Photo Credit: Dale Cruse
By EJ Toppin
June 3, 2019
With an amendment to Proposition 13 on California’s ballot in 2020, the conversation around the measure’s impact and its potential reform is intensifying. Understanding how Prop 13 not only resulted in exacerbating inequality, but in some ways welcomed it—by those who stood to benefit from public disinvestment—helps underscore the urgency of its reform. While the debate over the 2020 ballot measure will ramp up over the ensuing year, careful consideration should be given to the ways the proposition has deepened economic inequality and racial disparities, and a renewed look at the more harmful aspects of its origin.
Prop 13, passed in 1978, significantly limited the amount of money paid in property taxes on both commercial and residential properties. The initiative holds the assessment value of a property at the acquisition value of its last purchase, as opposed to a periodic reassessment at market value. The assessed rate can only increase year to year by two percent or the rate of inflation, whichever is lower. The tax rate on the assessed value is also locked in at 1 percent.
The radical alteration of tax policy that Prop 13 instated wasn’t just a boon for long-time homeowners. On the other side of this coin is the abject starvation of government revenue and the severe scaling back of the programs and services paid for by that revenue. In the year immediately following the passage of Prop 13, revenue from property tax payments dropped by 60 percent. California also went from fifth to forty-seventh in per pupil spending on schools post passage. Research from California’s Legislative Analyst Office found that two-thirds of the tax benefit that Prop 13 created goes to homeowners making at least $80,000 a year, with the bulk of that relief going to those earning more than $120,000 a year.
The reform measure that will be on the ballot in 2020 proposes the creation of a split-roll tax, which has the potential to address some of the inequality caused by Prop 13. Currently, owners of residential properties and owners of commercial properties pay the same 1 percent rate on the acquisition value from the property’s last sale. The new proposal would keep in place the 1 percent rate but conduct reassessments on the value of commercial properties every three years. Analysts at the University of Southern California estimate that this shift in policy would raise an additional $11.4 billion annually for the state. These much-needed funds can begin to put a dent in the deep cuts wrought by Prop 13 in its current form.
Every effort to begin to reverse the tremendous inequality created by Prop 13 is necessary and the type of proposal slated for the 2020 ballot could create “broad economic benefits”. But understanding why the proposition’s effects have been so pernicious and why achieving a post-Prop 13 California is imperative requires a more extensive look at how economic and racial inequality were not only a result of the proposition, but also a motivation for it.
Prop 13’s Racially-Motivated Origin
A history lesson on Prop 13’s origins helps provide a fuller grasp of the inequalities embedded within the conditions this policy created.
The common narrative around the proposition is that it was the result of general anti-tax sentiment. But a closer look is offered by William Fischel’s analysis of Serrano v. Priest. In this 1971 case, the California Supreme Court ruled that the property tax-supported scheme to fund education produced such unequal results it violated the state’s constitution. California was ordered to equalize education funding across the state. There was a property tax limiting initiative on the ballot in 1968, prior to the Serrano ruling, and one in 1972 right after the ruling came down but before a concrete solution was ordered, both of which were defeated. Included on the 1978 ballot along with Prop 13 was another split roll measure called Proposition 8 that would have limited residential property taxes much the same way Prop 13 does. But Proposition 8 was defeated, having been opposed most strongly by the districts that were heavily in favor of Prop 13.
Fischel argues that this discrepancy in support for the two measures was due to how each would affect school funding. Proposition 8 was drafted to comply with the Serrano ruling so that it would have reduced property taxes in every category with the exception of the portion levied by school districts, which would be reallocated to equalize school funding. Fischel understands this result to mean that support for Prop 13, which effectively eradicated the state’s ability to comply with Serrano, was less about restricting property taxes in general, and more of a backlash to the prospect of wealthy residents sharing resources for education with low-income people.
Yet a more critical interpretation of Fischel’s research suggests the motivation for Prop 13 went past frugality. It was not merely about the rich not wanting their money to go towards helping pay for under-resourced schools. It was a revolt specifically against the prospect of equalizing education with Black and Brown communities, a feature consistent with the long history of wealthy white communities resisting integration.
Whether it is unwinding Great Society advances in the 1970s and 1980s at the bequest of dog whistlers or closing entire school districts to avoid complying with Brown v. Board of Education, American society has repeatedly shown that it would rather self-sabotage than forfeit any material advantages that secure notions of white racial hierarchy. For Prop 13, California willingly gave up quality education funding for the entire state, as well as severe cuts to health services, infrastructure, and the social safety net broadly. Should a wariness not be maintained that this impulse still governs policy decisions today, including reactions to proposals to alter this policy?
Racial Disparities and Economic Inequality Caused by Prop 13
Given its origins, it should be of no surprise, then, that Prop 13 since its passage has proven to be a significant driver of racial inequality. Because of redlining and other racist, exclusionary practices in real estate during the twentieth century, most homeowners were white at the time of Prop 13’s passage. This racial imbalance in homeownership rates persists today. Since the provision discourages moving, it has made it harder for people of color to enter the housing market in California. It has also provided a massive relative tax advantage to mostly long-term, white homeowners compared to younger and more diverse newcomers who must pay taxes on a more recent assessment value. This effect works to deepen the wealth disparity between whites and people of color, exacerbated primarily through differences in rates of homeownership.
When it comes to Prop 13’s impact on public education, the landscape is dismal for the entire state. Per pupil spending, as previously mentioned, fell from fifth to forty-seventh nationwide. This burden is shouldered disproportionately by lower-income districts and places more likely to have higher rates of people of color. As the entire state reacted to the enormous reduction in public education funding, wealthier communities were able to make up shortfalls and subsidize public dollars with private donations. The number of local school foundations significantly increased to facilitate this private giving. Wealthy districts—to prevent their dollars from supporting the education of those who were less advantaged—voted to decimate public education spending state-wide and then fell back on the outlet of self-funding to prevent their own children’s schools from being hollowed out.
Prop 13 also disproportionately harmed dense, high-population counties that had higher property tax rates to pay for their higher levels of social services and safety net expenditures. These counties tend to be more diverse than the whiter, wealthier, and more conservative counties that already had very low property tax rates and low social service spending prior to the passage of Prop 13. For example, after the proposition’s enactment, San Francisco and Los Angeles counties’ social service funding suffered significant curtailment, especially compared to Orange County which already had the lowest property tax rate in the state. This dynamic changed very little for the wealthiest counties but made it exceedingly difficult for the large and more diverse counties to support their most vulnerable and at-need residents.
How Prop 13 Allows Individuals to Capture Public Benefits
The impact and consequences of Prop 13 analyzed through the lens of the principles of “land value recapture” shines light on publicly-generated value and how it is allocated. Understanding the concept of land value recapture can reveal that housing and land policies often aggrandize and give the benefit of the doubt to favored classes while looking upon the majority with a gaze of skepticism and undeserved-ness. Whether the conscious intent of these policies or not, this dynamic and the validity of the assumptions that give rise to it often go unquestioned.
Land value recapture is based on the idea that land value is influenced by public action. When the general public pays taxes, the government they pay taxes to uses those dollars to provide public amenities like quality infrastructure, education, and civic spaces. On top of paying taxes to fund these public benefits, the public interacts, conducts business, and fosters cultural flourishment in and near the publicly supported arenas. Therefore, any landowner benefiting from this public activity in the form of higher land value can be justifiably subject to exactions from the value that said landowner did not individually create. These payments can then be reinvested into the broader public to support them and reinvigorate the cycle. Recapture of this value is often proposed in the form of land value taxation but there are other methods as well, like non-incentive-based inclusionary housing.
What results from Prop 13 is a situation where the higher the publicly-generated value of land, the higher the privately-enjoyed benefit for landowners. Throughout California, property values are increasing due to the value of land going up—often the result of demand to live in places that offer culture, character, commercial opportunity, and quality public amenities. The higher the collectively-generated value, the more is gifted to those who did not create it but happen to be in the right place at the right time. The reason is because Prop 13 restricts the assessment value from growing by more than 2 percent a year, so the taxable value of the property is unlinked from its market value. Public action increases the market value of properties, but Prop 13 prevents it from being recaptured for the public’s benefit. This effect is in all ways the opposite of the principles behind land value recapture.
To add insult to injury, these concessions to landowners are subsidized by eroded public services for the broader population. One study examining the aftermath of Prop 13 found that as counties were forced to curtail provisions and cut staff, the services most affected were libraries, parks and recreational facilities, summer school programs, and vocational education opportunities. For those who helped fuel the growth in land value, they are asked not only to forfeit their due returns but to suffer the consequences of an abandonment of the public domain. In the upcoming debate on Prop 13, it may be prudent to ask who is being privileged by, and who is being asked to shoulder, the cost of any change in policy.
Charting a New Direction
Often missing from discussions and public policy debates generally, and housing in particular, is the work that goes into maintaining current power structures and unearned advantage. It’s often masked in an analytical approach that describes the status quo as obvious and inevitable, which, then by inverse relation, infers policy that leads with the interests of the marginalized as irresponsible and impractical. Surfacing the roots of existing inequities and the power yielded to shape them can aid in changing the perception that present conditions are immovable.
As in the recent teachers strikes in Oakland and Los Angeles to protest ever-shrinking funding for education and the threat of school closures, a central question California must ask is if it can stand to undergird any longer the normalization of public abandonment. If the pain and neglect inflicted on the many is worth the excused responsibility for the few? Californians must also ask if current racial disparities can be ignored merely because they were set into motion in the past. If blindness to color justifies blindness to suffering.
With Prop 13’s reform, or the split roll tax, on the 2020 ballot, voters will have the opportunity to answer these questions: Do we have a collective responsibility to all Californians? Should the public benefit from value it helped create? When deciding how to invest in the future, do we close ranks or do we expand who belongs? And, lastly, is this upcoming measure good enough, or is it just the beginning in changing the narrative and setting a new path forward?
Editor's note: The ideas expressed in this blog post are not necessarily those of the Haas Institute or UC Berkeley, but belong to the author.