This Friday, June 6, marks the 25th anniversary of one of the most important political/economic events in American history: Proposition 13. This initiative, which was approved by the voters of California on this date in 1978, sparked a "tax revolt" that spread throughout the country and continues to reverberate today.
The impetus for Prop. 13 was the inflation-induced housing price boom of the 1970s. Investors seeking to preserve their capital poured their savings into tangible assets like real estate. With double-digit inflation also pushing up prices, many homeowners suddenly found themselves living in houses worth many times what they paid for them. But with property taxes based on assessed values, this meant that tax bills were also rising sharply. Since incomes were not rising as fast as prices or taxes, some California homeowners found that they couldn't pay the taxes and were forced to sell their homes.
Howard Jarvis and Paul Gann, leaders of two California taxpayer organizations, joined forces in 1978 to put an amendment to the state constitution on the ballot that would limit property taxes to 1 percent of assessed value in 1975. Valuations were frozen until the property was sold. And just to make sure that other taxes were not increased to compensate, a two-thirds majority in the legislature was required to raise taxes.
At first, California politicians ignored the Jarvis-Gann effort. But when polls showed that the measure would pass, they panicked. Dire effects were predicted if taxes were cut. Police, firefighters and teachers would all be laid off, voters were told. Unemployment would rise, and the state's economy would be decimated.
Lest you think I exaggerate, consider these quotes from an April 17, 1978, Washington Post story:
Former California Gov. Edmund G. (Pat) Brown: "If I were a communist, I would vote for Proposition 13."
Los Angeles Mayor Thomas Bradley: Proposition 13 will "hit the city like a neutron bomb, leaving some city facilities standing virtually empty and human services devastated."
Howard Allen, president of the Los Angeles Chamber of Commerce: Proposition 13 is "a fraud on the taxpayer that will cause fiscal chaos, massive unemployment and disruption of the economy."
Some economists at the University of California at Los Angeles predicted that the state's unemployment rate would rise by 4.5 percentage points, from a projected 6.7 percent rate in 1980 if Prop. 13 was defeated to 11.2 percent if it was enacted.
Despite a massive advertising campaign against Proposition 13, financed by the state's business community, which almost universally opposed the measure, voters held firm in their support. On June 6, 1978, they backed it by a two-to-one margin.
Almost immediately, it became clear that all the predictions of doom and gloom were so much hot air. Within months, the critics even admitted it. A New York Times report on Feb. 11, 1979, was headlined: "Little Impact Seen in Coast Tax Slash." On March 7, 1979, another Times report carried this headline: "Dire Predictions on Proposition 13 Have Not Materialized." The latter story had this to say:
"Fire and police protection have been virtually unaffected by the proposition. ... Schools are spending about as much money as they did last year. Some services, such as libraries and flood control, have been cut. But for the most part, the eliminated services appear to have gone unnoticed, according to interviews with many residents."
What about unemployment? According to the U.S. Bureau of Labor Statistics, California's unemployment rate was 7.1 percent in 1978 -- well above the national rate of 6 percent. By 1979, the gap had narrowed, with the state unemployment rate at 6.2 percent versus a national rate of 5.8 percent. Although the California unemployment rate rose in 1980, at 6.8 percent it was below the national rate of 7.1 percent for the first time in many years. There is no record that the UCLA economists ever apologized for their gross error.
Within months, 12 other states cut taxes, fueling the idea of a nationwide tax revolt. Congress, with overwhelming Democratic majorities in both houses, quickly abandoned a liberal tax reform plan it was working on and cut the capital gains tax instead -- over the strenuous objections of the Carter administration. President Carter signed it anyway.
Republican tax-cutting initiatives, such as the Kemp-Roth bill, suddenly became viable. GOP congressmen and senators who had withheld their support because it would increase the deficit now jumped on board.
Two years later, Ronald Reagan rode the tax revolt into the White House. The most lasting effect of Proposition 13 is that it taught Republicans the political power of tax-cutting and weaned them from their obsession with budget deficits. In that respect, its impact continues to be felt 25 years later. Passage of the 2003 tax bill is only the latest example.