A cautionary tale about tax cuts

Americans are getting crankier about paying taxes. 

Most people don’t enjoy paying Uncle Sam, but for much of the 2000s and 2010s, a sizable percentage of Americans thought that the amount of federal taxes they paid was “about right,” according to Gallup. But recently, the share saying their taxes were “too high” has been climbing; last year, nearly 60 percent of Americans said they pay too much.

Call it the Great American Tax Revolt, or maybe the Third American Revolution. Whatever we label this anti-tax wave, its effects are already rippling out across the country. Republicans in red states are slashing property taxes, or threatening to eliminate them entirely. Even some Democratic lawmakers are proposing massive tax cuts to be paid for with tax increases on only the very richest. 

All of this reminds Isaac Martin, a professor of urban studies at University of California San Diego, of the battle over Proposition 13: a 1978 California ballot measure that capped property taxes statewide, setting off a chain of fiscal and social consequences that the state is still grappling with. 

“I think the history of California really teaches us that you can want your government for free, but you can’t get it for free,” Martin told Today, Explained co-host Noel King.

King and Martin talked about the history of property tax in America, the story of Prop 13, and what California’s experience suggests about where the rest of the country may be headed. 

Below is an excerpt of their conversation, edited for length and clarity. There’s much more in the full podcast, so listen to Today, Explained wherever you get podcasts, including Apple Podcasts, Pandora, and Spotify.

What was going on with taxes in the 1970s?

There was what we call now the property tax revolt, a major grassroots movement of protest against local property taxes. It was a nationwide thing. It happened in communities all around the US, but people really remember the events in California because Californians at that time, in 1978, amended their constitution to limit the property tax. And that tax limitation, which they called Proposition 13, then became national news and had all kinds of impacts in and outside of California.

I lived in Los Angeles for a couple of years and I remember Proposition 13 being a big topic of conversation, but not everyone will know of its history. Why does Prop 13 matter? Why is it such a big deal?

Proposition 13 is a big deal for a few reasons. The first is that it very dramatically changed the state’s tax structure. It said local governments cannot levy any property tax in excess of 1 percent, so it capped the property tax rate at 1 percent. 

“It’s a real cautionary tale that you can really lose something very valuable if you allow your anger at taxes to take over and you don’t think carefully about what to do with that anger.”

The second and more important thing it did is it put an annual cap on the amount that the assessed value of your property for tax purposes could increase from year to year. Even if your home was appreciating in value very rapidly, as far as the local tax assessor was concerned, it wasn’t actually going up more than 2 percent per year in value. And that, among other things, constrained the finances of local governments in California. 

It also gave property owners a tax break that grew over time, the longer they stayed in their homes. It was the beginning of a real cascade of similar changes to California law, including later initiatives in the 1980s that said that the tax break you have on your home because you got in early, you can pass that down to your children. You can pass that down to your grandchildren. That’s one reason why Peter Schrag, who was the [opinion] editor of the Sacramento Bee for many years, said in the 1990s, Listen, we now have a hereditary aristocracy of property in California.

The story of Proposition 13 in California matters for at least a couple of reasons. One of those reasons is that it’s a real cautionary tale that you can really lose something very valuable if you allow your anger at taxes to take over and you don’t think carefully about what to do with that anger. As I understand it, it’s a story of the simplest, worst solution to a real crisis.

Where did [Prop 13] come from?

First off, property taxes have always been a mess in America. Property taxation is the oldest tax we have in the United States. It predates the republic. And until the middle decades of the 20th century, the property tax was still being administered as if we were in the horse-and-buggy era. 

The people who were in charge of figuring out how much your house or your business was worth for the purpose of taxing it were political animals, and they didn’t tend to have much expertise in actually appraising property. Instead, what they would do is just kind of write down from year to year, Oh, we wrote down this number for your home last year. Let’s write it down again this year.

They were giving away these kinds of informal tax breaks to people in a way that was often also very political. They might trade a low assessment for bribes. They very commonly traded low assessments for votes. And in the 1960s, led by California, many states then began to reform how they administered the property tax. They brought in computers, they professionalized assessment, and suddenly for the first time, many, many property owners, especially homeowners in the United States, started to get taxed on the actual values of their homes for the first time. And it turned out they didn’t like that.

It was a cause of an incredible freak-out — people petitioning to abolish the property tax. One of the most colorful figures in the movement was a real crank named Howard Jarvis, who was a Los Angeles entrepreneur, a kind of serial entrepreneur, who first in the late 1960s campaigned to abolish the property tax and got nowhere with it, but did get enough traction that he decided it was worth continuing to try. 

He teamed up with a used car salesman named Paul Gann, and took inspiration actually from the Los Angeles property assessor, who was also arguing for property tax reforms, a guy named Phil Watson, and wrote a limitation — a state constitutional amendment to limit taxes — that became Proposition 13. They collected more signatures than any ballot initiative in the history of California. And in June 1978, a majority of the voters went for it.

Why did a majority of voters go for it? Was it hard to convince people?

Jarvis wrote later in his memoir that the best argument was simply to go up to people and say, Sign this, it will lower your property taxes.

All right, so the upshot is what exactly? What happens after voters say, Yeah, this is what we want.

Quality of services in many cases declined. It’s clear, for example, that there was a shift in fire protection away from professional fire departments and toward volunteer fire departments in some parts of the state. 

It hurt the schools. School finance has continued to, of course, increase in California as it has elsewhere in the US, but California used to be at the top in terms of quality of education in primary and secondary education and in terms of school spending. And now it’s definitely not.

“The lesson here is that we really value, and should value, a lot of the public services and public goods that our governments provide.”

It has hurt the quality of infrastructure — potholes in the roads, response times of first responders. It has shifted the state tax structure onto income taxes, which means that the tax system in California is really swingy — in a boom, a lot of money might flow into the state’s coffers, and in a recession, the state budget really suffers. During the financial crisis, this meant that local governments that could no longer rely on a lot of property tax revenue were especially vulnerable to bankruptcy.

It has also created all kinds of unfairness — new unfairness, rather unlike the old system. Now you might actually pay a lot more tax than somebody else in your neighborhood who has an identical home worth the same amount of money, just because they bought their home earlier than you did. And they might agree that that’s unfair, but they might not vote to change it because it’s an unfairness that allows them to stay in their home.

You’re aware that Americans are growing irritable about paying taxes, and I wonder whether you think it’s fair to look at California and see a warning about where the rest of the country might be headed?

I do. I mean, I think the history of California really teaches us that you can want your government for free, but you can’t get it for free. The lesson here is that we really value, and should value, a lot of the public services and public goods that our governments provide. That doesn’t mean that they shouldn’t operate efficiently, but it does mean that when you think about how much you’re willing to pay for them, you also have to pay attention to what you’re willing to give up.