Palesky Compared With California’s Prop 13

(from Maine Townsman, October 2004)
By Lee Burnett, Freelance Writer

Some of the worst things being said about Maine’s proposed property tax cap (the so-called Palesky initiative) were said about California’s momentous Proposition 13 more than two decades ago.

“No matter how you slice it, our police, our libraries, our fire department and schools will be crippled. It’s passage would cut services in half” — San Francisco Mayor George Moscone.

“Passage of the measure would require more than a doubling of the state income tax or the sales tax” — Gov. Jerry Brown.

“It will destroy education in California as we know it. Many schools will close, thousands of teachers will be laid off and the average class size will be between 45 and 60” — State Superintendent of Schools Wilson Riles.

“Disaster” — State Assembly Speaker Leo McCarthy.

HAS CALIFORNIA SURVIVED?

This doomsday rhetoric before Prop 13 sounds pretty ominous. Because Maine’s Palesky initiative is modeled after Prop 13, it’s worth revisiting what was said and what actually happened over on the left coast since the late 1970s.

But first some clarification concerning Palesky’s claim that everyone else is doing it. Palesky has claimed that 23 other states already have tax caps similar to hers, but she has yet to provide documentation of the claim. When asked in mid-September, she promised to mail the names of states with comparable caps, but never did.

The National Conference of State Legislatures surveyed tax limits in 2002 and found 38 states had some combination of limits on taxes, spending, or assessments. “This number is deceptively high, however. Not all these rate limits are restrictive enough to significantly control property taxes,” according to the NCSL’s”A Guide to Property Taxes: Property Tax Relief.” (Massachusetts’ cap is generous enough by Maine’s standards that Maine could increase property taxes by an average of 60 percent and still come under the cap of taxes at 2.5 percent of property value.)

The NCSL identifies five states with notably restrictive caps: California, Colorado, Montana, Oregon and, Washington. Among these, only California’s cap shares the features of Palesky: a cap on the tax rate, a valuation rollback, a limit on valuation changes, and, no local override authority. In other words, the bandwagon Palesky is pushing Maine to climb aboard is a pretty small one.

California’s tax revolt began with a couple of seemingly intractable problems. Homeowners were getting socked by haywire property taxes driven by an inflationary housing market. It was hard to coordinate a tax rate reduction locally to offset the higher values because of California’s complex system of local taxing districts. The state could have stepped in to resolve the problem, but instead then-Gov. Jerry Brown opportunistically reduced state aid and banked the surplus, which rose to an unprecedented level of nearly $5 billion. Voter disgust at political inertia combined with homeowners’ fears of being taxed out of their homes produced a grassroots rebellion so strong that it became obvious long before the election that voters would overwhelmingly approve the so-called “Jarvis-Gann Initiative.”

“Proposition 13,” the moniker that eventually stuck, drastically reduced property tax collections and locked in low taxes for property owners as long as they didn’t move. But peace of mind and predictability for property owners also came with a price: a crazy quilt of unintended effects, attempts to circumvent its restrictions, and worsening public schools.

TAX SHIFT

In spite of its reputation as a radical redirection of government, Proposition 13 does not appear to have fulfilled tax activists’ fondest wish — of rolling back the reach and overall cost of government. This is due partly to opponents’ continuing efforts to thwart, circumvent, and evade the strictures of Proposition 13. The Howard Jarvis Taxpayers Association, the organization that outlived its founder, is as active as ever beating back assaults on Prop 13, but neither the association nor its allies claim they have succeeded.

Michael J. New, researcher at the conservative Cato Insitute, found that the stabilization of the property tax did not stabilize the overall tax burden. From 1979 to 2000, New found property taxes remained below 3 percent of personal income but sales and income taxes gradually increased from 5.5 to 7 percent. Indeed, after California’s expenditure limit was raised in the early 1990s, spending soared, nearly doubling between 1990 and 2001. As a result, California has had to raise the income tax, the sales tax, and taxes on beer, wine, gasoline, and cigarettes to keep pace with these rising expenditures.

Jonathan Coupal, the president of the Howard Jarvis Taxpayers Association, says Proposition 13 has not lived up to supporters’ high expectations, but he adds: “The primary purpose was to protect homeowners, it was not to instill integrity in the government. If legislators had reasonably restrained government growth, we wouldn’t have had to labor under such a significantly high tax burden.”

Proposition 13 created many unintended consequences.

BIG BOX SPRAWL

There is a new word for the strip developments and big box sprawl creeping across the California landscape: “sales tax canyons.” It is one of the unforseen by-products of Prop 13. When local governments won the right to keep one percent of the sales tax generated within their borders (as a concession to partly compensate for the loss of property tax revenue), that changed the way municipal governments pursued economic development. It gave municipal governments an incentive to favor low-wage retail development over manufacturing or anything else.

Nevada writer Howard Ryan described one example that perfectly illustrated the perverse incentives unleashed. Two companies were both considering moving to the same site in Monrovia, northeast of Los Angeles, in 1992. One was a high-tech manufacturer of digital tape recorders that would have brought 400 high-quality jobs averaging $15 per hour. Monrovia favored Costco, a discount retail store, which would have brought 200 mostly low-skilled jobs in the $4 to $7 per hour range, according to Rod Gould, city manager, whom Ryan interviewed. The reason: Costco would generate $500,000 a year in sales tax for Monrovia while Datatape “would be lucky to cover its own costs.” Ultimately, neither company took the Monrovia site. But Gould relates that he was frustrated by the affair. “I found myself in the ironic position of spending time and energy trying to move Costco, which brings less jobs and more inferior jobs than Datatape.”

HOUSING PRICES

Proposition 13 has been credited with saving many homeowners from ruin. But some other homeowners apparently cashed in. In 1982, a researcher at University of California at Berkeley analyzed housing prices in the San Francisco Bay area before and after Proposition 13 and found that decreases in property taxes were absorbed into property sale prices. Kenneth Rosen found a one dollar decrease in relative property taxes corresponded to a seven dollar increase in relative property values.

Does that suggest people really can afford the property taxes they claim they can’t afford? That question was put to Todd Gabe, a researcher at the Margaret Chase Smith Center for Public Policy, who included Rosen’s research in a recent paper analyzing the expected effects of Palesky. Gabe declined to offer an opinion and said there is contrary research that in Massachusetts, following adoption of Proposition 2 1/2, housing prices showed the strongest drops in communities that failed to protect education spending.

TAX INEQUITIES

One of the most absurd outcomes of Proposition 13 is that California homeowners in shoebox houses may pay heftier tax bills than millionaires who’ve lived in their mansions for decades. That’s because assessed values were locked in at 1975 levels and allowed to rise by only two percent a year unless the property is sold. Long-term property owners get subsidized by more transient owners. (Property values are reassessed at market value whenever the property is sold.) Since housing prices have increased substantially over the past two decades, long-term homeowners often pay much less in property taxes than recent homebuyers in the same neighborhood. Researchers Steven Sheffrin and Terri Sexton examine this inequity in Los Angeles and San Mateo Counties and found tax rates on identical properties varied by as much as 519 percent.

"All the inequities of Proposition 13 are illustrated right here in my neighborhood,” Larry Stone, now the Santa Clara County assessor told the San Jose Mercury News in a May 2003 news story. The assessor, who lives in Sunnyvale, pointed to a neighbor’s house whose owners paid $90,000 in 1975, and an identical model nearby, purchased last year for $830,000. The old-timer pays $1,600 in taxes, the newcomer about $8,300.

“So,” Stone said, “now you have two houses, same builder, same year, same schools, same police, same fire, same street maintenance, yet one tax bill’s much higher than the other. There’s something inherently un-American about paying eight times as much for the same government services.”

SCHOOLS

For all its unintended consequences, it’s difficult to conclude that Proposition 13 hasn’t delivered on one outcome that was widely predicted: progressive starvation of schools.

In the two-plus decades since Proposition 13, California’s schools have gone from among the nation’s best to among the worst, according to a wide range of measures. By 1994, California class sizes were the largest in the nation. California ranks near the bottom in both reading and math scores based on the National Assessment of Educational Achievement, with 59 percent of students reading below the basic level. There are many factors at work, including the growing population of non-English speaking students and a school funding formula that discourages local initiative to spend more on education.

But a big factor is money. Prior to the 1980s, California’s per-pupil expenditures were above the national average; since then they have fallen farther and farther below the national norm. Dropped from the top five in the nation before Prop. 13, California was ranked 18th in public school funding in 1975; 20 years later it ranked 41st.

That schools take the biggest hit when taxes are capped is supported by a study of the effects of the tax cap in Massachusetts known as Prop 2 1/2. Researchers J. Rothenburg and P. Smoke looked at the response to the cap in 41 communities in spending for schools, police, fire, streets, parks, sanitation and libraries. The researchers found that communities generally protected three categories: police, fire and sanitation. Education took cuts twice as deep as the overall percentage cut and parks and libraries also took big cuts.

Coupal of the Howard Jarvis Taxpayers Association said Proposition 13 is disproportionately blamed for the state of education in California.

“Per pupil spending is now higher than it was prior to 13, so it’s not a lack of revenue that’s destroyed California schools,” he said. Coupal said the blame deserves to be heaped on the implementation of California’s Supreme Court ruling to equalize education funding. That decision, which predates Prop 13, discouraged local communities from raising additional taxes for education beyond the strict share-the-wealth formula set by the state because the money would go into a statewide pot, not into local schools. “What was so unfair . . . if you wanted to support your local school [beyond the state formula] because it was doing a good job, you could do so, but that money would go somewhere else.”

“For six years before Proposition 13, school spending dropped fast. After Proposition 13, it didn’t come back up,” said Mockler in an interview.

John Mockler, the former executive director of the California State Board of Education, says Prop 13 worsened a bad policy decision made in the aftermath of a 1970 state supreme court order to equalize funding of schools. To implement the so-called “Serrano” decision, the California legislature adopted both a share-the-wealth formula and statewide cap on overall school spending. The net effect of the cap was that any community that spent more on its schools beyond what the state considered necessary was penalized by a corresponding reduction in state aid. Needless to say local initiative was severely discouraged and overall spending shrank.

Mockler gave an extended interview in a PBS series “First to Worst,” broadcast earlier this year, which examined California’s sliding school performance.

“After Prop 13, you could not build local schools, because you had no source of income. There’s no way to build them, and, so, when more kids came, there was no place to put them and we had these huge schools. You go to places like Los Angeles or Santa Ana, and you have elementary schools with three to four-thousand students, multi-track year-round. It’s like you’re in Calcutta. It’s astounding. Normally, immigration’s difficult to deal with, because you have different cultures and languages and all things you have to adjust to. But without facilities, it makes it really hard,” Mockler said.

To better understand the effects on schools, a single school — Skyline College, a community college south of San Francisco — was examined. It was chosen for no better reason than a retired Skyline journalism professor was generous enough with his time to send the author some news clippings from the Prop 13 era.

Some background. In California, community colleges are almost as common as high schools, which they resemble in that they are funded largely through local property taxes and — before Prop 13 — had always been free to California residents. With more than 100 campuses, California’s community college system claims to be the largest educational system in the world and its tuition and fees are still low by most standards.

The timing of Prop 13 couldn’t have been worse for Skyline, which was still under construction at the time and lacking a real library, cafeteria or student union building. (A makeshift library and cafeteria were created from converted space at the campus bookstore and an aeronautics lab.)

“There were plans for more, but they were not able to come to fruition,” said former President James Hyatt. “It wasn’t a complete college. We really had to scratch out in the beginning.”

In addition to making do with makeshift facilities, Skyline College expected to lose 45 percent of its annual funding or $8 million as a result of Prop 13. Initially, it lost just $5 million because the state used some of its surplus to soften the impacts of Prop 13.

The first programs to go were summer session classes and the community service program (a non-credit academic and enrichment program similar to adult education). Later, an outstanding track and field program was eliminated.

“Things started to spiral downward,” said Hyatt. For a while, low-enrollment classes in calculus, labor law, computer science, forensics were dropped, raising fears on the school newspaper’s editorial page that Skyline College was in danger of regressing to the level of adult education. To save programs, some faculty members actually got involved in recruiting prospective high school students.

“We (faculty and administrators) literally kept enrollment up by recruiting heavily,” said Stan Goldman, a journalism professor. “I visited every city high school in San Francisco.”

It took many years to restore some programs, not because they weren’t supported by the community, but because of a large impediment created by Prop 13: a two thirds vote was required to raise taxes. Voters eventually reduced that requirement to 55 percent for school projects. Three years ago, Skyline College finally got a student union building when 65 percent of voters passed a $207 million bond issue.

“It would not have passed if the two thirds requirement were still in effect,” noted Hyatt.

At groundbreaking ceremonies last month, State Chancellor Mark Drummond talked about how the effects of Proposition 13 have been felt for decades and have made it difficult for colleges to make necessary improvements and repairs, according to a Sept. 15 article in the Pacifica Tribune.

“This is a big deal for the community college district. We went through 30 years of drought. We’re not able to keep up our campuses as we’d like to,” he said.

A telling detail noted in a San Francisco Chronical story: the upgrade of science and computer labs authorized by the bond issue allowed Skyline College to finally retire vintage laboratory equipment that had been donated by a long defunct scientific instruments company. The age of the equipment: 40-plus years.

MAINE VERSUS CALIFORNIA

Is this what Maine can expect? The question was put to a staunch supporter of the initiative and a fiscal policy analyst from California.

“It’s unfair to compare California, which is a country unto itself, to Maine. I don’t see any parallels,” said Phil Harriman, a former state senator from Yarmouth and a tax cap leader. “They claim education went from very good to very poor. But the facts are California has been increasing 100,000 students a year and over 60 percent of them are [immigrants]and over one quarter of them do not speak English at all. Compare that with Maine which has lost over 43,000 students over the past two decades. To say Maine will look like California is inaccurate.”

In spite of criticism, Californians have stood by Proposition 13, says Harriman.

“If it was so destructive, how come three referendums to overturn it have been resoundingly defeated in open elections? In a state where there are a million more Democrats than any other affiliation. If it’s so bad why haven’t the citizens overturned it.”

Harriman says California’s financial problems “have nothing to do with the property tax.” Furthermore, he says, “When factored for inflation, California property taxes are ahead of inflation. They’re taking in more adjusted for inflation than they were back then... because property values rise. California’s financial challenge has nothing to do with the property tax. It’s government spending and the energy crisis. To say (it’s) because of the property tax cap 25 years ago is an unfair comparison.”
Michael Coleman is a fiscal policy advisor to the League of California Cities. In early September, he spoke to Maine city and town managers at the New England Management Institute held at the Sebasco Resort in Phippsburg.

“In some ways, if it (Palesky) were to pass, it will be worse than what happened in California,” said Coleman.

“One of the advantages California had after Proposition 13 is that local government retained a certain level of autonomy to raise taxes in other areas... They retained the authority to raise hotel taxes, local option business taxes, utility user taxes, telephone fees and charges. There is far more flexibility, so they didn’t have to take it all in service cuts.”

Local governments in Maine, he points out, have nothing to fall back on, which means service cuts will probably be more significant.

Secondly, he points out that California had accumulated a $5 billion surplus, which was used to buffer the impacts of Prop 13. “Maine is not running a large surplus ... the fiscal capacity of the state to absorb the cuts is less. The state is already struggling.”

On the plus side, “Maine has flexibility to alter Palesky”, which California did not have because Proposition 13 was enshrined as an amendment in the state’s Constitution. Palesky is merely a change in the law, subject to judicial review. Four of the seven justices of the Maine Supreme Judicial Court said in mid-April that the assessing rollback (to 1996) and valuation freeze elements of the proposal are likely to be deemed unconstitutional for creating “an entire class of property owners whose taxes will not be based on market value.”