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Proposition 13 and State Budget Limitations
Past Successes and Future Options
by Michael J. New
 Michael J. New is a postdoctoral fellow at the Harvard-MIT Data Center and an adjunct scholar at theCato Institute.
No. 83
June 2003 marks the 25th anniversary of thepassage of Proposition 13, a landmark tax limi-tation measure approved by California voters in1978. Proposition 13 triggered one of thenation’s largest state and local tax reductions byimmediately cutting California property taxesby $5 billion. But Proposition 13’s impact wentfar beyond tax relief in California. It launched awave of tax limitation efforts in other states andcreated momentum for the large federal tax cutspassed in 1981.Although Proposition 13 limited propertytaxes, it failed to impose long-term discipline onstate and local budgets in California. Indeed,total state and local revenues (including federalaid) in California have risen from 19.4 percent of personal income the year after Proposition 13passed to 24.6 percent today. Rapidly expandingspending since the mid-1990s has put the stateinto a fiscal crisis with record budget gaps cur-rently being reported.Proposition 13’s focus on property taxes wastoo narrow to limit overall state and local govern-ment budgets in California. However, a number of states in the past decade have enacted broader taxand expenditure limitations (TELs) that attemptto control overall government growth. This paperdiscusses how well-designed TELs can restrainspending and provide tax relief. TELs combinedwith other mechanisms to terminate unneededgovernment programs should be pursued in allstate and local jurisdictions to close current budgetgaps and counteract the tendency of governmentsto collect ever-larger shares of Americans’ income.
June 19, 2003
 
Introduction
California’s landmark Proposition 13 waspassed in a June 1978 referendum with 65percent popular support. It slashedCalifornia property taxes from $11 billion to$6 billion between 1978 and 1979 and insti-tuted tax limitation mechanisms that are stillin force today.
1
Proposition 13’s impact wentfar beyond tax relief in California. Itlaunched a wave of tax limitation efforts inother states and generated momentum forlarge federal tax cuts in 1981.This study first discusses the enactmentof Proposition 13 and examines California’stax and spending trends during the past 25years. The study then focuses on lessonslearned from Proposition 13 and looks atbudget mechanisms in other states to discernwhich are the most effective at controllingspending. A statistical analysis concludesthat well-designed tax and expenditure limi-tations (TELs) can restrain governmentgrowth. Finally, the successful budget limita-tions in place in Colorado and WashingtonState are discussed.
2
The Enactment of Proposition 13
Throughout the 1960s and 1970s highand rising property taxes were a persistentproblem in California. Total property taxesin California jumped from $6.7 billion in1972 to $11.0 billion in 1978.
3
A number of groups were formed to find a solution to theproblem, including the United Organizationof Taxpayers created by Howard Jarvis. TheUOT focused on placing initiatives on thestate ballot in an attempt to reduce propertytaxes. In 1968, 1971, and 1976 the organiza-tion’s efforts stalled when it failed to obtain asufficient number of signatures.
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However,Jarvis teamed up with Paul Gann of People’sAdvocate in 1977, and their campaign easilysurpassed the 500,000 signatures necessaryto get Proposition 13 on the ballot.
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Proposition 13 limited property tax rates to 1percent of assessed value and limited proper-ty assessment increases to 2 percent annually.It also imposed a supermajority votingrequirement on the state legislature for taxincreases.
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Though it qualified for the ballot,Proposition 13 still faced hurdles. Indeed,many voters considered Proposition 13 tooradical, and for much of the spring leadingup to the June vote, polls showed that theelectorate was evenly split.
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But Jarvis andGann received good news in May when theassessor’s office in Los Angeles County pro-posed huge increases in property assess-ments for the next fiscal year. The increaseswere bad news for taxpayers, but they madeheadlines and shocked homeowners, thusproviding fuel to the tax limitation move-ment.
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Indeed, the opposition never recov-ered from that setback, and Proposition 13passed with 65 percent of the vote—nearly atwo-to-one approval margin.
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The passage of Proposition 13 had a num-ber of favorable consequences in Californiaand across the country. First, it triggered animmediate $5 billion reduction in propertytaxes in California (from $11 billion in 1978to $6 billion in 1979).
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That relief was muchneeded because property taxes had been soar-ing and newspapers were filled with stories of elderly residents on fixed incomes and otherfamilies that simply could not afford the ris-ing burden.
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Second, tax cuts were needed to helpboost California’s economy. California’sstate and local tax burden was among thehighest in the country before Proposition13.
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And like the rest of the country,California was mired in stagflation duringthe late 1970s. Proposition 13 was a shot inthe arm. In the years immediately followingits passage, California’s economic growthexceeded the national average, and the state’sunemployment rate fell.
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That belied someeconomists’ dire predictions. In early 1978economic forecasters from the University of California, Los Angeles, had argued thatProposition 13 would increase unemploy-
2
Proposition 13slashedCalifornia prop-erty taxes from$11 billion to $6billion between1978 and 1979.
 
ment and hurt the state’s economy.
14
Instead,the tax cuts were followed by robust econom-ic growth.Other dire predictions also failed to cometrue. Proposition 13 was strongly opposed byspecial interests, including unions, some bigcorporations, and various good-governmentgroups.
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Those opponents argued thatProposition 13 would cripple vital govern-ment services.
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That did not occur, but afterthe initiative passed, the legislature did allo-cate part of the state surplus to local govern-ments.
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Although some needed cutbacks ingovernment spending were made, the pre-dicted crisis did not materialize.
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Finally, Proposition 13 generated nation-wide momentum for tax cuts and tax limita-tions. Property taxes were an obvious focusfor tax limitation efforts. Property taxes arehighly visible to homeowners, and polls haveconsistently found that they are among themost unpopular taxes. A number of subse-quent property tax limitation efforts weresuccessful; Massachusetts’s Proposition 2½is the most prominent.
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Also, numerousstates enacted a variety of tax and spendinglimitations in 1978 and 1979.
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The Legal Aftermath of Proposition 13
Since its passage, Proposition 13 has comeunder numerous legal attacks, but it hasremained largely intact. The attacks beganeven before Proposition 13 was enacted. InApril 1978 government lawyers gathered inSan Jose to map out a strategy for overturn-ing Proposition 13 in court if it passed.
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Theirs was a three-pronged plan. First, theyargued that Proposition 13 violated the sin-gle subject rule of the CaliforniaConstitution. That rule requires that all bal-lot initiatives deal with only one subject.Second, they argued that different assess-ments of similar properties violated the equalprotection clauses of the California and U.S.Constitutions. Third, they argued thatProposition 13 was unconstitutional becausethe revenue reductions would force local gov-ernments to breach contracts.
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Shortly after Proposition 13 was passed, alawsuit was filed. To gain maximum sympa-thy for the lawsuit, the lawyers decided to useschool districts to front for Proposition 13’sopponents. However, on September 22, 1978,the state supreme court rejected all threearguments and upheld by a six-to-one votethe constitutionality of Proposition 13.
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Nonetheless, legal challenges continuedthrough the 1980s and 1990s. One series of attacks centered around the ability of localgovernments to levy nonproperty taxes.Section 4 of Proposition 13 states, “Cities,counties, and special districts, by a two-thirdsvote of the qualified electors of such district,may impose special taxes.” Jarvis intendedthat provision to cover all the taxes that localgovernments were authorized to impose.
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However, in
San Francisco v. Farrell,
theCalifornia Supreme Court ruled that “specialtaxes” meant “taxes which are levied for a spe-cific purpose rather than a levy placed in thegeneral fund to be utilized for general gov-ernment purposes.” That decision allowedlocalities to impose or increase any locallyauthorized general tax without voterapproval.
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California voters reversed that court deci-sion in 1986 when they approvedProposition 62. That initiative required thatgeneral taxes imposed by local governmentsbe approved by a majority popular vote. In1991 a California appellate court ruled thatProposition 62 was unconstitutional.However, that decision was reversed by theCalifornia Supreme Court in 1995.
26
In 1996California voters approved Proposition 218,a constitutional rule backed by the UOT, thatrequired that all local general taxes securemajority approval and that special taxessecure two-thirds voter approval.
27
Another series of legal attacks onProposition 13 centered on the equal protec-tion clause. Proposition 13 led to disparitiesin property assessments and thus propertytax burdens. Annual assessment increaseswere limited for particular homeowners, but
3
Proposition 13generated nation-wide momentumfor tax cuts andtax limitations.
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