Pushing the Limit

California's government may have gotten too big for the cage built by Prop. 13.

California's Proposition 13 remains the most famous tax revolt since the Boston Tea Party. Despite apocalyptic warnings from every establishment bastion of sense and sensibility, Prop. 13 passed in a landslide in June 1978 and propelled the nascent tax revolt into a national force, culminating in the election of Ronald Reagan and the supply-side income tax cuts of the early 1980s. The big-government establishment, addicted to ever more spending programs, has gnashed its teeth bitterly about Prop. 13 ever since. Repealing 13 has become the Holy Grail of "good government" reform in California.

Today, amid California's continuing economic catastrophe, Proposition 13 is in trouble. The state and local governments face huge budget deficits—more than $10 billion a year at the state level for each of the last three years—and the attack on Prop. 13 is being pressed with new vigor. Critics who charged back in 1978 that the initiative was "a gift-wrapped time bomb" claim that the bomb has now gone off.

To cut its own deficit, the state government has reduced aid to local government—aid it began providing in the aftermath of Prop. 13—by more than $2 billion this year. In response, local governments are threatening drastic cutbacks in basic services, including police and fire protection. San Francisco, for instance, lost more than $100 million in state aid, leading to local tax increases and an estimated 1,500 layoffs. Between reduced state aid and lowered revenue from other sources, Los Angeles County has had to cut its budget by nearly $1 billion.

Prop. 13's critics resumed their fierce attack on the occasion of the initiative's 15th anniversary in June. State Sen. Alfred Alquist (D-San Jose), the octogenarian chairman of the Senate Finance Committee, bemoaned the loss of over $150 billion in revenue since 1978. Peter Schrag of the Sacramento Bee calls the local government cutbacks "the 15-year deferred anguish of Prop. 13." He argues that "there is almost nothing in this state that hasn't been affected [by Prop. 13], mostly for the worse."

Like Bill Clinton crusading to undo Reaganomics partly through a revisionist history of "the last 12 years," California's big spenders are hoping to use the current crisis to undo Prop. 13 and tarnish the legacy of the tax revolt it helped to inspire. The chief vehicle for this purpose is a sales tax hike slated for a special election in November. The ballot initiative contains some fine print designed to eviscerate Prop. 13's supermajority vote requirement for local tax increases.

The debate over Prop. 13 in California is important not only to those states that copied some aspects of Prop. 13 for themselves (such as Massachusetts, Michigan, and Oregon) but also for what it can teach us about the way big government reacts spontaneously to tax limitation—like a host organism acting to isolate and kill a bacterial parasite. The lesson in a nutshell is: Tax limitation without serious spending control is not enough to stop the growth of government. Government has become like the outer-space creature in The Blob, absorbing every blow against it and growing relentlessly larger. The only solution for the Blob was a deep freeze; the same is required to limit government spending.

The key to settling this controversy is to understand what Proposition 13 did and didn't accomplish. Prop. 13 cut the property tax rate by more than 50 percent, capping it at 1 percent of assessed valuation. Perhaps more significant than the rate cut, Prop. 13 stipulated that assessed valuation can rise at only 2 percent a year, far below the rate of market-value appreciation in California over most of the last 15 years.

These limits mean that a homeowner is not subject to the capriciousness of inflation, market price surges, and aggressive tax assessors. He can predict with certainty what his tax burden will be as long as he owns his home or business property. But the restrictions mean that longtime property owners tend to pay much lower taxes than recent buyers, often on identical pieces of property. Critics argue that this distortion shifts the tax burden to new home buyers, and there is some merit to this argument. By 1989, the 44 percent of California homeowners who have owned their homes since enactment of Proposition 13 in 1978 shouldered only 25 percent of the more than $4 billion in residential property taxes paid by homeowners statewide. This feature has been a chief source of contention and litigation over Prop. 13. The U.S. Supreme Court last year rejected the argument that Prop. 13's acquisition value basis violates the Equal Protection Clause.

Finally, Prop. 13 stipulated that any local special taxes or bonded indebtedness must receive a two-thirds vote of the people to be enacted. This last feature has proven a significant stumbling block to raising local taxes. Prop. 13 immediately reduced taxes by $7 billion; a California homeowner with a $50,000 home enjoyed an immediate reduction of about $750 per year in property taxes. The cumulative savings to the taxpayers in the 15 years since its passage are estimated at more than $150 billion.

It is worth recalling some of the political and fiscal history behind Prop. 13's passage, partly in order to counter the current revisionism and partly to appreciate how dramatic that passage was. In the mid-1970s housing prices in California were skyrocketing, far faster than even the surging national inflation rate. The median price of an existing home doubled from $31,530 in 1973 to $62,430 in 1977. Housing prices in the Los Angeles and San Francisco areas were rising at an average rate of 14 percent to 15 percent a year. Assessed valuations for property-tax purposes were climbing along with prices. And because of some quirks in the way the property tax was levied, and the fact that most counties reassessed property values only every two or three years, many property owners were seeing their property-tax bills suddenly double or triple.

Not surprisingly, many homeowners thought things were getting out of control. In per-capita terms, California's property tax was more than 50-percent higher than the national average, and the property tax had come to account for more than 40 percent of total state and local government revenue.

Meanwhile, other state taxes were also going up, especially the state income tax, resulting in a sharply rising overall tax burden. The total tax burden in California had jumped from 11.29 percent of personal income in 1960 to 15.44 percent by 1978. Without Prop. 13, the total tax burden would have topped 16 percent of personal income in 1978. Thanks to bracket creep, the state income tax in particular was a very elastic tax for the state treasury. For every 1 percent rise in personal income, the state enjoyed a 1.6 percent increase in income-tax revenue, making the state government the major winner from the high inflation of the '70s. (The income tax was finally indexed for inflation in 1979, in the aftermath of Prop. 13's passage.) By 1978, California was among the highest-taxed states in America.

The state also had accumulated a huge budget surplus, more than $4 billion, owing in large part to tax increases supported by Gov. Ronald Reagan several years before. The surplus made taxpayers even more annoyed. Gov. Jerry Brown denied for a time that a surplus existed at all. The legislature fiddled with some property-tax relief measures, usually involving shifting but not reducing the overall tax burden, but could not come to agreement. Repeated attempts by the legislature to fashion a property-tax relief measure floundered in partisan wrangling. Even the prospect of Proposition 13 could not break the legislative deadlock.

And yet, in the months before the June vote on Proposition 13, public opinion polls found that the voters were evenly divided on the measure, with a large undecided segment. Then an extraordinary bureaucratic episode tipped the scales in favor of Prop. 13. One month before the June election, Los Angeles County residents received their new property valuation assessments and property-tax estimates for the following year. The resulting outcry about the huge increases in taxes made news headlines statewide and prompted many voters to fear that they were next. The interesting thing about this episode is that the new assessments for Los Angeles County were not due to be delivered to the taxpayers until July, after the election. A rare case of bureaucratic efficiency was the proximate cause in helping pass the measure to deprive the bureaucracy of tax revenue.

Proposition 13 terrified the big-spending establishment, which planned to defeat the initiative with scare tactics, as they had previous tax-limitation initiatives. (Voters had rejected earlier limitation measures, including Proposition 1, Reagan's 1973 tax-and-spending-limitation initiative. Opponents successfully argued that limiting state taxes and spending would reduce aid to local governments, encouraging them to raise taxes and cut services.)

To feed these fears, the Los Angeles Times said Proposition 13 would cause the doubling or tripling of the state income and sales tax. John Van De Kamp, then Los Angeles district attorney, called it "a gift-wrapped time bomb." Gov. Brown called it a "rip-off" and a "consumer fraud." The state Democratic party chairman said it would mean "turning the state over to the current day anarchists." Schools threatened massive layoffs of teachers; teachers threatened to go on strike in response to possible staff cutbacks.

National organizations even got in on the act. On the eve of the election, the National League of Cities, the U.S. Conference of Mayors, and the National Association of Counties called a press conference in Washington, D.C., to deplore Proposition 13, calling it a "wrecking ball" that would cripple local government. One economic study said it would cost the state 450,000 jobs. Even the Communist Party called a press conference to denounce Prop. 13. It was all for naught, as the voters were unmoved by the parade of imaginary horrors. Far from suffering a loss of 450,000 jobs, California gained 2 million new jobs over the next decade, growing at a rate 50-percent faster than the nation.

But even a salutary measure like Prop. 13 is not immune to the law of unintended consequences, and so it is necessary to survey what Prop. 13 didn't do. Prop. 13 was a limitation on local taxation; it did nothing to limit the growth of taxes and spending at the state level, and therein lies Prop. 13's Achilles' heel.

In the aftermath of Prop. 13's passage, the state government stepped in and essentially liquidated its multi-billion-dollar surplus by bailing out the local governments. Prop. 13 presented big government with a great opportunity to centralize authority by attaching myriad conditions to aid to local government and schools. "The passage of Proposition 13 has caused almost the entire liberal agenda to be de facto adopted," wrote economist Frank Levy of the Urban Institute shortly after the measure passed.

The state assumed most county health and welfare costs, and state funding for public schools increased from about 40 percent of all expenditures prior to Prop. 13 to more than 70 percent today. The state's legislative analyst, Alan Post, wondered whether Prop. 13 "left any significant role for local school boards." Economist William Oakland wrote, "Local control or 'home rule' may become a thing of the past in California." Both suggestions were right.

State government taxes and spending have continued to soar in the 15 years since Prop. 13, despite a constitutional spending limit the voters passed in 1979. One way of putting this into perspective is to recall a warning from then-Gov. Reagan during his campaign for the unsuccessful tax-and-spending-limitation amendment way back in 1973. Reagan warned, "Unless something is done to check the government's unlimited power to tax, this year's $9.3 billion budget will grow to a staggering $47 billion by 1989." The 1989 state budget in fact topped out at more than $50 billion. Throughout the 1980s, state spending grew one to two percentage points a year faster than personal income.

Even though Prop. 13 reduced the total state and local tax burden from nearly 16 percent of personal income to less than 12 percent, California still remains one of the 10 highest-taxed states in the country, and the state tax burden is still nearly twice as high as it was in the early '60s, when California was on a great binge of building roads, water projects, and state colleges. (The actual figures are these: Between 1958 and 1991, state per-capita spending, in real 1991 dollars, jumped from $629 to $1,716. While real state spending per capita tripled, real per-capita income less than doubled. Hence, state government's share of personal income has risen from 4.8 percent in 1962 to more than 8 percent today.)

Yet state government, with twice the tax burden of a generation ago, today claims to be unable to fund public works, education, and other basic services. This claim provides the essential clue about the mendacity of the attack on Prop. 13. The reason government can't afford the things it used to do isn't that it has no money; it's that spending on social programs has skyrocketed. Since Prop. 13, spending has soared for health and welfare programs, K-12 education (up by one-third per pupil in real terms during the '80s), and corrections (California's prison population quadrupled in the '80s, with a large portion of the increase composed of drug offenders).

The shift of spending priorities from public works to social programs, driven in part by federal mandates, lets big spenders play the old "Washington Monument strategy" with the fiscal structure of California. The "Washington Monument strategy" refers to the bureaucratic practice of threatening to close down the most popular or vital program in response to prospective budget cuts; the U.S. Department of the Interior always says it will have to close the Washington Monument first if its budget is cut. Faced with a budget crisis, Sacramento lawmakers inevitably threaten to slash spending for schools or law enforcement.

In a perverse way, many big spenders probably take secret delight in Prop. 13 and other tax limitations. In addition to enabling a vast centralization of government authority, tax limitation without tough spending controls allows big spenders to squeeze the basic public services that taxpayers demand from government. That squeeze then erodes public opposition to raising taxes. In California, for example, spending for roads has steadily declined from nearly 16 percent of the state budget in the mid-'60s to less than 5 percent today. "You see," the big spenders say when folks complain about the lack of public works, or about misspent education funds, "it's all Proposition 13's fault."

California's current economic and budget crisis has brought this problem into sharper focus. As a part of the solution to this year's $10-billion budget deficit, Gov. Pete Wilson and the legislature shifted $2 billion of property taxes away from local government and to the public schools. Local governments screamed that the property-tax shift would entail large cuts in police and fire protection, so frightened state politicians have placed on the November ballot a $1.4-billion sales-tax measure ostensibly for local government to provide police and fire protection.

But to get around Prop. 13's two-thirds vote requirement for special local taxes, the initiative declares these local sales taxes to be state levies, which require only a simple majority. This provision means that state government will continue to control the money that flows to the local governments—even the taxes they impose themselves. The most amazingly Orwellian aspect of all, however, is that neither the ballot title nor the summary of the initiative even mentions that it is a tax increase. It is called the "Local Public Safety Protection and Improvement Act of 1993" and speaks only of providing a "dedicated revenue source" for public-safety purposes.

But the initiative does not impose a "maintenance of effort" requirement on local government—a provision to prevent local governments from making the new revenue fungible by diverting existing money from public safety to other purposes. So the language about a "dedicated revenue source" is meaningless. "We've already gotten reports out of different counties," says Skip Murphy of the Peace Officers Research Association, "that every dollar that goes into the left pocket will be taken out of the right pocket." (A companion ballot initiative in November would reduce the requirement to pass school bonds from a two-thirds vote to a simple majority.)

The real lesson of the legacy of Prop. 13 is that tax limitation is not sufficient to reform the government. Comprehensive spending limitation is required as well, something like what Ronald Reagan proposed with Proposition 1 back in 1973. Rather than limiting specific taxes or tax rates, Prop. 1 would have slowed state spending growth by capping total state revenue at 7 percent of personal income—more than 1 percentage point below where it is today. But even more is required: either a legislative majority that will stick to sensible spending priorities like public works, or rigid earmarking to keep the bureaucracy from diverting the budget to its social-welfare clients.

Big spenders may succeed in nibbling away more and more bits of Prop. 13, but they are misjudging the mood of the people. The growth of wasteful and unproductive government spending in California is gradually building the circumstances for another tax revolt, which this time might take the form of something like Reagan's Prop. 1. The massive income- and sales-tax hikes of 1991 have contributed to the exodus of business from the state, and the anti-tax movement, still vigorous and well organized, now understands the need for comprehensive constitutional tax and spending restraints. The new revolt may well happen during the reign of Jerry Brown's sister, Kathleen Brown, currently the front-runner to win the governorship away from Pete Wilson in November 1994.

If so, it would provide dramatic closure to California's greatest political dynasty since the railroad barons. Gov. Pat Brown was humbled by Ronald Reagan, son Jerry by Prop. 13; now Kathleen seems poised to preside over the next great act of the tax revolt. If that act does indeed come to pass during the regime of Kathleen Brown, it will mean that the Brown family would have presided over more advances for the cause of limited government than California's legendary conservatives.

Contributing Editor Steven Hayward is research and editorial director for the Pacific Research Institute in San Francisco.