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 proposition 13 our children have dropped to the bottom ten of all fifty states in achievement for the same grades. The reason for this is clear; the voters went against their own children, and grandchildren and removed the funding that enabled us to keep our children educated in the best way possible. No longer would school districts be able collect property tax, and then distribute it locally by the school district board. Now the school districts would need to depend on the state and federal governments for the majority of their funding. The problem with this scenario is that because of prop 13, the state was beginning to enter into a fiscal crisis of their own, and could not afford to give our children the level of education, that the people who voted for proposition 13 were afforded.
It became apparent soon after prop 13 was passed that there were huge differences in the property taxes paid my individual homeowners. Because property taxes were locked at 2% per year and the value of property increasing more than 2% per year created a unique phenomenon. The phenomenon was that the longer one held on to the same property the larger the gap between its market value, and the value that it was assessed at for property tax purposes. The only time that a home was assessed at its market value was either when it was sold, or when a home is newly built. Therefore, you could have one home with a market value of $300,000 and an assessed value of $100,000 in a ritzy upscale neighborhood, at the same time we could have a home that was newly sold, with a market value and assessed value at approximately $100,000. Both homeowners in this example would pay approximately the same amount in property tax, because of the assessed value of the homes. This shows the true inequality of proposition 13 you could have next-door neighbors where the difference in property taxes differ at the ratio of ten to one. This difference places an unfair burden of property taxes on new homeowners.
As stated earlier proposition 13 was designed to alleviate the tax burden shared by the owner-occupant property owner. The true effect of the proposition was quite the opposite, the tax inequality that existed prior to prop 13 only continued to worsen, and the burden of property tax shared by commercial properties continued to be less than that of commercial properties. The reason for this disparity is that the designers made the tax relief available across the board. At the time proposition 13 was envisioned, commercial properties were not experiencing the tremendous growth in the market value of their properties, as the owner-occupant properties were. This indicates that businesses were not in the same dire need of immediate tax relief that the residential owners so desperately required. Because of this nearly two-thirds of proposition 13 s tax relief went directly to businesses and landlords, the ones who needed it the least.
One of the other effects of proposition 13, was that local governments needed money to fund themselves, and would become creative to do so. After the passing of proposition 13, we began to see a proliferation of new fees, and assessments imposed by local governments to raise revenue. One of the most common was a utilities user tax, in this a home that used electrical, gas, or water would pay a small fee each month based upon their utility usage. We also began to see taxes on the usage of hotels and motels, which did not affect the residents, and therefore were passed easily. In certain areas, we saw the implementation of an admissions tax. The admissions tax could be imposed on any recreational type event. For instance, one going to the movies may find a 2% tax added to the cost of the movie ticket, this would go directly to the local government. The admissions tax was challenged somewhat, and it was found to be almost as costly to implement as the revenues it collected. Today, we generally see the admissions tax in cities that have large arenas, which can generate large revenues. .
Fee assessments can come in many sizes and shapes but one type sticks out clearly in my mind. If the city would like to build a park, they may create an assessment district. This assessment district can assess a fee on the residents in the area that the park will serve. This has caused some controversy however, as some assessment districts did not know where to draw the line. In one case, the city of Orland, Ca. imposed an assessment fee that was 23 miles in diameter. They felt that even people who did not live in their small city, would benefit from the park. The end result of these fees however led to the reappearance of Howard Jarvis, who introduced yet another proposition (Prop218) to further restrict the ways that local governments could raise revenue.
Because we now must have a two-thirds vote to raise our taxes, 34% percent of the voters are granted the power of veto. This power of veto, gives the voting minority greater control over local government finances. It was the goal of proposition 13, say its supporters to lower taxes by going against the big government in Sacramento, and its powerful elite. But in reality, the end result was that they concentrated a large amount of power into the hands of relatively few.
One of the most hideous aspects of the passing of proposition has been what it has done to our schools. As a father with a daughter in the first grade, I worry about the passing of these laws by voters that limit the authority of local government to do what is right, and necessary to keep our children educated in the best method necessary. I believe that the money needed to keep our local schools open should come from the property owners in the district in which the school services. I would rather have a local board member allocating funds, and dispersing them at the local level, then some bureaucrat in Sacramento, who has probably no idea what the true needs of my community s schools are. To further this, the more we (voters) limit the authority of local governments to levy taxes, the more they will be dependent on Sacramento, and the federal government. Is this what the people really want? Should a school district have to do a song and dance routine for the federal government if they request it, just because if the don t they will lose their funding?
Another problem that I have seen is this: if there is a storm, and emergency money is needed to repair local streets, and a new tax is proposed to pay for it. We must have a supermajority to pass it. This gives power to the minority not the majority, and is the very opposite of democracy. It is ridiculous to me that the people of California would vote for a proposition that would cause them to have less control over their own lives, and their community. As well as needing a two-thirds vote to pass a tax, we must also have at least a two-thirds majority to remove a tax. It is my opinion that if we could remove the two-thirds requirement for new taxes, or tax increases. This would give Californians and her legislators greater flexibility when dealing with unjustified taxes, and new needs and demands.
One of the things that I believe would be beneficial to California, and her counties, and cities would be to bring the value of commercial properties, and rentals up to their full market value and adjusting the property tax rate. This could add billions of dollars of revenue to the state. If the tax rate of one percent were to be left intact, California businesses would still have one of the lowest cost property tax rates in the country, while adding nearly 5 billion in revenue each year. This would in effect keep the burden off the homeowner, and shift it back where it belongs, on the money generating properties.
Lenny Goldberg, in his book Taxation with representation: A Citizen s Guide to Reforming Proposition 13, states that in his opinion there should be a transfer tax levied upon people who sell their homes. This transfer tax would be a tax on the assessed value of a home before and after its sale. The rate would then be based on the number of years the previous owner lived in the home, therefore the state could regain some of the monies lost to underassessment. Goldberg also notes that this tax should be left to local governments to implement, with appropriate exemptions for low-income homebuyers. He also states that the money gained from this tax should be left in the hands of local government.
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