Today marks the 30th anniversary of California’s Proposition 13. This landmark property-tax reduction is widely seen as the most important event of the 1970s tax revolt. Proposition 13 limited property taxes in California to one percent of assessed value and placed tight limits on how quickly assessments could increase. Overall, Proposition 13 triggered an immediate property tax reduction of $6 billion and to this day provides homeowners in California some much needed tax relief. More importantly, its history along with the history of tax limits since that time teach some very valuable lessons to tax reformers today.
Indeed, in the years following the passage of Prop 13, fiscal conservatives struggled to enact similar measures in other states. This is likely because the passage of California’s Proposition 13 was due to some very unique circumstances in California. Rising property values were causing substantial property tax increases across the state. This placed a considerable amount of strain on retirees and others living on fixed incomes. Though many Californians desired property tax relief, Proposition 13 was seen by some as too radical and was behind in the polls throughout much of the spring of 1978.
Two pivotal events turned the tide. First, in the weeks leading up to the vote, Los Angeles County released its 1979 housing assessments which indicated that property values had increased by 17.5 percent countywide. Many homeowners were astonished by how much their housing values — and their property taxes – had increased. Needless to say, this made many California residents more supportive of tax relief. Second, the state government announced it was running a $6 billion surplus. The substantial surplus damaged the credibility of opponents who claimed the passage of Proposition 13 would cripple government services. In the end Proposition 13 easily passed, capturing a whopping 65 percent of the vote.
The passage of Proposition 13 was clearly a substantial victory for taxpayers. However, other states lacked the combination of soaring property values and a large surplus that made Proposition 13 a reality in California. Hence, taxpayer groups in most other states were unable to replicate the success of Proposition 13. In 1980 Massachusetts taxpayers enacted Proposition 2 ½ which was a similar, albeit smaller, property tax limit and reduction. Similarly, in 1980, Idaho voters enacted a similar measure to Proposition 13 only to have it nullified by a judge. However, all other efforts to enact large property tax reductions during the late 1970s failed at the ballot box.
During this time, fiscal conservatives actually enjoyed more success enacting fiscal limits rather than tax cuts. Indeed, during the late 1970s and early 1980s, 17 states enacted some kind of Tax and Expenditure Limitation (TEL) which placed a limit on how much state expenditures or revenues could grow in any given fiscal year. Unfortunately, most of the academic and policy literature finds that these tax-revolt-era TELs had only a marginal effect on government growth. As such, as anti-tax fervor waned in the early 1980s, the tax revolt could claim large property tax cuts in California and Massachusetts, but relatively little else. Indeed, it seems that the primary success of the tax revolt was that it demonstrated the existence of a substantial constituency for lower taxes. Indeed, Proposition 13 helped sow the seeds of Ronald Reagan’s victory in the 1980 presidential election and the subsequent federal income tax cut in 1981.
However, fiscal conservatives learned some valuable lessons from the late 1970s tax revolt. First they learned that large property tax cuts are difficult to enact in the absence of substantial budget surpluses. Furthermore, the impact of many property tax cuts is often reduced due to the fact that states and localities often subsequently increase other taxes to compensate for the revenue reduction. Lastly, fiscal limits need to be properly designed if they are to be successful at limiting the size of government.
In recent years, fiscal conservatives have wisely turned their attention to enacting fiscal limits modeled after Colorado’s Taxpayer’s Bill of Rights (TABOR). TABOR was enacted in 1992 and contained a number of features that made it considerably more effective than previous fiscal limits. It was constitutional, established a low limit for state and local revenue growth, and mandated immediate taxpayer refunds of all surplus revenues. In particular, these rebate requirements gave taxpayers and other watchdog groups a strong incentive to see TABOR’s revenue limit enforced. Between 1997 and 2002, Colorado taxpayers received $3.2 billion in tax rebates from the state government. Colorado easily led the nation in both tax relief and economic growth during this time.
The next important battle for the tax-limitation movement will concern the future of TABOR. In 2005, fiscal conservatives suffered a stinging defeat when Colorado voters passed Referendum C which suspended TABOR’s revenue limit for 5 years. This loss has done considerable damage to the prospects of enacting TABOR style fiscal limits in other states. In 2010 TABOR’s revenue limit is scheduled to come back into effect. However, it seems very likely that there will be another ballot proposal to either repeal TABOR or continue the suspension of the revenue limit. Such a proposal will, of course, be enthusiastically supported by politicians, unions, and the Colorado media.
However, the total size of the tax increase that was brought on by Referendum C will turn out to be considerably larger than what was promised back in 2005. In fact, latest projections have raised this projected tax hike from $3.7 billion to $6.2 billion. This means that the passage of Referendum C has caused the average Colorado taxpayer to miss out on $970 in tax rebates during the past two fiscal years. Fiscal conservatives would do well to highlight this. After all, a victory in 2010 might be necessary to give the tax revolt some new life in Colorado — and across the country.
– Michael J. New is an assistant professor at the University of Alabama and an Adjunct Scholar at the Cato Institute.