What Changes Would You Make to Proposition 13 - Essay Example

Proposition 13 Proposition 13 was an amendment of the constitution of California formulated in 1978 through the initiative process and approved by California voters with 65 percent votes (Ferreira 662; Reilly 5). It became popular as the People’s Initiative to Limit Property Taxation and was well received and publicized in both California and the United States. Arguably, proposition 13 was one of the most unpopular state initiates that significantly altered property taxation in California as a whole (Gervais and Rayford 763). Generally, this initiative established real estate property value for tax purposes to 1975 to 1976 market value; reduced tax increases to 2 percent annually especially for continuing property owners; and provided a reassessed value base for new property owners. It also reduced real estate taxes to 1 percent, and required two-thirds votes for legislative revenue or tax increases among others. Proposition 13 significantly reduced property taxes for both homestead and commercial properties. The major driving factor behind the enactment of the proposition 13 was the notion that Californians should not be priced out of their homes through high taxes. This initiative has been termed the third rail of California politics because politically, it is very difficult for policymakers to alter it. This paper provides a very thoughtful discussion on proposition 13, its meaning, what happened, some of the proposed amendments to this proposition, its impacts. It will also cover what is different prior to and after the enactment of this initiative. Proposition 13 has remained a law in California for a long period since its inception and its supporting vote was perceived as a tax revolt against California government (Ferreira 662). This initiative affected property taxes, individuals’ lives as well as businesses. This proposition dramatically changed California constitution and it helped taxpayers to address the rising property taxes and increasing state revenue. This proportion altered the structure of the property taxation and how taxes are distributed in California. There are many things that took place and various aspects or practices changed upon the formulation of this proposition. Firstly, this law removed much of the fluctuation of property tax revenue that resulted to a more stable revenue source for local government. Secondly, proposition 13 decreased the rates of property tax to 1 per cent. In 1977, the average property tax rate in California was 2.67 percent but proposition 13 reduced the rate to 1 percent in addition to any additional rate needed to cover voter-approved indebtedness. Thirdly, it restricted any annual rate increases, that is, the value of locally assesses property needed to be lesser than that of market value and should not be more than 2 percent per year, only if there is a change in ownership or upon completion of new construction. Proposition 13 states that a property is assessed for tax only if it changes its ownership but when the property is not sold, future tax increases in assessed value are limited to an annual inflation factor (Fields 36). Nevertheless, proposition 13 controlled the assessment growth by dealing with the difficulties of inflation. In the early 1970s, inflation rates were high, the assessors increased property values, and as a result, property owners were forced to pay high tax bills within a year. All these hardships were removed by this proposition as it allowed assessed values not to increase more that 2 percent annually. This resulted to stabilized revenue for local governments and it enabled owners of the property to estimate the amount of future property taxes. More so, this proposition requires that all real property be assessed at their acquisition cost to avoid subjective assessment of property values. Accordingly, this initiative changed the commonly used method of assessing properties at market value with the use of cost-based approach upon the acquisition of the property. Before the formulation of proposition 13, if a property in a neighbourhood was sold for higher prices, there were high chances of reassessing neighbouring properties based on the newly increased are values. In addition, proposition 13 established vote thresholds in that, it needed a two-thirds majority in both legislative chambers for future rise of any state tax rates or the amounts of revenue collected incorporating income tax rates (Gervais and Rayford 764/5). Accordingly, it specified that individuals’ votes are needed in order to increase local taxes, that is, a two-thirds majority in local elections was a mandatory requirement for local governments wishing to increase taxes in local areas (Teipelke 1). This initiative prohibits local governments from imposing taxes without the consent of the locals (Schwadron and Paul 7). Moreover, this initiative significantly reduced property taxes because it rolled back property values for tax purposes to their 1975 level (Monk, Herbert and Margaret 35; Teipelke 1). Additionally, this initiative eliminated subjectivity from the assessed property values. Before the enactment of proposition 13, the assessors valued properties at their market value and in some cases, the assessors made subjective judgments based on their opinion on the property’s best use instead of valuing a property based on its actual use. Such practices led to an increase in assessed values and this influenced the owners of the properties to undoubtedly sell these properties due to unfavourable high tax rates. The enactment of this initiative led to an elimination of this subjectivity in assessing property value as it demanded objectivity during the assessment of real property locally. Furthermore, this initiative gave the state policymakers mandate to allocate property tax revenues to various local jurisdictions. Before this proposition, jurisdictions created their tax rates independently and property tax revenues entirely relied on the levied tax rate. The main reason for the formulation of proposition 13 was to keep property owners from being hurt by huge, unpredictable tax increase. However, some Californians were disturbed that reducing property tax rates would lead to devastating cuts to government spending. They believe that this initiative would lead to an increase in California’s unemployment rate. The formulation of proposition 13 was one the most essential event in the history of California and impacted negatively on the state such as experience of recurrent state budget deficits and compromised funding of education among other important public services (Burtless and Janet 92). While California’s property tax rates are lower as compared to other countries, it remains to be a high tax rate state. California has been ranked third to have worst business climate in the region, highest statewide sales tax, and remains to be the fourth highest overall tax burden. Overall, it cannot be proved that the passage of proposition 13 led to an increase in other taxes but it can be argued that this proposition failed to prevent high taxes in California. Notably, in this initiative, property tax referred to as a tax and expenditure limit. Since the enactment of proposition 13, many other states have adopted tax and expenditure limits, but some individuals have argued that tax and expenditure limits is not effective. On the contrary, other scholars have claimed that tax and expenditure limits have at least an effect on reducing state expenditures. More so, reposts shows that certain tax and expenditure limits have been effective and successful in limiting government revenue. Based on other people’s arguments, proposition 13 has failed to manage California’s public sector and apart from some of its good elements such as the prohibition of split roll, there are some changes that needs to be done on this proposition. Split roll suggests different property taxation on commercial property and the residential one by imposing more tax on the former. However, the rules created by the legislature under the influence of powerful landowners have led to many inequities. In addition, so many people think that this initiative should be fixed, as they no longer recognize it as a third rail. There are many suggested changes that can be made to proposition 13 with quite a number of these attempts failing including that 2000 to acquire two-thirds supermajority needed to change this initiative (Reilly 5). Some of the proposed amendments to this initiative include recapturing the lost tax revenue by finding a total of the differences between the actual taxes that taxpayers pay yearly and the tax that would have been provided by assessed values. By doing this, homeowners will be allowed to stay in their houses; however, they need to recapture capital increase benefit. More so, equalizing up has also been suggested and this helps in bringing properties into market-value assessments. This will in turn lead to increase in taxes especially for homeowners with 1975 base-year values. It will as well affect those individuals who have transferred or constructed properties and who have benefited from inflation protected offered in proposition 13. More so, this approach will offer many local agencies with additional revenues. A change in proposition 13 that would increase tax rates would threaten homeowner voters as they would experience tremendous increase in property taxes forcing them out of their homes. Such plan will also minimize resale values. On the contrary, equalizing down strategy involves equalizing all properties downward to achieve equity. Equalizing down approach is very useful as it assists in reducing revenue to local agencies and increasing resale values. Another approach is to equalize up and reduce the rate that is, bringing properties up to market value with a reduced rate to ensure that there is revenue neutrality. Unfortunately, this mechanism is more likely to raise tax particularly for individuals with low income and elderly persons. Some of the disadvantages of these methods are that, taxpayers would be at the danger of upcoming tax rises especially if the value of the property increase. Secondly, the purchase price would change from being an objective standard of assessment to a subjective standard. Lastly, the change of ownership that promotes the growth of the assessment roll and property tax revenue would be all gone. Split roll is another option, for instance, a split roll property can be imposed whereby business would pay property taxes at a higher rate as composed to the residential properties. Many people have proposed split roll since the enactment of proposition 13 but have rejected many times. Some of the argument against the split role approach is that business properties pay about two thirds of the property tax just as before the formulation of proposition 13, and that this proposition has not caused tax burden shift to homeowners. Anti-split roll individuals argue that massive increase in tax rate on businesses from the split roll would make California’s business less competitive leading to job losses because some businesses will opt to move to other states. More so, an increase in all business property assessments to market value would lead to tremendous tax increase. Many studies have suggested split roll approach but the problem is that, this approach is impossible to achieve politically and it will also cause some inequities in the process. Overall, proposition 13 has been unable to establish a program that would help in relieving individuals from property tax (Schwadron and Paul 7). Proposition 13 limited the local governments’ ability to fund education and this initiative led to the decline of education spending (Monk, Herbert and Margaret 35). Many scholars have pointed out this initiative to be the major cause of California’s near-bottom per-student funding because it has negatively interfered with the funding process of California’s school system. Before the enactment of proposition 13, schools in California were capable of setting up their own tax rates and directly received the funds (Fields 35). Secondly, proposition 13 has negatively influenced the services offered by the local governments and some government officials accusing this initiative of taking away important local powers. However, many Californians disagree with this as most of them support the idea of collecting property taxes at the local level then state legislature divides the money among local governments. Another impact of proposition 13 is that it limited the local governments’ abilities to raise revenue and this has made some local government officials to claim that proposition 13 limits their ability to provide residents with public services (Baldassare 89). Furthermore, this initiative has led to an escalation of housing prices and this has forced many Californians to be unhappy with this initiative (Baldassare 90). In California, the average household tenure has been increasing since the inception of this proposition (Burtless and Janet 92). Proposition 13 has reshaped the landscape for state and local government in California and it has changed the perception individuals from other states about government taxes and spending (Baldassare 88). Chapman has mentioned various effects of the proposition 13 including the growth of arcane finance techniques, the fiscalization of land use, and lastly increases in state control over county finances (Fields 37-38). The initiative led to instant decrease in property tax revenue by approximately 57 per cent. This initiative also forced the state to come up with new system of local property taxation but before the enactment of this proposition, every local government agency used to levy its own tax rate and the property in that particular district pay the taxes levied. Further, proposition 13 changed the nature of property taxation, for instance, before this initiative California had a traditional way of tax property whereby, tax rate was applied to an approximated market value of the property. After its enactment, property tax was done based on the acquisition value (OSullivan, Terri and Steven 6). Briefly, this proposition was enacted and approved by many Californians at higher vote percentage. This was one of the state’s initiatives that significantly changed how properties are taxed in California. The enactment of this proposition was driven by the notion that Californians should not be priced out of their homes through high taxes. Indeed, this proposition altered the system of property taxation in California. Firstly, it reduced tax increases to 2 percent annually especially for continuing property owners and provided a reassessed value base for new property owners. More so, prop.13 decreased real estate taxes to 1 percent, and required two-thirds votes for legislative revenue or tax increases. Furthermore, this initiative vote thresholds since it required a two third majority in both legislatives houses in California for future increase of any tax rates or revenue amounts. Accordingly, the proposition stated that people’s votes are needed in order to increase local taxes and it therefore prohibited local governments from imposing taxes without the consent of the locals. However, there have been many attempts to make amendments to this initiative since its inception but no attempt has succeeded to do that. More so, many changes have been proposed including equalizing up, equalizing up, equalizing up and reducing tax rates, and lastly the use of split roll approach but none of this has received enormous support. May studies have proposed split roll approach but some have claimed that such strategy will lead to inequalities and that it will be impossible to achieve this politically. Proposition 13 has a lot of impacts in California mainly, it tremendously changed property taxation system. Additionally, this proposition negatively affected many school districts in California because it compromised education funding in California and this adversely affected the education system in this state. Overall, proposition 13 is also known as the third rail of California politics and it remains one of the most controversial issues in California politics. Works Cited Baldassare, Mark. California in the New Millennium: The Changing Social and Political Landscape. Berkeley, Calif. [u.a.]: Univ. of California Press, 2002. Print. Burtless, Gary, and Janet R. Pack. Brookings-wharton Papers on Urban Affairs 2005. Washington: Brookings Institution Press, 2005. Ferreira, Fernando. You Can Take It with You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities. Journal of Public Economics. 2010, Vol. 94, Iss. 9-10, pp.661-673. Fields, Melea. Designing a Successful Budget Model for California Community Colleges. ProQuest, 2007. Gervais, Michael, and Rayford Dontae. In Pursuit of Equity in Property Tax Allocation: Discussing the Flawed Implementation of Proposition 13. Virginia Tax Review. 2011. Vol. 30.4, p.761. Monk, David H, Herbert J. Walberg, and Margaret C. Wang. Improving Educational Productivity. Greenwich, Conn: Information Age Publ, 2001. Print. OSullivan, Arthur, Terri A. Sexton, and Steven M. Sheffrin. Property Taxes and Tax Revolts: The Legacy of the Proposition 13. Cambridge, Mass: Cambridge Univ. Press, 1995. Print. Reilly, Shauna. Design, Meaning, and Choice in Direct Democracy: The Influences of Petitioners and Voters. Farnham, Surrey: Ashgate, 2010. Internet resource. Schwadron, Terry, and Paul Richter. California and the American Tax Revolt: Proposition 13 Five Years Later. Berkeley: University of California Press, 1984. Print. Teipelke, Renard, The Ambivalent Legacy Of California Proposition 13 (1978): What Can Be Said About The Tax Revolt After Three Decades, GRIN Verlag, 2011. Read More