Proposition 13 & the effects of regressive policy in California

The financial crisis has hit California particularly hard. Poverty continues to spiral as unemployment reaches a post-war high of 12.2%. The political response has been to implement drastic cuts.

In July, the state legislature haggled for weeks over how to close a $26 billion budget gap. Instead of increasing taxes of corporations or the wealthy, the budget deal that emerged to be signed by Republican Governor Arnold Schwartzenegger ordered deep spending cuts, laying off tens of thousands of state workers.

Reduced funding for education, coupled with big tuition increases, sparked a student and faculty strike at California’s public universities. Programs for ex-prison inmates and parolees have been slashed. And the social safety net of healthcare and services for the poor, children and elderly - the least powerful and least vocal members of society - has been systematically shredded. [...]

A legal challenge has temporarily halted some of the cuts to elderly care. But Governor Schwartzenegger is trying to overturn the court ruling and re-institute the cuts. [...]

So, why has California been hit so disproportionately hard, and what are the causes of this drastic response? Whilst Schwartzenegger's regressive political attitude can take some of the blame, Proposition 13 plays the lead role.

Proposition 13 was an initiative that was enacted by the voters of California. The key components of the proposition were to cap property tax (even if the value rises) and put into law that a two-thirds majority is required to raise taxes and pass a budget. The bill gained popular support and the Californian constitution was duly amended.

Ever since its was written into law, Proposition 13 has played a duel role in exacerbating California's instability and inequality as well as preventing progressive reform.

It is so iniquitous because the maximum rise in property tax is considerably lower than the actual increases in property prices. Neighbours living in identical homes are liable to pay substantially different property tax depending upon when they purchased the property. This means that the tax liability is heavily tied to the date of purchase rather than the value of the property or financial circumstances of the owner. (A relatively well-known example of this is billionaire Warren Buffet, who pays less than 0.06% tax on a $4,000,000 Laguna Beach home purchased in the 1970s. Meanwhile, a working family in a modest, newly purchased home is liable to pay several times this amount).

By capping property tax, Proposition 13 effectively places the state’s budget in a straitjacket. As Krugman argues, "limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions," which is why California has been so heavily affected by the financial crisis. And, by putting into law that a two-thirds majority is required to raise taxes and pass a budget, Proposition 13 prevents progressive reform and encourages drastic regressive policy responses in times of economic hardship. With Proposition 13 in place, the response to people needing a safety-net in times of need will always be to take it away from them.