Legislators may alter Prop. 13

By Andrew LaMar
Times Staff Writer

SACRAMENTO -- Local officials have complained for years about how local government is funded, but have gotten little response from state leaders.

Proposition 13 in 1978 limited property taxes to 1 percent of a property's purchase price and then, eight years ago, state lawmakers redirected a major portion of property taxes toward schools and away from other local agencies.

Now, 22 years after Prop. 13, lawmakers plan to take a serious look at changing the underlying tax structure that supports local government.

In coming weeks, legislative leaders will create a committee to explore reforms that could include a constitutional amendment to alter Prop. 13, a move long considered to be politically inconceivable.

The panel is to include three members of the Assembly and three senators, Steve Peace, D-La Mesa, Don Perata, D-Alameda, and Charles Poochigian, R-Fresno.

Peace, who will probably co-chair the committee, said he wants to develop a dependable and flexible system to improve tax efficiency for local governments with less reliance on sales taxes.

Many of the state's most vexing growth problems -- traffic, lack of housing, development focused on retail --can be traced to a complicated, inequitable local tax structure, Peace said.

Minor changes, he said, won't fix the problem.

"The hardest part is convincing people it's easiest to do it that way, in a comprehensive manner," Peace said.

Others have come to a similar conclusion. Three separate blue-ribbon panels have called for changes in recent months, and the Legislature's chief nonpartisan policy adviser, the legislative analyst, produced her own report Feb. 3 that offered five alternatives for reform.

"It seems like there is all this activity swirling around and maybe we have come to some kind of harmonic convergence of ideas, or maybe it is we're just reaching critical mass," said Pat Leary, a lobbyist for the California State Association of Counties.

Local officials have fought for change since the state instituted the Educational Revenue Augmentation Fund in 1992. That measure hurt many local agencies and counties when the state took 18 percent of their property tax share during the recession to pay for schools.

Since its inception, the educational fund has taken $829 million in property tax revenues from Contra Costa County, its cities and special districts. Alameda County, its cities and special districts, have lost $1.5 billion.

The tax shift complicated an already complex landscape of local government finance. Many cities, starving for revenue, fixate on retail development that could boost sales tax revenues because a portion of sales taxes goes directly to the city or county where the sale occurs.

According to Peace and others, that fixation comes at the expense of sound growth and development.

"More than anything, we have an addiction to sales tax in this state because politically it has been the easiest thing to market," Peace said.

Since the tax shift occurred, cities and counties have lobbied lawmakers to give the money back. Last year, Gov. Gray Davis responded by paying out $150 million to cities and counties to ease the pain -- a fraction of the $23 billion local governments say they are owed.

Local government advocates are optimistic this could be the year for major reform. A series of developments have propelled the entire tax question out of the shadows:

• First, term limits have forced out longtime legislators and replaced them in many cases with former city council members and county supervisors who know the tax problem first-hand.
• Second, counties won a court ruling in December that said the educational fund shift was unconstitutional and the state had to pay back the money. The state has appealed.
• Third, the California economy has shifted into overdrive, and the state's coffers are overflowing with cash, meaning lawmakers might be willing to drop or limit the educational fund shift and make up the difference with state money.

Even with the economy at full tilt, local governments are struggling with the same old problems, which has prompted many to re-examine the system.

"Citizens are finally beginning to ask the question, 'How come the state has so much money but I have to drive to work over 54 potholes?'" said Leary, the association of counties lobbyist.

Nevertheless, formidable obstacles remain.

Prop. 13 continues to be popular, and legislators won't be eager to mess with it in an election year. Also, Davis has shown little interest in the issue, and lobbyists and other local government advocates say they don't know where he stands.

In addition, cities that profit heavily from sales taxes are certain to fight any proposals that would diminish those receipts.

The Howard Jarvis Taxpayers Association, named for the principal author of Prop. 13, will follow Peace's committee closely, said association President Jon Coupel. Polling shows that Prop. 13 enjoys support today from a large majority of voters, he said.

"I do think there is room for some reform," Coupel said. "Certainly, we're not going to support anything that would damage the core of Proposition 13."

Coupel said the problem isn't Prop. 13, but how the state handled it. To implement the measure, the state set formulas for distributing property tax revenue that differ in every corner of the state.

In each county, the state determined the percentage of total property tax revenue that each local agency received prior to Prop. 13. The state then essentially froze that level and applied it to the new amount of property taxes set by Prop. 13. Today, counties collect the property tax and redistribute the money based on those formulas.

In her report, Legislative Analyst Elizabeth Hill said the state's implementation of Prop. 13 created a local government tax system that confuses people, reduces governmental accountability, lacks local control and skews development incentives.

While noting that no perfect solution exists, Hill's report suggested five possible reforms, including one that would change Prop. 13. It would reduce sales taxes by 1.25 percent and give half of the sales taxes to local governments based on the population they serve rather than giving all of it to the city or county where the sale occurs.

This alternative would allow cities and counties to increase property taxes above the 1 percent rate set by Prop. 13, if voters approve a charter with rules on how to do it.

Another committee, the Assembly Speaker's Commission on State and Local Government Finance, is due to release recommendations next week.

Jim Bickhart, who staffs the committee for Speaker Antonio Villaraigosa, said it's clear the Legislature has an opportunity that it won't have when the economy takes a turn.

Whether reform will get done this year is "a long-to-middle shot at this point," Bickhart said. "I think we're going to ratchet up the intensity of the discussion a fair amount and probably get a sense of what will fly."