Cost Accounting in Local Government

The Proposition 13 con job

Forty years ago, in 1978, California voters passed Proposition 13 by an overwhelming margin. This proposition significantly changed California public finance by reducing property taxes. The rationale for its passage was that it saved people, especially those on fixed income, from losing their homes due to large increases in property taxes. Howard Jarvis, the author and champion of Proposition 13, was a “would be” politician who had run for California Senator and Los Angeles Mayor. At the time of the vote he was a lobbyist for the Los Angeles Apartment Owners Association. Jarvis had held no elected office and his limited understanding of governmental finance has proved to be dangerous.

Property Tax Mechanics. In 1978, Jerry Brown was Governor and I was a Finance Director. Each year I would be responsible for the preparation of the annual budget, and it was then reviewed by the City Manager and City Council to ensure that any budget changes were justified. Prior to Proposition 13, when the expenditure side of the budget was complete and other revenues were estimated, the difference was the revenue needed from property taxes to balance the budget. By that point in the process, the County Assessor had provided the city with its total assessed valuation. I then divided what we needed from property taxes by the assessed valuation to determine the tax rate. The City Council then adopted the rate in a resolution that was sent to the County for property tax bills.

Fundamental Voter Misunderstanding. Prior to Proposition 13, Finance Directors knew that the assessed valuations were increasing. We could explain to our City Councils that the property tax rate should be lowered since maintaining the same rate would generate more revenue than we needed. Consequently, all responsible public agencies lowered their tax rate. The most glaring local exception was Los Angeles County, which failed to lower the property tax rate. That there were people who believed they were in danger of losing their homes is not in question. However, the fundamental issue was not the increase in valuations but the misfeasance of some elected officials.

What Should Have Happened. Voters in LA County and elsewhere should have kicked out of office any elected official that failed to act appropriately when the assessed valuations increased. Jarvis would have been a shoo-in for elected office by blaming his opponent for their failure to reduce the tax rate. Instead, he blamed the symptom (property tax increases due to higher valuations) rather than the cause (official misfeasance for not lowering the tax rate) and sought relief though the initiative process.

What Did Happen. Proposition 13 was passed overwhelmingly at the ballot box. Howard Jarvis started a movement that made him famous.

Pros:

  • Local government was forced to become more efficient as revenues decreased.
  • Immediately, property owners saw their taxes decrease. Anecdotally, it may have saved some from losing their home.
  • It has helped to fuel an initiative industry where voters are encouraged to treat symptoms rather than causes.

Cons:

  • It delayed the process of holding elected officials responsible for the “cause.”
  • It required cities to charge residents for discretionary services that were previously free or cheap.
  • It shifted local control to the State.
  • It punished cities that lowered their tax rate and rewarded cities that maintained or increased their tax rate.
  • It created inequities between neighbors in the taxes paid.
  • It resulted in many homeowners paying a higher tax than they would have to if all were paying on the same basis.
  • Businesses and high-income individuals who don’t move are the BIG winners of lower taxes, not the average homeowner.
  • The tax on new homes limits the number of people who can afford the homes and it might be a contributing factor on the housing crisis. New homes will not be built if people cannot afford them.
  • Finally, it’s led to a society in which voters believe that the candidate who yells the loudest must have the best answer.

Prescription for the Future.  Forty years is long enough to put up with a failed solution to misfeasance. We need elected officials to thoughtfully consider the following:

  • What would be the true assessed valuation if all property were assessed correctly?
  • What would be the potential tax rate if all property taxes were based on the true assessed valuation?
  • What lien process could be used so that property-rich but cash-poor homeowners don’t have to pay while they live in their home? This should also insure that the tax is paid if someone inherits the house.
  • Finally, the mythology surrounding Howard Jarvis should be amended to include the damage he did to the State of California.

 

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