Forty years ago this week, voters passed Proposition 13, the most consequential act of direct democracy in California history. This taxpayer revolt of June 6, 1978 amended the state Constitution, carrying 65% of the vote and all but three counties. Its backers can boast one enduring success: Proposition 13 has, as promised, protected homeowners from sharp increases in their property tax bills.
As for its other goals … well, turning 40 is a good time to take stock.
Proposition 13 was a multipronged attack designed by businessman-activist Howard Jarvis and his supporters to do two things: ease the overall tax burden and protect a stable culture of homeownership. To that end, it set tax rates at 1% of a property’s sale price and capped annual increases at no more than 2%. Then it required future tax hikes of any form to pass the state Legislature by a two-thirds vote. “The most important thing in this country is not the school system, nor the police department nor the fire department,” Jarvis declared after his ballot box victory. “The right to have property in this country, the right to have a home in this country, that’s important.”
Still, it’s hard for California to claim any sort of lasting victory on taxes or homeownership. Today, Californians remain among the most highly taxed people in the nation; low property taxes have been more than offset by increased income, sales and gas taxes. That might not be so bad if Proposition 13 was thereby rendered a wash. But it’s not. Its effects are deeply regressive taxation and distorted local economies and housing markets.
Perhaps most perversely, Proposition 13 has made it harder, not easier, to become a homeowner. California has one of the lowest rates of homeownership (55%) in the nation, second only to New York and nine percentage points below the national average.
The pernicious incentives that led to these outcomes are obvious in hindsight. With property taxes near frozen, local governments began to see residential development as a liability and commercial development as an income stream. For 40 years, that perspective shaped which new projects cities approved. Homeowners, meanwhile, had a disincentive to move if they had a low property tax bill locked in. Finally, these relatively low property taxes made California an attractive place to undertake speculative real estate investments and leave valuable parcels of land undeveloped.
The consequences of Proposition 13 have hit every generation following the baby boomers particularly hard. California is left with a housing shortage and not enough turnover in the real estate market. New homeowners face a much bigger property tax burden than their older, often wealthier neighbors. And the overall tax burden has been shifted to more heavily burden nonproperty owners — increasingly Gen-Xers and millennials who can’t afford to buy a house.
If California voters still really care about “the right to have a home in this country,” they should finally reform Proposition 13 to fix these flaws. There have been many attempts over the years, but no successes, in part because many of them involve tough tradeoffs.
One oft-articulated idea would eliminate Proposition 13 protections for commercial parcels. Proponents of this idea point out that a law that the public passed to protect homeowners shouldn’t necessarily benefit Disneyland or Facebook. Opponents warn that a property tax hike will hurt small businesses and note that, although companies may enjoy artificially low property taxes in California, their overall tax burdens are so high that some already have fled to other states.
There are fewer downsides to stripping Proposition 13 protections from residential property that is not a primary residence. It is one thing to subsidize keeping people in their longtime home but quite another to offer a tax benefit to foreign speculators, domestic investors and wealthy people with vacation homes. Under this logic, undeveloped parcels should lose Proposition 13 protection, too.
Then there is the sole Proposition 13 reform that has qualified for the November ballot. It would allow homeowners 55 or older (or severely disabled) to retain their low property tax assessment essentially forever. Propositions 60 and 90 — passed in the 1980s — allowed a one-time transfer of lower tax assessments, and only if the over-55 person moved to a less-expensive house in certain participating counties. This new initiative would scratch all those limitations. The result would be yet another transfer of wealth to older generations, just as the massive baby boomer generation is retiring in great numbers.
What California should do is make the housing market fairer instead. It would be easy to calculate which communities benefit most from Proposition 13, enjoying pricey real estate without contributing commensurately to property tax coffers. Then those locales could be stripped of the ability to use zoning laws to prevent construction of high-density housing. After all, it is especially unfair to exempt people in pleasantly leafy suburbs or quiet beach colonies from higher taxes even as they inflate their property’s value by limiting the supply of local housing units. How better to start solving California’s immoral housing crisis?
But no one has put that idea on the ballot. It probably wouldn’t pass anyway. Homeowners still edge out renters in statewide numbers, and they vote at much higher rates, allowing them to extract benefits for themselves at the expense of everyone else.
Jarvis may have wanted to lower everyone’s tax burden. But 40 years on, making home-owning baby boomers marginally richer, and many besides worse off for it, is his true legacy.