Speaker's Commission
State Seal
October 25, 1999

Legislature may dare to revisit Prop. 13 tax cut.

By DOUG WILLIS, Associated Press
San Jose Mercury News

SACRAMENTO -- Next year, the Legislature may go where it has not dared go in more than two decades -- a reconsideration of Proposition 13, a 1978 ballot initiative that cut homeowner property tax bills in half.

Proposition 13 was simple but sweeping. It limited annual taxes to 1 percent of assessed value, an average 52 percent cut at the time. To protect those savings from inflation, it allowed annual assessment increases of no more than 2 percent unless a property is sold. Then a new owner's tax starts at 1 percent of the purchase price.

It also required support from two-thirds of voters to raise local taxes.

But the caps on tax rates and reassessments created unintended side effects: increased local dependence on fees and sales taxes, large cuts in infrastructure spending and large tax disparities between identical properties depending upon when they were purchased.

For the past year, Sen. Steve Peace, Senate Budget Committee chairman, has been the point man in a legislative effort to untangle the fiscal relationship between the state and local governments.

The La Mesa Democrat held a half-dozen public hearings around the state. The topics ranged from the causes and effects of bidding wars among local governments to attract auto malls and ``big box'' retailers to the impact of 1992 legislation shifting $3 billion annually in property tax revenue from counties to schools.

Just last week, California's 58 counties won a lawsuit contending the property tax shift was unconstitutional. Attorneys for both sides say the case will take years to settle.

The allure of sales taxes from huge retail outlets has prompted local governments to favor them, though they typically produce few high-paying jobs, over manufacturing, which doesn't produce local sales taxes but provides better jobs, contributing more to the state economy.

State Controller Kathleen Connell recently proposed a major overhaul of how sales taxes are divided. That issue was also part of the controversy over a union-backed bill vetoed by Gov. Gray Davis this month aimed at halting the construction of more big box retail stores such as Wal-Mart, Costco and Target.

But Peace says those problems, along with the ever-increasing meddling of the Legislature in local budgeting and land-use decisions, all stem from Proposition 13.

Peace says the time is right to rewrite 13, but polls and Proposition 13's sponsors disagree.

Proposition 13 was enacted by a 65 percent majority. A Field Poll published on its 20th anniversary last year still found a 53-30 margin supporting it.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, named for Proposition 13's author, said ``anything that takes on the property tax limitations, or takes on voter approval of local tax increases, and we go to the mat.''

Peace won't say exactly what he hopes to propose, but notes the problem points directly to core provisions of 13.

A fundamental flaw, he says, is increased dependency on sales taxes, which taxpayers may not deduct on federal tax returns, while reducing property taxes, which are deductible.

``We have a tax structure that donates 30 percent of our revenue to the federal government unnecessarily,'' Peace said. ``If one sat down and started with a blank piece of paper, you could construct a tax structure that would actually decrease the net tax impact on California taxpayers and increase the yield to state and local government.''

Peace has his supporters. Senate leader John Burton, D-San Francisco, called for the hearings Peace conducted this year. And the executive committee of the California State Association of Counties meets next week to discuss proposals to submit to the Legislature next year to reform local government finances.

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