The Effects Of Tax Reform On California

Essay, Research Paper

The Effects of Tax Reform on California

Prior to 1978, local governments in the state of California enjoyed own-source general revenues that were significantly higher than the national average. But, the passage of proposition 13 in 1978, and the subsequent passage of proposition 218 in 1997, has significantly reduced the ability of local governments to remain as fiscally independent from the state and federal government as they were prior to the initial passing of Proposition 13. It is my intention to show the history of Proposition 13, the differing opinions regarding it, the laws that govern Proposition 13, and the effect that Proposition 13 has had on the ability of local governments to raise revenue.

In the mid 1970 s the real estate market in the state of California began to boom. At the current time, property taxes were based on the full-assessed value of property. Real estate speculation began to push the value of California s property higher and higher. The increase in assessed values of homes in California, with the owner as the primary resident increased one hundred and eleven percent, in just three years (1975-1978). At the same time that owner occupied residential properties were seeing gigantic increases in assessed value, commercial property was increasing in assessed value at the rate of twenty six percent. Another sharp contrast would be the values of renter occupied residential housing, which like the commercial properties only increased moderately at the rate of thirty four percent in the period between 1975-78.

The increased assessed value of owner occupied residential property during 75 -78 began to shift the balance of tax burden increasingly towards the homeowner. In 1975 the percentage share of property tax burden is as follows: 26% property occupied by the owner, 22% property occupied by renters, and 53% to industrial, and commercial properties. In just three years we saw a dramatic increase on the property tax burden of the owner occupied residential properties. The following is a breakdown of the property tax burden by property category in 1978. 36% property occupied by the owner, 19% property occupied by renters, and 45% to industrial and commercial properties. It is not difficult to extrapolate the data from these findings, in just three short years the amount of property tax paid by owner occupied properties rose 10%. At the same time we see a drop of 3% for rental properties, and a staggering 8% decrease in the property tax paid by industrial and commercial properties.

Following the defeat in the legislature of a homeowner tax relief plan, the stage was certainly set for some type of property tax reform in the state of California. Instead of relief, the people of California got Howard Jarvis, the man responsible for the decimation of local finances. Howard Jarvis set out on a mission to unite the property owners of California as one, and initiate a taxpayer revolt known as Proposition 13, the property relief act. Instead of a well thought out plan of reducing the property tax burden on the owner occupied properties, California s local governments were single handedly stripped of their primary source of funding. The proponents of Proposition 13 did have noble ideals. They wished to expand freedom, and hold back the unnecessary burdens of government.

Proposition 13 as written would set the rate of property tax to one percent of the assessed properties value. In addition to setting the property tax at one percent, the date of the assessed properties value was rolled back to the 1975 level for tax purposes. Proposition 13 also limited the increase in the value of assessed value to 2% every year, or the rate of inflation whichever is greater. Properties could only have their values reassessed is when the property is sold, or newly built. If the property is sold, or new it will be assessed at the full market value and then the assessment will start to rise at the rate of 2% per year.

Proposition 13 also placed restrictions on the ways local governments could initiate new taxes to pay for vital public services. Proposition 13 requires that local governments who wish to introduce a new tax to pay for special taxes for specific purposes. Local governments would now be required to put the tax to a vote of the people, and that the tax must receive a two-thirds vote of the people to pass. Local government taxes for general purposes could be approved by a majority of the governing body or a majority vote of the people. The state too was limited in the way it could increase or create new taxes. The state would need to pass any new tax by a majority vote of the legislators, in addition to the signature of the governor.

In the month of June 1978 the voters of California turned out and voted on Proposition 13. The results were 65% in favor of the proposition, and 35% against. Immediately following the passage of proposition 13 the effects were felt almost immediately. The effects of proposition were serious indeed, 6.1 billion dollars or 53% of local property tax revenues evaporated almost instantly.

One of the most immediate effects of proposition 13 was against the states school age children. Prior to Prop 13, California schools enjoyed being ranked in the top five states for achievement for children grades kindergarten through twelfth. After the implementation of prop