How a Court Case Caused Taxpayers to Revolt

In 1978, 64.8 percent of California voters approved Proposition 13, marking one of the greatest anti-tax victories in history.

Essentially, Prop. 13 capped taxes on commercial and residential real estate to a maximum of 1 percent of a property’s full cash value. These values can be adjusted up to 2 percent per year for inflation, and also when a piece of property changes ownership or undergoes new construction. Prop. 13 also required a two-thirds vote in the state legislature for the approval of new taxes.

There is no doubt that Californians were (and still are) taxed too much. But the idea that Californians approved Prop. 13 simply for tax relief is incomplete. What often goes unmentioned is that in the decade prior to its passage, two similar ballot measures were overwhelmingly rejected by voters.

In 1968, Proposition 9 was on the ballot. A “yes” vote for Prop. 9 would have provided that “taxes on property for any given year” would “not exceed 1 percent of the market value of the property.” While the language is not identical to Prop. 13, the sentiment is unmistakably the same. Yet 68 percent of voters said no, rejecting Prop. 9 by a 2-1 margin.

Four years later, property tax limitations were back on the ballot, this time as Prop. 14. While this initiative did not contain a specific 1% cap like Props. 9 and 13, its effects would have been remarkably similar. The summary voters saw on their ballots informed them that Prop. 14 “Establishes ad valorem property tax rate limitations for all purposes except payment of designated types of debts and liabilities.” Prop. 14 also would have required a “two-thirds vote of Legislature to increase designated taxes,” in the same way Prop. 13 eventually did. But just as had occurred in 1968, voters in 1972 had little interest in property tax relief. Prop. 14 was rejected by a 66-34 percent margin.

Within the span of 4 years, California voters had twice rejected capping property taxes by huge margins. Yet just six years later, those very same voters would approve Prop. 13 with a whopping 64.8 percent of the vote. In a short period of time, roughly a third of Californians seemingly changed their minds about the merits of limiting property taxes.

In order to understand why taxpayers revolted, we need to ask a simple question: what changed?

Part of the story certainly has to do with inflation, which was high throughout the 70s, and home prices nationwide nearly doubled between 1972-78. As property values rose, so did homeowners' tax bills, leading to fears among many that they would be taxed out of their homes. Some credit also certainly belongs to Howard Jarvis, the legendary anti-tax crusader who championed Prop. 13 during the campaign.

While things like rising tax burdens and persuasive campaign tactics are highly visible things that impacted the 1978 result, there is a less obvious factor that conservatives should take note of—local school taxes.

Economist William Fischel argued that the implementation of the California Supreme Court’s decision in Serrano v Priest, which was a series of court cases regarding public school financing, was the most important difference between 1972 and 1978.

Justice Raymond Sullivan wrote for the majority: “We are called upon to determine whether the California public school financing system, with its substantial dependence on local property taxes and resultant wide disparities in school revenue, violates the equal protection clause of the Fourteenth Amendment. We have determined that this funding scheme invidiously discriminates against the poor because it makes the quality of a child's education a function of the wealth of his parents and neighbors. Recognizing as we must that the right to an education in our public schools is a fundamental interest which cannot be conditioned on wealth, we can discern no compelling state purpose necessitating the present method of financing. We have concluded, therefore, that such a system cannot withstand constitutional challenge and must fall before the equal protection clause.”

The decision held that funding local schools with local property tax revenue was unconstitutional because it resulted in unequal per-pupil spending on a statewide basis. Since the court held that education was a fundamental right, it determined a discrepancy in funding based on the relative wealth or poverty of an area was a violation of the Equal Protection Clause of the Fourteenth Amendment.

Thankfully, the US Supreme Court in 1973 rejected this logic with its ruling in the case San Antonio Independent School District v Rodriguez. The decision, written by Justice Lewis Powell (a fellow Washington and Lee University alum), noted that there is no fundamental right to education guaranteed by the Constitution and also ruled that “the Equal Protection Clause does not require absolute equality or precisely equal advantages.”

Unfortunately for Californians, the Serrano ruling had also been partially based on the California Constitution, which meant that the decision would stand even after the US Supreme Court ruled in San Antonio v Rodriguez. And indeed, the California Supreme Court affirmed its decision in 1976 and mandated that the state’s school funding system be brought into compliance. In 1977, the Legislature passed AB 65 to comply with the mandate. This bill effectively led to the state, not local governments, taking the revenue generated by local property taxes and then disturbing the funds evenly to schools across California.

As the economist Fischel put it, “In 1972, voters in most of the school districts in California could still see a connection between what they paid in property taxes and the quality of their local public schools.” But the implementation of Serrano in 1977 “broke the connection between local property taxes and local school spending.”

Fischel argues that this new statewide education funding scheme mattered even to Californians with no kids in school because the value of a home tends to be related to the quality of schools in its neighborhood. It is only natural that homeowners are willing to pay higher property taxes if it means having well-funded, high-achieving schools in their district that would boost the value of their homes by a greater amount than they pay in taxes. Once Serrano divorced local school spending from property taxes, voters no longer had a reason to tolerate high property taxes for the simple reason that they were no longer reaping any direct benefits.

Fischel’s argument is backed up by election data showing that the areas most harmed by Serrano were the ones that swung the hardest between the 1972-78 elections. Additionally, his theory helps explain why Proposition 8, a separate property tax relief initiative on the ballot in the 1978 election, received less support than Prop. 13. Basically, Prop. 8 provided relief for all property taxes except those used for education funding. In effect, districts that were “Serrano losers” would receive tax relief under Prop. 13 but not under Prop. 8. If voters were indeed reacting to Serrano in 1978, we would expect those “loser districts” to be relatively more in favor of Prop. 13 than Prop. 8. And that is exactly what the data shows.

Fischel’s argument relies on additional data and analyses that are not important for our purposes. While some scholars have objected to his research on the grounds that there are better explanations for why Prop. 13 passed, we have good reason to believe he’s onto something important. Indeed, while we can’t know precisely how big of a role Serrano played in the passage of Prop. 13 compared to things like inflation, the correlation between “Serrano losers” and voter support for the initiative makes it clear that the passage of AB 65 had a real impact.

This finding powerfully illustrates something that conservatives have long known to be true—local politics matters. While no one likes paying taxes, individuals are generally okay with paying to fund things that will benefit them directly. Few people seriously object to taxes that fund their police and fire departments. Similarly, property owners are much more willing to pay for schools that benefit their children and their community. But when the state starts robbing Peter to pay Paul—as Serrano effectively mandated the California government to do—people will naturally get upset. And in a democracy, when people get angry, they vote.

Many economists, including Fischel, oppose Prop. 13 because, in their view, it overly limits the state’s power to collect revenue. However, from a conservative perspective, Prop. 13 is wonderful. According to the Howard Jarvis Taxpayers Association, Prop. 13 has saved California taxpayers over half a trillion dollars since its passage in 1978, and voters have consistently rejected ballot measures designed to undermine it.

At the end of the day, the lesson of Prop. 13 is simple: localism matters. Voters, who had previously been happy to pay property taxes to support their local schools, revolted against a heavy-handed redistributionist scheme designed to take their money to pay for education in communities on their other side of the state. Conservatives have long advocated for taking power out of Washington and returning it to states and communities, and if the story of Prop. 13 is any guide, we would be wise to continue to do so.