BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SR 41 HEARING: 6/11/14
AUTHOR: Morrell FISCAL: No
VERSION: 5/7/14 TAX LEVY: No
CONSULTANT: Grinnell
THE 36th ANNIVERSARY OF PROPOSITION 13
Commemorates and reaffirms the Senate's support of the
Senate for Proposition 13
Background and Existing Law
Before Proposition 13 (1978), the Legislature could
generally enact new taxes or increase existing taxes by
majority vote. Proposition 13 instead required that any
changes in state taxes for the purpose of increasing
revenues must receive approval by 2/3 vote of both houses
of the Legislature prior to enactment. Proposition 26
(2010) subsequently modified the definition to apply the
2/3 requirement to bills that "results in any taxpayer
paying a higher tax."
Local agency governing boards could enact taxes by
ordinance prior to the initiative's enactment. Proposition
13 amended the Constitution to require a two-thirds vote of
the electorate to enact a local special tax
Cities, counties, and special districts set property tax
rates on property within its jurisdiction without an
aggregate cap before Proposition 13. State law required
assessors to revalue property annually; however, in
practice, assessors usually reassessed all the homes in one
neighborhood every three to five years. Local agencies
received property tax revenue resulting from the
appropriate property tax rate fixed by the local agency.
Proposition 13 reformed property tax assessment in the
following ways:
Limited the maximum amount of any ad valorem tax on
real property at 1% of full cash value as shown on the
1975-76 tax bill.
Precluded assessors from reassessing property
SR 41 - 5/7/14 -- PageB
unless it was newly constructed, or changed ownership.
Capped the growth in assessed value to 2% per year.
Provided that the Legislature allocates property
tax revenue "according to law
Proposed Law
Senate Resolution 41 commemorates the 36th anniversary of
Proposition 13. The measure contains several statements
regarding property tax rates, taxpayer benefits, effects of
the initiative on the state's economy, as well as taxpayer
support for Proposition 13 and potential changes and
alternatives. The resolution states the Legislature's
reaffirmation of its support for Proposition 13 and the
benefit it provides to individual homeowners and the
state's overall economy.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "During
the 1970s, inflation was on the rise and property tax bills
were soaring. These circumstances put seniors at risk of
losing their homes and affected first-time homebuyers
thinking about entering the market. It was against this
backdrop that voters overwhelmingly passed Proposition 13.
The initiative reined in out-of-control property taxes and
made them more predictable and stable for homeowners. In
fact, the average homeowner has saved tens of thousands of
dollars in taxes since that time. Additionally, unlike
California's sales and income tax rates, revenue from
property taxes has remained a reliable source of income for
the state. Even in the depths of the last recession,
property tax revenue increased while other revenue sources
declined. Senate Resolution 41 simply acknowledges the
positive impact Proposition 13 has had on California. Its
taxpayer protections are still as popular today as when
voters passed it over three decades ago - and that support
SR 41 - 5/7/14 -- PageC
cuts across party lines and ideologies. Every anniversary
of its passage is an opportunity to reflect on one of
California's most important examples of democracy in
action."
2. Yes, but . Proposition 13 may be the most significant
initiative ever enacted by California's voters: its changes
irreversibly reshaped fundamental aspects of California
governance and public finance. However, SR 41 celebrates
the initiative from a specific point-of-view, and includes
adjectives, phrases, and causal connections that may not
reflect the views of the entire Legislature, including a
statement of the Senate's support for the initiative.
Should the Committee wish to amend SR 41 to celebrate the
initiative's more complicated history as described below,
it can amend it by deleting some of its terms and passages,
among others:
While inflation and property tax bills increased
prior to Proposition 13's enactment, are the
adjectives "raging" and "soaring," accurate?
What examples exist of property taxes forcing
layoffs, and closing businesses? What specific
evidence demonstrates a statistically significant
causal connection between the two?
While the average homeowner and small business
have likely saved tens of thousands of dollars
annually in property taxes, how can it be shown that
the same money was used to create jobs and foster
economic development? Foregone taxes could have been
used on consumption items, saved or invested in
financial assets, or spent outside California.
The measure states that proposed alternatives to
Proposition 13 have "unwelcome effects," including
"substantial tax increases for low-income and elderly
homeowners," What alternatives were these, and did
they target low-income persons and the elderly
specifically?
SR 41 also cites the defeat of Proposition 167
(1992) as an indication of a lack of favor of today's
voters for a split-roll. Can the results from an
initiative election more than 20 years ago be
correctly extrapolated to today's electorate, given
the state's demographic and political change during
that time? 2012 and 2014 Public Policy Institute of
California polls showed that while more than 60% of
respondents expressed support for Proposition 13, an
almost equal amount favors a "split roll" property
SR 41 - 5/7/14 -- PageD
tax prohibited by the initiative.
The resolution reaffirms the Legislature's
support for the measure, and its benefit to
homeowners and the state's economy. While homeowners
have certainly benefitted from Proposition 13, no
empirical data shows that it produced a net benefit
for the state's economy. Given the initiative's more
nuanced and complicated effects described below,
should the Legislature instead recognize the
anniversary of the initiative's enactment, and its
significance and effect on California's system of
governance and public finance without declaring its
support or characterizing it as a benefit to the
economy?
3. The rest of the story . Enacted over 30 years ago,
Proposition 13 remains controversial today. California
property owners pay less property tax, and enjoy the
additional benefits of increased certainty due to the
initiative's limitations on assessed value growth and
reassessments. Additionally, the initiative placed voting
thresholds on the Legislature and local agencies seeking to
raise taxes where none existed before, likely contributing
to a lower tax burden for Californians. However, enacting
Proposition 13 did not occur without tradeoffs. Economists
and academics have researched the measure's legacy
copiously, and their findings include: that the initiative
shifted the burden of financing public services from
property taxes onto other revenue streams, with undesirable
consequences; transferred property tax allocation powers to
the state; and created considerable distortions and
inequities in the housing market.
Proposition 13 reduced public revenues, however, the state
ameliorated much of the revenue loss, and local agencies
found other ways to finance public services. Proposition
13 resulted in a property tax revenue loss of 51% percent
in the first year after enactment, but the state assumed
health and human services programs from the counties,
shifted property taxes from schools to local agencies, and
provided a $2.7 billion bailout to local agencies in 1978.
Local agencies took other steps, such as relying more on
sales taxes, and increasing fees and charges, which did not
for the most part require voter approval until Proposition
218 (1996), thereby shifting the burden of financing public
services away from property taxes. Sometimes, costs were
aligned with services; for example, housing developers now
SR 41 - 5/7/14 -- PageE
pay significant fees for infrastructure, permitting, and
environmental review, which they attempt to pass on to
homebuyers. Other fees did not bear such a relationship,
such as the 48% increase in revenues from library fines,
garbage collection fees, and sewer charges between 1979 and
1983. Local agencies often became more entrepreneurial,
using redevelopment until recently to capture property tax
increments, making land-use decisions based on sales tax
revenue consequences instead of sound land use practices,
and offering economic incentives to businesses that
generate significant sales tax revenue to locate in its
jurisdiction, such as big-box stores and auto
dealerships.<1>
The initiative also fundamentally changed California's
state-local fiscal relationship. Proposition 13 required
that property tax revenues be allocated "according to law,"
meaning that the Legislature would determine how property
tax revenues would be allocated among local agencies in a
county levying a property tax. Previously, each local
jurisdiction set the property tax rate within its
jurisdiction. The Legislature decided to freeze current
allocations within a county, locking in each agency's share
of the property tax regardless of future changes in
demographics or service demand (AB 8, Greene, 1979); these
allocation shares have been locked in for the last
thirty-five years. Proposition 13 also laid the foundation
for the Legislature to shift property tax revenues from
local agencies to schools in 1992-93, 1993-94, 2004-05, and
2005-06 to meet the state's public education spending
obligations under Proposition 98 (1998).
While it reduced total taxes, Proposition 13 caused
distortive and inequitable tax consequences for California
taxpayers. Under Proposition 13, the date a taxpayer
purchased a property sets a taxpayer's property tax more so
than its actual market value by locking in a property's
assessed valuation from the 1975-76 fiscal year until
ownership changes or the property is newly constructed.
Property owners have a significant incentive not to move
residences, because a new home's purchase price determines
its property taxes, which could exceed the taxes determined
by the original property's factored base year value. While
-------------------------
<1>
Chapman, Jeffrey; "Proposition 13: Some Unintended
Consequences," Public Policy Institute of California,
September, 1998
SR 41 - 5/7/14 -- PageF
Propositions 60 (1988) and 90 (1990) allow disabled
taxpayers or those over the age of 55 to transfer base year
values to properties of equal or lesser value than the
original property, locking in the base year leads taxpayers
to make different decisions on housing to due to tax
implications, distorting the function of a normal market.
Additionally, locking in assessed valuations and limiting
growth caused taxpayers owning identical homes on the same
street to pay vastly different property tax amounts; newer
homebuyers bear a proportionally larger share of the burden
for financing public services than longer term residents.
4. On subsidiarity .Proposition 13 is often regarded as a
critical change in tax policy. However, by shifting
control of property tax allocation from local agencies to
the state, and limiting local revenue raising ability, the
initiative and changes that followed fundamentally altered
the relationship between citizens and their government,
empowering the state to the detriment local agencies.
Before Proposition 13, local agencies exercised "home rule"
powers over local revenue sources: local taxes paid for
local services, with some state intrusions. Voters chose
their priorities when selecting officials to lead these
local agencies, who set local tax rates, and then voters
held officials accountable at the next election. Today,
local agencies have little flexibility to raise revenues
due to the initiative's limitation on property tax rates
and the 2/3 vote threshold for enacting new or higher
special taxes. Researchers state that Proposition 13 and
subsequent legislative action severely undercut local home
rule powers by establishing a fiduciary relationship on the
part of the state toward local agencies.<2> Counties
particularly are reliant on state funding and must
implement state programs as legal subdivisions of the
state. Researchers add that any policy discussions between
state and local agencies have deteriorated as a result,
describing the fiscal relationship that evolved between
state and local agencies as "a zero-sum political
atmosphere in which fiscal considerations dominate
intergovernmental policymaking."<3>
5. Not so fast? . The Committee approved six measures at
its May 15th, 2013 hearing that change the vote threshold
-------------------------
<2> Barbour, Elisa, "State-Local Fiscal Conflicts in
California: From Proposition 13 to Proposition 1A," Public
Policy Institute of California, December, 2007
<3> Ibid.
SR 41 - 5/7/14 -- PageG
for special taxes enacted by Proposition 13:
SCA 3 (Leno) - allows school districts, community
college districts, and county office of education to
levy parcel taxes at 55% vote.
SCA 4 (Liu) - allows local agencies to levy,
extend, or increase special taxes at 55% vote for
local transportation projects.
SCA 7 (Wolk) - lowers the vote threshold for bonded
indebtedness incurred to construct, reconstruct,
rehabilitate, or replace public libraries; allows
local agencies to levy, extend, or increase special
taxes at 55% vote to fund public libraries.
SCA 8 (Corbett) - allows local agencies to levy,
extend, or increase special taxes at 55% vote for
local transportation projects.
SCA 9 (Corbett) - allows local agencies to levy,
extend, or increase special taxes at 55% vote for
community and economic development projects.
SCA 11 (Hancock) - allows local agencies to levy,
extend, or increase special taxes at 55% vote for any
purpose.
With the exception of SCA 3, which was amended for other
purposes and recently enacted as Proposition 42, all the
measures are currently in the Senate Committee on
Appropriations awaiting hearings.
6. Six squared . The Committee defeated an almost
identical resolution celebrating the 35th Anniversary of
Proposition 13 (SCR 25, Wyland), and the former Committee
on Revenue and Taxation, a predecessor to this Committee,
also defeated the almost identical SCR 116 (Harman, 2008).
Support and Opposition (6/5/14)
Support : California Taxpayers Association, Howard Jarvis
Taxpayers Association.
Opposition : None
received.