still collect more money because of the higher assessed values.

Unfortunately, the system of local government finance that has subsequently evolved has also become quite dysfunctional. One of the more obvious examples is the so-called fiscalization of land-use decisions or “cash box zoning.” With less income realized from property taxes, cities have become more dependent upon sales taxes. In the name of economic development, cities are often willing to twist themselves into pretzels to get a large retail business to locate within their boundaries.

All of these cities recognize that retail spending is the result of, and not the cause of, economic prosperity. Promoting businesses that provide high-paying jobs adds true value to a community. But because cities now receive so little from the property tax and none of the income tax, there is little incentive for a city to want such businesses. In some cases--such as needed low- and moderate-income housing--the cost of providing necessary services can exceed the revenues created by the new developments.

Cities cannot be blamed for responding the way they do. They play according to the rules they are given. Those rules are determined in Sacramento, not City Hall. In 1994-95, I served on two task forces, one for Gov. Pete Wilson and one for the League of California Cities, trying to develop ways to “reform” local government finance. Both of those reports are now lost somewhere on my bookshelf. The motivation in the mid-1990s was the recession. A weak economy had brought to the surface the flaws in the system. Now our economy is again booming and the motivation for new reform is gone. As a culture, Americans always respond best to a crisis, and today this situation is not seen as a crisis.

The chances of reforming state and local government finance look pretty slim. I am not sure if any local government finance issue could ever again fan the public’s involvement the way Proposition 13 did. In the years before Proposition 13, we knew the system was broken but we did little to fix it. By the time we tried, it was too late and change had to come from the voters rather than elected and appointed officials. In some ways, it is like deja vu all over again.