The Aftermath of Prop. 13

by Prof. Mason Gaffney, Univ. of California, Riverside


What
happens

when a state abruptly changes its degree of dependence on the property tax? California provides the most obvious case study. A great many of the states have shifted gradually away from the property tax in the past several decades. California did it suddenly.

In 1978 the electorate was persuaded to support Proposition 13, which put a cap on the rates of the property tax. California's real personal income per capita, and especially in wage income per capita, dropped precipitously. Both rents and housing prices soared after 1978, such that only ten years later, in 1988, one could not find an apartment for less than $600 a month. Between 1980 and 1989, according to reports in the press, real disposable income fell for a majority of the region's residents. Between 1985 and 1990, the average household's income rose by 91%. During that period, the Consumer Price Index rose by 64%; while Californians' median rent rose by 132%, and the median price of owner-occupied homes climbed 163%. (These data are from San Francisco Examiner, September 27, 1991, page B-1.)

California's unemployment rate became the highest in the United States, rising to over 9%, three points above the national rate. It was good news when it fell to 8.5% in May, 1994 - high above the national rate of 5.6%. Its student/teacher ratio, grades K-12, deteriorated. Most telling of all, spending per pupil dropped from fifth place in 1965 to fortieth place in 1985. It is hard to see how a state can continue to win and hold the high-tech professionals required for California s high-tech industries to remain competitive, with one of the worst school systems in the nation.

California s poverty rate in 1994 was 17.9%, compared with the US rate of 14.5. The Los Angeles Times (October 11, 1995) chronicled the continuing decline. There was a net outmigration from California to other states of 236,000, even though international migration showed a net inflow. Most of the loss was from Los Angeles-Riverside, a large metro area.

California's counties lack funds to maintain existing stretched-out roads. Riverside County is responsible for 2,500 miles of roads. In the eight years to 1995 it repaved an average 19 miles per year. At that rate roads are repaved once every 130 years. It should be once every 20 years, according to industry standards, if roads are to be correctly maintained.

California's bond rating dropped to last among the states.

Some cities and neighborhoods are especially devastated. In 1976, San Bernardino was an "All-American City," one of ten receiving the award as a city on the go. But two decades later, and after the sharp turn away from the property tax, 40% of its 185,000 residents were on welfare, up from 18% in 1985. Orange County, known as the epicenter of wealth and conservatism, actually went bankrupt in 1995, and some other counties are close to it. Still, median home value in 1995 in San Bernardino was $94,000. High as that is, it is the lowest in southern California. A shack rents for $550. Absentee ownership and tenancy are rising, because in the 1980s speculators moved in from Los Angeles and Orange County, thinking values had to rise. (So thinking, they ruined neighborhoods and caused values to fall.)

Downtown Los Angeles remains a basket case. It was boom and bust carried to the Nth degree. Federal tax breaks encouraged speculative office building. Then, floor space rents dropped over 50% from their peak, and values dropped even more. Walkaways and bankruptcies multiplied.

Large parts of the San Fernando Valley failed to renew themselves following the Northridge Earthquake of January, 1994. California was quickly rebuilt after many previous earth quakes. This time it is different.

It is too easy to explain California's recent fall by the ending of the Cold War, the loss of defense jobs, and cutbacks in aerospace. Many professional explainers seize upon these factors. The events of recent decades must be compared with the similar, but much more severe, external events after World War II. Wartime immigrants did not languish unemployed, then, or return home. They remained to create or join in a fantastic burst of growth. Things went otherwise before the scuttling of the property tax. By the end of 1945, Los Angeles lost its wartime economic base: three quarters of its aircraft workers, and 80% of its shipbuilders. Motion pictures went into a decline. Los Angeles was left without much of its former economic base of export industries.

Yet, during 1945-49 there was an increase in jobs (Jacobs 1969: 151-54). Los Angeles grew by replacing imports. It became remarkably self-contained, as large metropoles do. New local companies prospered. One eighth of all new businesses started in the United States during those four years were in Los Angeles. Firms which formerly sold materials to Los Angeles opened branch plants there: Detroit auto-makers, for instance, and Akron tire-makers.

What was different about 1945-49? Why did Los Angeles thrive then, but not now? The difference in which to look for cause and effect is in the fact that in those earlier years California was taxing property heavily, and land heaviest of all. Absentee land speculators, rushing in to free-ride on California's enterprise, were required to share in bearing its public costs. Holders of prime land were pressed to sell or use it to pay the taxes. Anecdotal evidence comes from executives of interstate firms, who commented on the greater pressure toward land performance in California. The state's fall did not begin until 1978, with Proposition 13. It continues.