Dealing with the unintended consequences of Proposition 13
By Daniel B. Wood, Christian Science Monitor, April 14, 1999
Even famous tax revolts can't last forever. Proposition 13 - California's 1978 ballot initiative that spawned copycat legislation across the United States - has been almost untouchable since voters passed it. And for good reason. It did the two things voters wanted it to do: cut billions of dollars in property taxes and forced local officials to spend public money more judiciously.
But now, for the first time, Californians in high places are talking openly about making changes. That's because, along with its achievements, Proposition 13 has come with a host of unintended consequences. Key among these: a shift in the balance of power that gives state lawmakers greater control of the purse strings and casts local officials in a somewhat beggarly role.
No one is saying that higher property taxes are in the offing. Yet sentiment is building that Proposition 13's side effects - from run-down schools to exorbitant housing prices to the proliferation of strip malls - must be redressed.
"It shifted much control from local to state government, but did it in such a confounding way that no one can be sure who's accountable for what," says Peter Schrag, former editor of The Sacramento Bee editorial page and author of a recent California history that examines implications of the law.
Now, several moves are afoot to possibly, just possibly, tweak Proposition 13 so that local officials regain greater control over close-to-home issues the voters care most about. Though the California experience with tax reform is more complex than that of other states which followed suit - including New York, Arizona, Ohio, Illinois, and Massachusetts - the current re-evaluation is being seen as a case study for others caught in similar disarray.
"The effort is to replace accountability to local government in ways that are understandable by normal people, taxpayers," says Burt McChesney, co-chairman of the California Governance Consensus Project, a coalition of business, government, labor, education, and community groups.
Formed four years ago, the project's goal is to craft agreement among its diverse members and submit a plan for amending Proposition 13 to the state legislature or, failing that, to submit a measure for the November 2000 statewide general election. "We're trying to deal with the huge mess we created with Proposition 13 in creating a morass and maze of overlapping laws and restrictions that almost no one understands," says McChesney.
Backers are proud to point out that Proposition 13, over its lifetime, saved California taxpayers at least $100 billion, by some estimates. It also helped preserve neighborhood stability by keeping thousands of people from being forced from their homes as real-estate prices soared.
But for cities, the balance sheet looked less sanguine. Not only did they lose that revenue, but they also lost their say in how state monies should be allocated for services they used to provide.
Moreover, Proposition 13 forced them to find other ways to raise money to fund their priorities. As a result, many cities increased fees - some say exorbitantly - on everything from speeding tickets to home inspections to tourists staying in local hotels.
But the primary new source of revenue for localities became sales taxes - which were still available to them under Proposition 13. This created huge incentives for officials to attract retail stores to their cities - and as many as possible.
"One of the things we are concerned most about is a host of land-use decisions (by localities) that favor retail strip and auto malls at the expense of everything else," says David Abel, appointed by state Assembly Speaker Antonio Villaraigosa to head a southern California coalition of businesses known as the Metropolitan Forum Project. "Such decisions have killed off Main Streets, adequate housing, industrial uses, jobs, recreational space, libraries."
The zeal to capture sales taxes has also created competition between city and county governments, manifesting itself in drives such as the San Fernando Valley's effort to secede from Los Angeles.
The California Governance Consensus Project and the Metropolitan Forum Project are two of several organizations formed in recent years to grapple with the issue.
In northern California, a public-private partnership known as Joint Venture: Silicon Valley Network is examining the link between Proposition 13 and sky-high housing prices. The theory is that local governments, seeking to recover costs of growth, are imposing high fees on real estate developers - some as high as $30,000 to $40,000 per home.
Senate Budget Committee chairman Steve Peace has held hearings across the state to examine state-local fiscal relationships. And Assembly Rules Committee chairman Robert Hertzberg has launched a commission looking at LAFCOs, local agency formation commissions, which govern annexations, incorporations, and other boundary issues.
"There are all kinds of contradictory statutes that no one has looked at comprehensively for decades," says Paul Hefner, who works on Hertzberg's staff.
Part of what's driving lawmakers Villaraigosa, Peace, Hertzberg, and others in Sacramento to restore some political and financial heft to local officials is that they themselves may soon return to their hometowns for jobs at city hall. Many have aspirations for local office after they are forced out of office by terms limits, which California passed in 1994.
"A lot of these guys came from or are going back to local government experience and are well-aware of the problems they want to fix before going back," says Hefner.
With all these moves afoot, some political observers are reminding reformers not to go too far, too fast. They mention a Los Angeles Times poll of 1,409 Californians last month, showing two-thirds approved of Proposition 13's impacts. Conservatives, the elderly, and the middle class like its effects even more.
"We can't have governments run by theorists and civics books," says Joel Fox, president emeritus of the Howard Jarvis Taxpayers Association, which is named after a co-author of Proposition 13. "The fact is, people were losing their homes and wanted clamps on the taxman. That sentiment prevails today."
Fox acknowledges that Proposition 13 proponents never intended the state legislature to take control of local revenues the way it has, and he accepts the idea of a constitutional amendment that would lessen state interference with local funding. That could come via recommendations by the California Governance Project.
A compromise could be allowing localities to impose nonproperty taxes by a simple majority instead of two-thirds voter approval, and letting them keep some property taxes levied on commercial development. Other measures could include constitutionally guaranteed revenue streams.
"The stars are finally aligning," says Ruben Barrales of Joint Venture: Silicon Valley Network. "It's never been done, although people have tried hard and not lived to tell. But if ever we have been close to a period where we can see real changes on the horizon, this is it."
Copyright© 1999 Nando Media
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For the first time in a generation, significant momentum is building among California's politicians and civic activists to restore powers to local government that were taken away by Proposition 13.
As the closest thing to a sacred icon that California politics has produced, Proposition 13 has been treated as untouchable since the 1978 voter revolt over spiraling property taxes produced a state constitutional amendment limiting the levy. Now, even its most ardent backers are conceding that it went too far.
It not only capped the property tax rate, but also shifted control over property tax allocations from localities to Sacramento. No one involved in the current push has publicly advocated tampering with the heart of Proposition 13 by raising the property tax rate. The main efforts are being directed at returning control of property tax allocations to local governments. But some are advocating amending Proposition 13 to make it easier for local governments
The shift in the traditionally local power of the purse to Sacramento has had many consequences, among them an erosion of home rule that made it harder for voters to influence government and contributed to the next big voter revolt, which imposed term limits.
In the constitutional bumper-car ride that is government by initiative in California, unforeseen consequences of term limits have now collided with unanticipated consequences of Proposition 13.
Term limits created rapid turnover in Sacramento--creating more opportunities for local officials familiar firsthand with local government's beggar status to move up to the state Capitol in positions to do something about it.
"More than half of the new members of the Legislature are former local elected officials," said Assemblyman Robert Hertzberg of Sherman Oaks, a ranking Democrat. "They've grown up in [a world of] post-Proposition 13 dysfunctional relationships with the state. . . . So they're very receptive."
"That has opened up a discussion that, in the pre-term limits world . . . would never have happened," said David Abel, a Los Angeles businessman and civic activist who is playing a major role in the current push for change.
Term limits also caused politicians who might otherwise have spent their professional lives in the state Capitol to set their sights on local government offices and, perhaps, to decide that they would like more power vested in local government when they arrive.
More Equitable System Sought
Assembly Speaker Antonio Villaraigosa, who is frequently mentioned as a future mayoral or City Council candidate in Los Angeles, appointed a commission chaired by Abel, declaring: "For 20 years, California has been coping with the unintended consequences of changes in its fiscal policy that destroyed home rule in government. . . . And I believe it is long past time to do something about it."
Villaraigosa said his possible local ambitions played a minor role in the move. "I can't tell you that doesn't come into my mind, because it does," he said. But he said he was influenced much more by reading a 1998 book, "Paradise Lost," by Peter Schrag, former editorial page editor of the Sacramento Bee, who argues that Proposition 13 helped launch a "nearly constant revolt against representative government" in California that has "led to a sharp decline in the quality of public services."
Villaraigosa said the book resonated with him as he considers how to "make government work for people."
Rules Committee Chairman Hertzberg, who has been mentioned in political circles not only as a possible future Assembly speaker, but also as a possible Los Angeles city attorney, has launched his own commission to examine issues of municipal incorporation of special interest to some of his secession-minded San Fernando Valley constituents. It has branched out to include state-local fiscal relationships. "Government," Hertzberg says, "has to change."
State Senate Budget Committee Chairman Steve Peace (D-El Cajon), who has been mentioned as a potential San Diego mayoral candidate, has also conducted legislative hearings around the state and proclaimed his hope for a more "rational" system of local government finance.
Taken together, these efforts reflect an acknowledgment that "our system of local government is fundamentally broken," said Michael Colantuono, a municipal lawyer who is a member of the Hertzberg panel. "It's impossible for the average citizen to figure out who is responsible for what."
A key player in determining how far to go in making repairs is speaker's commission member Joel Fox, president emeritus of the Howard Jarvis Taxpayers Assn., which is named after one of the coauthors of Proposition 13. Fox has a record of credibility on tax issues with voters, who would ultimately have to approve any change, and his status has made politicians leery of him as a potential enemy. It may give him enough clout on the panel to circumscribe the outer limits of proposed change.
Fox said that he and the Jarvis group "could look favorably upon" a constitutional amendment "to make sure the property tax is a local tax revenue without interference from the state government."
He said he did not believe that the authors of Proposition 13 "ever intended . . . that the Legislature be in control." (Three words in the measure, declaring that property taxes be apportioned among the various levels of government "according to law," shifted power to the Legislature, which makes the laws.)
Fox, however is convinced that the speaker's commission wants to go farther by replacing Proposition 13's requirement that local officials obtain a two-thirds approval vote to raise non-property taxes with a simple majority vote. He said he will not go along with that.
Fox is right--at least about the speaker. Villaraigosa said in an interview that he hopes "we'll be able to find some way to resolve the two-thirds voter threshold. We're the only state in the country with that threshold."
Villaraigosa said he also hopes to amend Proposition 13 "to allow local governments to keep most of their property tax revenues" and, in doing so, to erase financial incentives that sometimes lead localities to make long-term planning decisions based on short-term needs.
The current discussions involving state politicians are an overlay on other, more long-standing talks among civic leaders, local officials and lobbyists for public and private special-interest groups.
In the greater Los Angeles area, a group called the Metropolitan Forum Project, headed by Abel, has worked for more than a year to stimulate a ground-up movement for change among civic and local government leaders frustrated with what they believe are skewed government priorities attributable to localities' strained fiscal relationship with the state.
Because local governments do not control property tax allocations but are guaranteed a share of sales taxes, they have more financial incentive, for example, to encourage so-called "big box" retail developments that will produce sales taxes rather than new housing developments that will produce property taxes.
Tax Structure Puts Squeeze on Housing Community leaders say this is a problem in the Silicon Valley, where computer chip multimillionaires have pushed housing prices sky high and more housing is needed if businesses are to be persuaded to stay.
"Right now, the incentives are all wrong for those who want to encourage development of more housing, particularly affordable housing," said Ruben Barrales, chief executive of Joint Venture: Silicon Valley Network, a public-private partnership whose aim is to keep businesses there.
Civic discussions on the consequences of what Barrales terms "the dismantling of fiscal incentives for good planning" were stimulated by Sacramento's decision during the recession of the early 1990s to solve its own financial problems by shifting billions in property tax revenues from localities to the state.
The massive shift underscored the uncertain, beggarly position of localities and accelerated the tendency of some of them to fill holes in their budgets in unhealthy ways--for example, by wooing auto mall developers, but not industrial complexes that might produce more jobs at higher wages, because the industrial complexes would not yield sales tax revenues that localities could control.
Lobbyists for 34 special-interest groups, including major business and labor organizations that ordinarily would have little reason to get along, have been working with mediators for nearly four years under an umbrella called the California Governance Project to try to arrive at a consensus for structural government reform. "The only reason this group is together is that the situation is that bad," said its director, Jim Connor.
The group has tentatively agreed to push for a ballot initiative next year that would substantially change Proposition 13 by allowing localities to impose non-property taxes by simple majority votes. It would address land-use problems by allowing localities to keep property taxes generated by any kind of commercial development and retain some of the property taxes levied on houses. To enhance the ability of local governments to plan from more than one legislative session to the next, it would also provide them with some sort of constitutionally guaranteed revenue base.
Copyright 1999 Los Angeles Times. All Rights Reserved
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Speaker's Commission on State/Local Government Finance