By Mark Baldassare, research director, Public Policy Institute of California
This opinion article appeared in the New York Times on June 27, 2003

California is facing the worst budget crisis in history: no state has ever faced a deficit, $38 billion over two years, as large. As Gov. Gray Davis and the legislature spar over spending cuts, tax increases and borrowing to balance the budget, they are working against a deadline. If no agreement is reached before Tuesday, the start of the new fiscal year, the state will literally run out of money.

Preoccupied with this looming disaster and lingering economic uncertainty, Californians are in no mood to celebrate the 25th anniversary of Proposition 13, the citizens' initiative limiting property-tax increases that was approved in June 1978. Instead, there have been sobering reflections about the mixed legacy of Proposition 13 — and calls to reform it.

California's reassessment should serve as a warning to the many states that followed California down the path of tax reform — 18 states placed limits on taxes and spending in the wake of Proposition 13 — as well as those who have pointed to California's "tax revolt" as a model for the national level. For all its value to the people (and politicians) of California, Proposition 13 has been anything but a simple fix.

Proposition 13 has been highly popular with the state's residents ever since it passed — 60 percent still support it today — because it has provided Californians with tax predictability during two decades of rising real-estate values. No one dares question its core: the property tax can be no more than 1 percent of the actual sales price of real estate, and increases are limited to 2 percent per year. The unintended consequences of Proposition 13, however, can be debated.

Although the initiative was heralded as tax relief for homeowners, for example, its major beneficiaries were the corporations whose land and buildings avoid property tax reassessments at market value. Revamping the property tax system to protect homeowners while allowing increasing rates for commercial property is supported by a majority of Californians, according to a survey conducted this month by the Public Policy Institute of California. But such a change would require voter approval.

Some are also taking aim at Proposition 13's supermajority requirement. The initiative's authors wanted to rein in local governments, which, prohibited from making large increases in the property tax, might be tempted to pass other tax measures. So the law requires that two-thirds of the voters approve any special local taxes, which are those used to pay for specific services like schools or parks.

In the past 25 years, local officials have indeed found it difficult to gain enough support to raise such taxes. Earlier this month, for instance, voters in many school districts around the state approved an increase in local taxes to cover the expected shortfall in state financing — but not by the necessary two-thirds majority. Some are now proposing to change the ratio necessary for approval from two-thirds to 55 percent for all special local taxes. Nearly half of the state's residents agree.

Meanwhile, Proposition 13 has shifted the balance of power between the state and local governments. While the law requires that local governments collect property taxes, it puts the state legislature in charge of distributing the money. As a result, local schools are vulnerable to statewide economic downturns. This trend has taken its toll over 25 years: Since the 1990's, California has ranked in the bottom half nationally for educational spending on a per-student basis.

It's not just schools that have been hurt by the state's boom-or-bust budgeting. City governments, seeking alternative revenue sources after losing control of property taxes, increasingly encourage the building of shopping malls and auto dealerships in order to generate more local sales tax revenue. The result? Not enough room for new housing, which is seen as less attractive because property tax money goes to the state. According to the state department of housing and community development, California needs 220,000 new units of housing every year to meet demand, yet since 1990 it has averaged 100,000.

Through the current budget crisis and beyond, it is important to remember that it was the voters who changed the tax system 25 years ago, and that most of these fiscal reforms require the voters' approval. Moreover, with the combination of a relatively inexperienced state legislature (because of term limits) and a governor preoccupied with the threat of voter recall, there is policy paralysis in state government. So it is voters, once again, who control state fiscal matters.

California's problems are not the nation's, of course, nor are California's solutions. But as the largest state, the economic and political effects of its actions will reverberate. As America is to the world — the exceptional nation that nonetheless sets an example — so California is to America. California's response to its present crisis may well set the stage for a new era of reform among the states.