In the 1970s soaring property values in California led to dramatic increases in property taxes, prompting a tax revolt that resulted in the passage of Proposition 13* in the June 1978 California primary. Also called the Jarvis-Gann Initiative after its chief sponsors, Howard Jarvis and Paul Gann. Proposition 13 reduced local property taxes by 57% and thereby slashed the revenue base for local governments and schools. Over the years the revenue loss has been made up by a varying mix of state funds and new revenue from specialized local fees and taxes, as well as by outright local budget cuts.
The California tax revolt did not end with Proposition 13. In November 1979 voters passed the Proposition 4,* also known as the Gann Amendment. Proposition 4 imposed a limit on most state and local government expenditures from tax sources. The limit is calculated annually according to a formula based on population and the cost of living. Under Proposition 4, excess revenues must be returned to the taxpayers. The Gann limit, as it is often called, was not exceeded until the 1986-87 fiscal year when $1.1 billion was refunded to taxpayers.
Both Propositions
13 and 4 have been modified in the years since their passage. While weakened by the changes, Propositions 13 and 4 remain constraints on California state and local budgeting, and continue to be focal points in the public policy debate about California taxing and spending.
- *Ballot arguments and the Attorney General's
official title and summary can be found in the California
Ballot Propositions Database.
Proposition 13 (Art.
XIIIA of the California Constitution) is widely regarded as the most far reaching of California's many initiative measures, and is the most enduring artifact of the California tax revolt of the late 1970s. Its passage in the June 1978 primary heralded a new era of using the initiative process as an instrument of California public policy. In cutting local property taxes by 57%, Proposition 13 fundamentally changed California's tax system and state-local fiscal relations.
Essentially, Proposition 13:
- Limits property taxes to 1% of assessed valuation with fiscal 1975-76 as the base year.
- Limits assessment increases to 2% per year.
- Allows reassessments to market value only when a property is sold.
- Prohibits state lawmakers from imposing new taxes without a 2/3 vote of the legislature.
- Prohibits local governments from enacting most new taxes without a 2/3 vote of the electorate.
With property taxes as their revenue base, local governments and school districts bore the brunt of Proposition 13. The revenue shortfall was managed in various ways: many local jurisdictions cut services and reduced expenditures; cities and counties found alternative revenue sources in new or increased user fees, special taxes and assessments; and the state came to the rescue with a bailout program involving shifts in the allocation of sales tax and other revenues. An intergovernmental fiscal realignment took shape which, in broad strokes, gave property tax revenues mostly to cities and counties, and funded school districts mostly from state general funds instead of the property tax.
Proposition 13 succeeded in its core aim of providing property tax relief to beleaguered property owners alarmed by swiftly rising assessment increases. But it has had many other consequences. It created new inequities in the burden of the property tax. Because properties are fully reassessed only when they are sold, owners of very similar properties can have very different property tax bills. Since commercial property turns over less often than residential property, residential property owners have gradually assumed a larger percentage of the property tax burden. Observers note that Proposition 13 considerably diminished local taxing authority and centralized it in the state, thus undermining home rule. Local jurisdictions are largely at the state's mercy in determining what their actual budgets will be, and local officials complain that the state has not been reliable in its allocation of funds. Observers also note that an unintended consequence of Proposition 13 was that, because of the continuing robustness of the sales tax as a revenue source, Proposition 13 encouraged cities and counties to promote retail development at the expense of housing and job-creating businesses.
Proposition 13 has been extensively litigated in the courts. It survived a big hurdle when in 1992 the U.S. Supreme Court found that disparate property tax assessments under the measure were not a violation of the Equal Protection Clause of the Constitution (Nordlinger v. Hahn). Among the many particular points of contention was local government authority to impose "special taxes" under Proposition 13. After much litigation and two further voter approved initiatives, Proposition 62 (1986) and Proposition 218 (1996), it was settled that all new local taxes, whether for general or specific purposes, require 2/3 voter approval.
Voters have revised Proposition 13 many times since its passage.
Many revisions ameliorate negative impacts of Proposition 13 on particular groups of citizens. For example, Proposition 8* (1978), Proposition 50* (1986) and Proposition 171* (1993) give assessment breaks to property owners harmed by natural disasters. Other revisions remove reassessment requirements in order to advance particular policies, such as historic structures rehabilitation (Proposition 34,* 1984), and the seismic retrofitting of existing buildings (Proposition 127,* 1990).
The 2/3 vote requirement for approving tax increases is one of Proposition 13's fundamental principles. Only once since Proposition 13's passage have voters relaxed that requirement. In November 2000 they passed Proposition 39,* authorizing the passage of school construction bonds by a 55% vote. Proposition 39 passed with a 53.4% margin.
- *Ballot arguments and the Attorney General's
official title and summary can be found in the California
Ballot Propositions Database.
Modern spending
limits in California began in 1979 with the passage of Proposition 4* (Article
XIII B of the California Constitution). Also called the Gann Initiative after its chief sponsor, Paul Gann, Proposition 4 places an appropriations limit on most spending from tax proceeds. The limit for each year is equal to the prior year's
spending with upward adjustments allowed for changes in population and the cost of living. Most state and local government appropriations
are subject to the limit. However, the law exempts certain appropriations
from the limit including capital outlay, debt service and local government subventions. When the limit is exceeded, Proposition 4 requires the surplus to be returned to the taxpayers within two years. Appropriations in the two year period can be averaged before becoming subject to the excess revenue provisions of the Gann limit.
Voters approved the Gann limit in a November 1979 special election by a 74% margin. The late 1970s were a time of surplus state revenues in California, and voter exasperation at the inability of the legislature and the governor to agree on a plan to return the surplus to the taxpayers in the form of refunds or property tax relief helped fuel the tax revolt that led first to Proposition 13 and then to Proposition 4. With the Gann limit, voters took the matter of spending limits into their own hands, and ignored objections that spending limit formulas are an artificial constraint on policy making and hamper the government's ability to address citizen needs.
During the early 1980s, increases in population and the consumer price index outpaced the growth in state revenue, and the Gann limit was not reached. However, a surge in state revenues in 1987 caused the limit to be breached, and led to the first--and so far, only--refund to taxpayers.
Voters have modified the Gann limit in a series of initiative measures. Proposition 99* (1988) and Proposition 10* (1998) exempted new tobacco taxes from the Gann limit. Proposition 98* (1988) required public schools to receive a share of revenues exceeding the Gann limit. That share was changed to a flat 50% by Proposition 111* (1990). Proposition 111 also added three exemptions to the Gann limit: capital outlay spending, appropriations supported by increased gas taxes, and appropriations resulting from national disasters. Most significantly, Proposition 111 changed the formula used for calculating annual adjustments to the Gann limit. Under Proposition 111, the population factor is based on a weighted average of population and K-14 school enrollment growth (instead of population only), and the cost of living factor is based solely on California per-capita personal income growth (and no longer takes into account the Consumer Price Index).
The changes to the Gann limit formula under Proposition 111 substantially raised the Gann limit, making it less likely that the limit will be reached in the future. Many observers believe that in its current weakened state the Gann limit has ceased to be a meaningful constraint on state spending.
For an overview of developments regarding spending limits in the Schwarzenegger era (Nov. 2003- ), see the related Hot Topic Spending Limits: the California Live Within Our Means Act
- *Ballot arguments and the Attorney General's
official title and summary can be found in the California
Ballot Propositions Database.
- In reverse chronological order:
- Mendel, Ed.
"It's the Structure, Stupid!"California Journal, v. 35, no. 8 (Aug. 2004), p. 24-38.
- Reviews California's structural budget gap, which is "to continue into the future as far as projections can see."
- "Local Property Tax" and "Government Appropriations Limit: Article XIIIB of the Constitution."
In: Revenue and Taxation Reference Book 2003. Sacramento: Assembly
Revenue and Taxation Committee, Jan. 2004.
- New, Michael J.
Proposition 13 and State Budget Limitations: Past Successes and Future Options. Washington, DC: Cato Institute, June 19, 2003. (Cato Briefing Papers no. 83). 11p.
- "Rethinking
Proposition 13: on Grim Realities and Escapism," [editorial].
San Francisco Chronicle, Jan. 12, 2003, p. D4.
- Saxton,
Gregory D.; Hoene, Christopher W.; Erie, Steven P.
"Fiscal Constraints and the Loss of Home Rule: the Long-term Impacts
of California's Post-Proposition 13 Fiscal Regime," American Review
of Public Administration, v. 32, no. 4, (Dec. 2002), p. 423-455.
- Who
Pays Taxes in California? Sacramento: California Budget
Project, Apr. 15, 2002.
- Bayer, Theodore
F.
"Special
District Fees and Similar Charges: Supreme Court Resuscitates
Stealth Property Taxes," Cal-Tax Digest, v. 5, no. 2 (Mar.
2001), p. 11-12.
- Martin, Lisa.
"Exploring the Gann Limit: Then and Now," Cal-Tax Digest, v. 4, no. 6 (July 2000), p. 20-23.
- Kroes, Stephen.
"Spending Limits in Era of Record Revenues," Cal-Tax digest,
v. 4, no. 5 (June 2000), p. 19-20.
- Williams,
Brad; Vasche, David.
The
State Appropriations Limit : an LAO Report.
Sacramento: Legislative Analyst's Office, Apr. 13, 2000. 8 p.
[pdf version]
- Will
California Hit the "Gann" Limit? Sacramento: California
Budget Project, Apr. 2000. 3 p.
- From
Home Rule to Fiscal Rule: Taking Measure of Local Government Finance in California, edited with an introduction by David W. Lyon. San Francisco: Public Policy Institute of California, 2000. 48 p.
- Kiewiet,
D. Roderick.
"Californians
Can't Blame Everything on Proposition 13," Public Affairs
Report, v. 40, no. 6 (Nov. 1999), p. 14-16.
- McGuire,
Therese J.
"Proposition 13 and Its Offspring: For Good or for Evil?"
National Tax Journal, v. 52, no. 1, (Mar. 1999) p. 129-38.
- Sexton,
Terri A.; Sheffrin, Steven M.; O'Sullivan, Arthur.
"Proposition 13: Unintended effects and feasible reforms,"
National Tax Journal, v. 52, no. 1, (Mar. 1999), p. 99-111.
- This article explores
the causes and consequences of Proposition 13, focusing on its effects
on horizontal equity among homeowners, household mobility, and the fiscal
structure of state and local government.
- Shires,
Michael A.
Patterns
in California Government Revenues Since Proposition 13. San Francisco: Public Policy Institute of California, Mar. 1999. 111 p.
- Misczynski,
Dean J.
Proposition
218 After Two Years. Sacramento: California
State Library, California Research Bureau, Oct. 1998. 16 p.
- Proposition 218,
passed Nov. 1996, is an initiative constitutional amendment that limits
the ability of local government to raise revenue through fees, assessments
and taxes.
- Sheffrin,
Steven M.; Sexton, Terri.
Proposition
13 in Recession and Recovery. San Francisco: Public Policy
Institute of California, Sept. 1998. 90 p.
- Examines the effect
of falling property values, 1991-95, on the disparity between real estate
taxes within different categories of properties, and the effect of the
recovery, 1996-98.
- Shires,
Michael A.; Ellwood, John; Sprague, Mary.
Has
Proposition 13 Delivered? : the Changing Tax Burden in California.
San Francisco: Public Policy Institute of California, Sept. 1998. 86 p.
- Frates,
Steven B.
"Proposition
13 Did Not Strangle Local Budgets," Cal-Tax Digest, v. 2,
no. 5, (June 1998), p. 5-6.
- "Proposition
13: Its Benefits Are Real," Cal-Tax digest, v. 2, no. 4 (May 1998), p. 23-29.
- Brinkerhoff,
Noel.
"SIM CAL: the California Governance Consensus Project Is Trying Its
Hand at Reinventing Government," California Journal, v. 29, no. 2 (Feb.
1998), p. 24-9.
-
Describes efforts
of interest groups to influence state and local government finance, in
view of limitations on tax increases under Proposition 13 and
later referenda. The California Consensus Project includes the League
of California Cities, California Teachers Association, California Chamber
of Commerce, and other state-wide organizations.
- Chapman,
Jeffrey I.
The
Continuing Redistribution of Fiscal Stress: the Long Run Consequences of Proposition
13. Cambridge, Mass.: Lincoln Institute of Land Policy, 1998.
109 p. (Working Paper)
- Chapman,
Jeffrey I.
Proposition 13: Some Unintended Consequences. San Francisco: Public Policy Institute of California, 1998.
- Lewis, Paul
G.
Deep
Roots: Local Government Structure in California. San Francisco: Public Policy Institute of California, 1998. 102 p.
- Examines structure,
causes, and consequences of local government fragmentation, variations
in levels of it in various counties, and factors underlying differences since the 1970s, with historical references.
- Lyon, David
W.
Representation
Without Taxation: Proposition 13 and Local Government in California.
San Francisco: Public Policy Institute of California, [1998]. 7 p.
(Occasional papers).
- "Speech to the Municipal
Law Symposium, Hastings College of the Law, September 18, 1998."
- Proposition
13 : Its Impact on California and Implications for State and Local Finances.
Sacramento: California Budget Project, Apr. 1997. 13 p. [Summary]
- Shires,
Michael A.; Habers, Melissa Glenn.
A
Review of Local Government Revenue Data in California. San Francisco: Public Policy Institute of California, Feb. 1997. 178 p.
- Blanning
& Baker Associates, Inc.
"Proposition 218 Punches a Hole in Local Agency Revenue,"
CSDA News, v.13, no. 1 (Jan. 1997), p. [1], 4.
- O'Malley,
Marianne.
Understanding
Proposition 218. Sacramento: Legislative Analyst's Office,
Dec. 1996. 52 p.
- Dunstan, Roger.
Local government revenue and expenditures since Proposition 13: A historical primer. Sacramento: California Research Bureau, Aug. 1993.
Harrington, Jim.
"Realities of the Gann limit," Western City, v. 63, no.7 (July 1987), p. 41-42.
The State Appropriations Limit: The "Gann ceiling." Sacramento: California Postsecondary Education Commission, Sept. 1986.
Article XIIIB: Government spending limitation: Analysis and issues. Sacramento: Assembly Office of Research, Oct. 1986.
- Rafool, Mandy.
Supermajority Requirements for Tax Increases. Denver: National Conference of State Legislatures, 2004. (Legisbrief v. 12, no. 19). [2] p.
- "Sixteen states now have supermajority requirements, which dictate either a two-thirds, three-fourths or three-fifths majority vote in both chambers to pass tax increases or new taxes."
- New, Michael
J.
Limiting Government
through Direct Democracy: the Case of State Tax and Expenditure Limitations.
Washington, D.C.: Cato Institute, 2001. (Policy Analysis no. 420). 17 p.
- "National Federation of Municipal Analysts 1999 Conference Part II:
Panel Discussion: the Impact of Initiatives on State and Local Government
Finance," Municipal Finance Journal, v. 20, no. 4, (Winter 2000),
p. 18-41.
- Includes a presentation by Kim Rueben, an economist with the Public Policy Institute of California, on how initiative
requirements have affected state and local government finance. Notes that states
with more binding limits, on average, decreased general fund spending
by 10%; in many states that had both state and local limits, there was
a shift of responsibility from local governments to the state.
- Downes,Thomas
A.; Figlio, David N.
"Do Tax and Expenditure Limits Provide a Free Lunch? Evidence on the
Link Between Limits and Public Sector Service Quality." National
Tax Journal, v. 52, no. 1, (Mar. 1999), p. 113-28.
- The authors summarize
research addressing the validity of the argument that constitutional constraints
such as Proposition 13 could reduce the size of local governments while
having little effect on the quality of public services provided.
- Mullins,
Daniel R.; Joyce, Philip G.
"Tax and Expenditure Limitations and State and Local Fiscal Structure:
an Empirical Assessment," Public Budgeting & Finance, v. 16,
no. 1 (Spring 1996), p. 75-101.
- Shadbegian,
Ronald J.
"Do Tax and Expenditure Limitations Affect the Size and Growth of
State Government?" Contemporary Economic Policy, v. 14, no.
1 (Jan. 1996), p. 22-35.
- From the author's
abstract: "Most TEL [tax and expenditure limitation] laws are not designed
to stop public sector growth but are intended to cap it relative to personal
income growth. ... Thus, TEL laws, as they currently are written, allow
states with high income growth to keep increasing the size of the public
sector. Meanwhile, they prevent states with low income growth from doing
likewise."
- Joyce, Philip
G.; Mullins, Daniel R.
"The Changing Fiscal Structure of the State and Local Public Sector:
the Impact of Tax and Expenditure Limitations," Public Administration
Review, v.51, no. 3 (May-June 1991), p. p. 240-253.
- Hughes,
Justin J. T.; Rieman, Garth B.
"A New Generation of State Tax and Expenditure Limitations,"
Harvard Journal on Legislation, v. 22, no. 1 (Winter 1985), p. 269-287.
For current information
and on-going analysis of California tax and spending policies consult the the following websites:
- Budget Documents (California.
Dept. of Finance)
- California Budget Project
- California
Legislative Analyst's Office
- California
Taxpayers' Association
