Proposition 13, Revisited.

• Author: Danforth, Evelyn

Table of Contents Introduction I. Background A. The Path to Proposition 13 B. Proposition 13's Effect on Equality and Socioeconomic Mobility II. Prospects for Reform A. Reform Through the Courts 1. Prior litigation 2. Prospects for the future B. Reform Through the Political Process Conclusion Introduction

In 2003, Warren Buffett revealed in an interview with the Wall Street Journal that he paid the State of California just $2,264 in property taxes that year for his multimillion-dollar beach home in the tony enclave of Laguna Beach. (1) It was a fraction of what he owed the State of Nebraska for his much more modest primary residence in Omaha. (2) More surprisingly, it was a fraction of the tax bill for the beach house next door, which Buffett also owned. (3)

The disclosure made headlines nationwide (4)--but not because Buffett, a billionaire many times over, had revealed a talent for tax evasion rivaling his legendary investment skill. Rather, his lopsided tax burdens laid bare the perverse operation of California's property-tax regime: After Buffett purchased his first beach house for $150,000 in 1971, (5) the California Constitution effectively froze his property-tax bill in time. He was guaranteed this benefit despite his significant personal wealth and despite the fact that the property in question was a seldom-used second home. (6) Moreover, if Buffett died and title transferred to his children (or their children), most of this legacy tax basis would travel with the deed to the home. In other words, the California Constitution promised one of the richest men in the world--and his heirs--a tax break on a vacation house, in perpetuity.

Warren Buffett is far from the only person to benefit from the California Constitution's largesse. In 1978, voters passed a ballot measure known as Proposition 13, which added a slew of revenue-generation restrictions to the state constitution. (7) Chief among them are three limits on how California can levy property taxes on both commercial and residential land: The measure caps property-tax rates, requires that the State assess tax burdens by reference to a parcel's purchase price rather than its current market value, and limits any annual increases in that assessed value to 2% per year or the rate of inflation--whichever is lower--until the property changes hands. (8) Proposition 13 also requires that virtually any other increase in statewide taxation clear the legislature by a two-thirds supermajority. (9) Most alternative forms of new local taxation must pass by a two-thirds vote at the ballot box. (10) Subsequent constitutional amendments have expanded Proposition 13's footprint by entitling property owners to transfer their legacy property-tax basis to children or grandchildren who inherit family real estate. (11)

Although Proposition 13 is now an entrenched feature of life in California, stories like Buffett's throw questions about its wisdom into sharp relief. And in recent years, statewide fiscal crises and ever-spiraling housing costs have brought renewed urgency to those questions. Forty-three years after Californians dramatically reshaped the statewide rules of property ownership through a populist ballot initiative, that regime's propriety has vaulted back to the forefront of public debate. In the fall of 2020, Californians voted for the first time in Proposition 13's history on whether to limit the measure's scope--ultimately restricting its reach somewhat but expanding it in other ways and leaving the law's applicability to commercial property intact by a narrow margin. (12)

This Note contributes to the resurgent debate over Proposition 13 in two ways. The first is largely descriptive: By chronicling the law's anti-redistributive origin story and the distortions it has created, I argue that Proposition 13's effects on socioeconomic mobility and equality provide another reason--on top of its already well-documented effects on California's budgetary health--to embrace reform.

The second contribution is more prescriptive: Having chronicled some of the injustices that Proposition 13 works, this Note considers how to blunt their force. To begin, this Note considers the possibility of reform through the courts. It offers the first comprehensive survey in academic literature of legal claims against Proposition 13 in a quarter century. (13) And because several federal constitutional arguments against the law have been raised by plaintiffs but never fully resolved on their merits, this Note excavates those lost constitutional challenges and assesses their viability for future litigation. After concluding that those legal challenges face varying doctrinal hurdles, this Note closes by evaluating the feasibility of reform through the political process, drawing on lessons from two proposals that voters faced on the 2020 ballot.

1. Background

   How did California arrive at this odd state of affairs? Like so many good stories, this one starts with a revolution. But it differs in one critical respect from the standard revolutionary yarn: Rather than reflecting a mass mobilization against entrenched economic interests, the tectonic political movement that gave birth to Proposition 13 appears to have been spurred in large part by existing property owners attempting to protect their financial interests from the prospect of redistribution. Today, Proposition 13 and its companion provisions largely operate in service of those same goals--advantaging existing property wealth at the expense of historically marginalized communities, younger generations, and public education.

   1. The Path to Proposition 13

      Heading into the late 1970s, Californians were experiencing a combination of extremely high inflation, increasing rates of homeownership, and a steady uptick in home prices. (14) The state was also well into a decades-long period of significant public investment in infrastructure and government services to accommodate its swelling population. (15) Taken together, these trends meant that more and more Californians faced escalating property-tax bills. (16) In 1968, the average single-family homeowner in California paid $362 in property taxes annually. (17) A decade later, that figure had exploded to $811. (18) In urban areas, the trend was even more pronounced; some homeowners' property-tax bills doubled over the course of just a few years. (19) Meanwhile, state legislators responded to a series of corruption scandals in county tax assessors' offices by overhauling local tax-assessment methods. (20) Those reforms made the process of assessing individual homeowners' tax burdens much more rigid, systematic, and centralized, in turn increasing the likelihood that homeowners would be hit with regular assessment increases from a faceless, bureaucratic back office. (21)

      These changes hit Californians hard. Property taxes are an ad valorem tax, meaning that the government calculates what a taxpayer owes based on the value of an underlying physical asset. (22) This structure creates the risk that--if market conditions change--a taxpayer's obligations might exceed their available cash on hand, forcing them to sell the asset to pay their tax bill. That risk is particularly acute for ad valorem taxes levied on residential property; if a taxpayer cannot pay up, they may have to sell their house.

      Californians' discontent with their rising property-tax bills therefore coalesced into a specific public narrative: The state's runaway property taxes were pushing middle-class Californians--especially the elderly--out of their homes. (23) In April 1977, a group of angry senior citizens became the face of this story when they gathered on the steps of the Redwood City courthouse and burned their property-tax assessment notices in protest. (24)

      At the same time, the state's property-tax system was in the midst of massive structural changes. In 1971, the California Supreme Court issued the landmark decision Serrano v. Priest, holding that the state's heavy reliance on local property-tax revenue to fund public schools violated the Fourteenth Amendment's Equal Protection Clause. (25) Because district-level divergence in property values and appetites for taxation had caused "wide differentials" in per-pupil educational spending, California's highest court concluded that the status quo impermissibly distinguished among schoolchildren on the basis of wealth. (26)

      By rejecting hyper localized school funding formulas, the Serrano decision "sent tremors to the very foundations of public education in every state." (27) It also unleashed dramatic changes to school financing statewide. To give life to the state supreme court's opinion, California embarked on a significant redistributive project. Before Serrano, the public benefits derived from property-tax revenue remained overwhelmingly in the community from which they had been extracted. (28) After Serrano, the state legislature and the state supreme court worked in tandem to reallocate property-tax revenue from richer communities like Beverly Hills to poorer communities like nearby Baldwin Park. (29)

      But while the California Supreme Court found this redistribution normatively desirable--and, indeed, constitutionally necessary (30)--the Serrano case meaningfully shifted homeowners' perception of their tax burdens. Prior to Serrano, most had a clear incentive to pay their fair share: It was easy to see how the money they paid in property taxes redounded to their own children's education. (31) Moreover, keeping property-tax revenue within the community from which it had been extracted provided homeowners with tangible financial benefits; higher-quality local public schools lured families to the neighborhood, pushing up property values. (32) Spreading property-tax revenue statewide diffused the benefits of these tax payments--from taxpayers' own, identifiable children to the anonymous, unknowable masses of children across California. (33) It also weakened...