Negative Effects of California's Proposition 13 on Term Paper

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Negative Effects of California's Proposition 13 on Infrastructure

California's Proposition 13, officially known as the People's Initiative to Limit Property Taxation, was enacted in June 1978 in response to soaring property taxes (Chapman 1998). As a result of this act, real property tax in California is capped at 1% its assessed value. Furthermore, this assessed value cannot increase by anymore than 2% annually while under the same ownership. Once a property is sold to a new owner, the property value is reassessed at current market value and taxed at 1% of this value.

Three other changes became law when Proposition 13 passed ("What is Proposition 13?" n.d.). First, the responsibility for allocating property tax revenue among local jurisdictions transferred to the state. Second, it became mandatory to receive a two-thirds majority vote in both legislative houses on any measures enacted to increase state revenue. Third, local governments were now required to receive a two-thirds majority vote on any tax increases for special purposes (e.g. sewage and water handling, fire services, etc.).

This essay will consist of a brief discussion of California's tax system before Proposition 13 was enacted, followed by an in-depth analysis of how this act has negatively impacted the ability of local governments to fund necessary infrastructure. It is the position of this writer that Proposition 13 must be amended in order to restore power at the local level and improve infrastructure, while still providing financial protection to homeowners. Thus, this essay will conclude with a discussion on suggested amendments to this Act.

Prior to Proposition 13

Prior to Proposition 13, city and county governments, schools districts, and special districts used property taxes that they received to fund the creation of infrastructure and programs (Katz 2008). If the people within a specific jurisdiction called for new or improved government services, or if the state required local governments to create new programs, local law makers could raise the property taxes within that jurisdiction to fund these programs.

On average, property taxes in California averaged slightly less than 3% of market value; however, there were no limits on tax rate increases (Katz 2008). As well, there were no limits on increases on individual ad valorem charges (i.e. taxes based on a property's value). In some circumstances, assessed property value increased by 50% to 100% in just one year, resulting in corresponding increases in property tax bills.

Around the time that Proposition 13 was enacted a "tax-payer revolt" could be seen throughout the country (Katz 2008). People in California particularly were frustrated with rising property taxes and fears of being taxed out of their homes. This tax-payer frustration was further fuelled by the California Supreme Court rulings in Serrano vs. Priest (Foldvary 2006). These rulings stated that using property taxes to finance schools was unconstitutional, resulting in legislation which made financing of public schools separate from property tax. This separation drastically reduced residents' support for rising property taxes as they felt that they no longer benefited from the use of their tax dollars in the same way.

Howard Jarvis and Paul Gann were the most vocal supporters of Proposition 13, popularly known as the Jarvis-Gann Amendment (Foldvary 2006). Proposition 13 was voted on through the California ballot initiative, a provision of the California constitution which states that a proposed law or constitutional amendment can be voted on by the public if a petition exists with a sufficient number of signatures. 70% of registered voters in California voted and Proposition 13 passed with a 65% majority.

The Impact of Proposition 13 at the Local Level

As a result of Proposition 13, local governments lost control of proceeds from locally levied property tax (Katz 2008). It is now at the State's discretion to decide how this money is spent. According to one reporter, Proposition 13 has "made beggars of city and county governments. When they need money to provide services their constituents demand, they must crawl to the state government on their knees" (Katz 2008). Not only has Proposition 13 left local governments at the mercy of the State, but it has done the same to students, affordable housing, and special districts. Elisa Barbour, who recently wrote a paper on the consequences of Proposition 13 for the Public Policy Institute of California, states that this measure "removed the local control that allowed property tax to reflect, more than any other source, the community-wide taxing decision of a given set of residents. The state was now largely responsible for allocating what had been the single largest local revenue source" (Katz 2008).

Of the money received by local governments from the state, a large portion of it is already earmarked upon receipt (Foldvary 2006). Cities have lost control of more than one-third of their funds, and counties have lost control of over half. The funds which cities and counties do control are considered general revenue, which go primarily to emergency services at the expense of other programs. Michael Coleman, a budget guru for Californiacityfinance.com, states, "Its not police and fire that are likely to get hit the most, its parks, libraries, and streets. You can tell a city is in budget trouble when there are potholes, park closures, and cut library hours" (Katz 2008).

Raising Funds

Due to the fact that cities and counties retain a portion of the income from local sales tax, land is being disproportionably used to develop big-box retail stores, malls, and auto malls (Foldvary 2006). In fact, the "auto mall," which is now commonly seen throughout the United States, was invented in California by local governments as a sales tax generator (Fulton 2008). Conversely, residential property development is dropping in many areas because residents provide little tax revenue and yet still demand better services (Foldvary 2006). Retailers on the other hand provide higher revenue and demand fewer services. As well, less land is being used for manufacturing and office buildings due to the lack of sales tax generated from them.

A few jurisdictions in California have partnered with private developers in order to increase revenue and improve infrastructure (Chapman 1998). For example, one jurisdiction partnered with a private developer to build a shopping mall. As the profitability of the mall increases so does the local government's revenue. This money is then invested into improvements in infrastructure, such as repairing or creating new roads and highways. That being said, such a move is not without risk. If the shopping mall does not make a profit then the local government does not make a profit. In such a case money will have been invested into a project that actually causes the city to loose money.

A number of cities experiencing rapid population growth have used eminent domain and redevelopment laws to condemn deteriorating industrial buildings and residential buildings and communities in order to rezone the land for retail establishments (Chapman 1998). As well, a number of newer cities have focused on sales tax revenue generators when planning a city's general zoning plan. It has also become common practice to rezone vacant parcels of land for retail use.

This drive for sales tax revenue has created deep inequalities and competition among regions. "Well-located cities have been able to cherry-pick retail centers, high-end housing, and other tax 'winners'. Meanwhile, starter homes and other tax 'losers' have been relegated to distant locations on the metropolitan fringe, often in unincorporated areas, where county leaders are desperate to generate any types of revenue they can get" (Fulton 2008).

This shifted focus on retail establishments has been criticized for many reasons: it has resulted in poor land use choices, discouraged growth in other sectors, and prompted individuals to take jobs that do not allow them to reach their full potential (Katz 2008). As well, this shift is believed to be a major contributing factor to the severe housing shortage in California (Chapman 1998). In addition to residential properties and communities being rezoned for retail purposes, Proposition 13's cap on property tax acts as a disincentive for people to move, choosing instead to modify their homes or transfer their homes to people within their family to avoid new, higher property value assessments.

In addition, local governments have had to increase development fees on residential and industrial properties to compensate for the lack of revenue received from such properties (Katz 2008). These fees are transferred to the buyer, resulting in them paying thousands of dollars more on their home. A large portion of this revenue is used to create infrastructure around newly-built retail establishments on previously undeveloped land. For example, in Contra Costa County development fees include permit fees, traffic fees, water and sewage fees, fire fees, park fees, and school fees (Chapman 1998). Between 1992 and 1995, these fees totalled over $16,000 per dwelling unit in the east area of Contra Costa County and $24,000 per dwelling unit in the west.

Development fees are far more profitable in undeveloped areas (Chapman 1998). Conversely, in developed areas little new construction occurs, resulting in a lack of funds needed…[continue]

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