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California

Troy Senik
The Enduring Proposition 13
Try as it might, the Left just can’t kill California’s property tax cap.
14 September 2011

Los Angeles mayor Antonio Villaraigosa is a man in search of a new résumé entry. A former city councilman and Speaker of the California Assembly, Villaraigosa—who in 2005 became the City of Angels’ first Hispanic mayor in modern history—has less than two years left before he’s term-limited out as chief executive of America’s second-largest city. That time frame aligns nicely with California’s 2014 gubernatorial elections, when incumbent Jerry Brown will be 76 years old and, many pundits speculate, more inclined to retire than to seek a fourth term as governor (Brown previously served two terms from 1975 to 1983).

While Villaraigosa hasn’t confirmed his ambitions, he certainly sounded like a candidate for statewide office when he delivered a major address on August 16 at the Sacramento Press Club titled “Making California First Again.” Amid his calls for greater education spending and eliminating the state’s corporate income tax, Villaraigosa resurrected a persistent liberal bugbear: he challenged Brown to “have the courage to test the voltage in some of these so called ‘third rail’ issues, beginning with Proposition 13.”

Proposition 13 is sacrosanct for a reason. California is tied with Hawaii as the state with the highest cost of living and beset with some of the nation’s highest income, sales, and corporate taxes. The 1978 ballot initiative capping property taxes is one of the last remaining firewalls for financially strapped Golden State residents. Until the 1960s, property tax assessment had been a relatively informal—and corrupt—process in California. Elected tax assessors would routinely lower the tax burden for campaign contributors and other favored parties by intentionally undervaluing their properties. When news of the quid pro quo became public, assessors in San Francisco and Alameda counties ended up in prison; their counterpart in San Diego County committed suicide.

In response, the state legislature in 1967 passed Assembly Bill 80, which established a uniform assessment of property pegged to market value (commercial property had previously paid higher rates than residential). Though the law successfully rooted out local corruption, it brought an unintended consequence: spiraling rates of taxation that threatened to price many Californians out of their homes. As home values inflated dramatically throughout the 1970s, property tax rates skyrocketed. By 1978, the year that Proposition 13 made it to the ballot, the Los Angeles County assessor warned that many properties would see their valuations increase by as much as 100 percent. Unless Californians sold their homes, however, they wouldn’t see any additional income to compensate for the tax hikes. It was, in essence, a tax on unrealized capital gains.

In that environment, Prop. 13 passed overwhelmingly, receiving a nearly two-thirds majority at the polls. Upon taking effect, Prop. 13 set a statewide property tax rate of 1 percent of property value, with annual increases capped at 2 percent or the rate of inflation (whichever was lower). The measure also abolished the old system of regularly reassessing property values, stipulating instead that values would be based on sales prices and thus would only reset when a property changed hands. As a result, Prop. 13 has saved California taxpayers well over $500 billion, according to estimates by the Howard Jarvis Taxpayers Association, whose founder and namesake championed the initiative.

Liberal pundits have blamed Prop. 13 for everything from the state’s plummeting education performance to its chronic deficits to the quality of its infrastructure. But three decades on, Prop. 13 remains overwhelmingly popular, regularly polling support in the 60 percent range. Its popularity has proved irksome to California liberals, who opposed the measure’s tax restrictions from day one. During the 1978 campaign, Brown, then campaigning for reelection as governor, referred to the proposition as a “fraud” and a “rip-off.” (After the initiative passed in the June primary, Brown quickly reversed course and became a vocal Prop. 13 supporter, just in time to win a landslide in the November general election.) In the years following Prop. 13’s passage, overturning the initiative has become an obsession on the left. It has been litigated all the way to the U.S. Supreme Court, where in 1992 eight justices upheld the law in Nordlinger v. Hahn. Opponents have repeatedly aimed to kill it at the ballot box, though all such efforts have fizzled.

Now the property tax cap is squarely in Villaraigosa’s crosshairs. The Los Angeles mayor is taking a new tack: framing higher property taxes as a populist crusade. Villaraigosa pledged to keep Prop. 13’s protection for homeowners, but labeled its safeguards for commercial property as “a corporate tax giveaway,” suggesting that nonresidential property should be subject to higher taxes than private homes. “A reform of our property tax system as I’ve described could yield anywhere from $2.1 up to $8 billion a year,” he told his Sacramento audience.

Nothing could be more toxic to California’s already-battered business climate. In July, the state’s unemployment rate climbed to 12 percent—the second-highest in the nation—with official statistics showing only 4,500 new jobs created. Joe Vranich, an Orange County business-relocation specialist, says that companies are divesting in California at a rate five times higher than only two years ago. According to Vranich, part of this trend owes to the efforts of at least 14 states that have tasked their economic development agencies with luring away California companies tired of high taxes, profuse regulations, and an extortionate legal system. The state cannot collect billions in taxes from businesses that simply pull up stakes and move out. Those factors help explain why Chief Executive magazine has ranked the Golden State the worst place in the nation to do business for seven consecutive years, saying in its 2011 rankings that California is “conduct[ing] a war on its own economy.”

Villaraigosa’s proposal would only escalate that war. With California caught in an economic maelstrom, the Los Angeles mayor proposes to increase the burden on businesses by challenging the state’s only meaningful check on government rapacity. Should he choose to run for the state’s highest office, he’ll have to do so defending higher taxes and the evisceration of a policy that has enjoyed more than three decades of majority support from Golden State voters. Perhaps he shouldn’t touch up that résumé quite yet.

Troy Senik is a senior fellow at the Center for Individual Freedom and a contributor at Ricochet.com.

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