The Summer that Elvis Died and Proposition 13 was Born

This commentary gives a clear explanation of how Prop. 13 came about. Jim Shultz wrote it in 1997, 19 years after Prop. 13’s 1978 passage, and it seems worth reposting (with a few updates) today.

Jim Shultz is a former teacher of policy analysis and California politics at San Francisco State University and former staff with the California Legislature. He is the founder and executive director of the Democracy Center, an advocacy organization founded in San Francisco.

Updates are in [brackets].  

Proposition 13 pop quiz:

Who among the following opposed Proposition 13 when it was voted on in June 1978?

Former Republican Gov. Pete Wilson (governor at the time this commentary was written)

The California Taxpayers Association

Atlantic Richfield

Southern Pacific Railroad

Bank of America

Former Republican Gov. George Deukmejian

Standard Oil of California

Southern California Edison

Answer: All of them.

THE SUMMER THAT ELVIS DIED AND PROPOSITION 13 WAS BORN

by Jim Shultz

Summer 1997 marked the 20th anniversary of the death of Elvis Presley. Then-popular TV Guide published three different Elvis covers. In Memphis, his widow, Priscilla, opened a chain of Elvis restaurants.

That summer, California marked its own anniversary from the summer of 1977, an anniversary of an equally memorable event.  It was that summer that California lawmakers tried and failed to head off the great California property tax revolt, and Proposition 13 was born.

Elvis, by most reports, is still dead. Prop. 13, however, still shapes the basic outlines of California government and politics nearly two decades later [and still does today, 40 years after it was passed]. This is the story of how, by political fluke, California ended up creating a perpetual multibillion-dollar tax cut for the state’s wealthiest corporations –  a tax cut that California’s corporate leaders not only didn’t ask for but that, at the time, they tried very hard to torpedo.

I spent the summer of 1977 as a student intern in the office of Assembly Speaker Leo McCarthy, D-San Francisco, watching from a front-row seat as the tax revolt unfolded. Back at UC Berkeley in the fall, along with two other interns, I wrote a student paper about what we saw – the summer when the attention of the nation turned from Elvis to Jarvis.

The roots of rebellion

In California in the mid-1970s, housing prices were skyrocketing. The state’s population was growing, families wanted homes and supply could not keep up with demand. In the course of just a few years, the jump in home prices went from 5 percent per year to as much as 5 percent per month.

For local governments, the explosion in home prices was a money machine. Local property taxes are based on a simple formula –  the “assessed value” of a property (what the county assessor says it’s worth) multiplied by the percentage “tax rate.” As prices boomed, so did local property assessments and, in turn, homeowners’ property tax bills. While local governments raked in the cash, homeowners were staring at tax increases of $600 to $1,000 per year and getting angrier by the day. By mid-1976, a tax rebellion had begun.

City and county leaders sought to shift the responsibility to Sacramento,  calling on the Legislature to enact tax relief. The rebellion turned to the Capitol, where Gov. Jerry Brown [in his previous stint as governor, 1975-83] was deluged with 200,000 protest letters delivered in brown paper bags (the “Brown bag campaign”).

California state government made an easy target. In the mid-1970s, it had its own money machine –  double-digit inflation. High inflation led to cost-of-living pay raises that boosted Californians’ incomes but gave people no real increase in buying power. Inflation raises did, however, shove taxpayers into higher tax brackets. By early 1977, this “bracket creep” led to a whopping $2.5 billion state budget surplus.

When lawmakers returned to the Capitol in January 1977,  they were under enormous pressure to use the surplus for property tax relief. Veteran state Sen.  Al Rodda, D-Sacramento, told reporters prophetically, “If we do not achieve some degree of (property) tax relief the taxpayer revolt is going to be of such a magnitude that they may sign initiatives, qualify those initiatives and vote for them.”

Tax relief, yes – but what kind?

On the basic question –  should the state use the surplus to help provide relief to angry homeowners? – there was no disagreement. Legislative leaders in both parties, as well as Gov. Brown, put tax relief at the top of their 1977 agendas. However, what form that relief should take was the subject of heated debate. Democratic liberals wanted a tax-relief program that targeted its aid to low-income homeowners and renters. Democratic moderates, led by the governor, wanted a program aimed more at middle- and high-income homeowners, and also demanded new statutory limits on state and local spending. Republicans, heavily outnumbered in both houses, proposed returning the surplus to Californians through an income-tax cut, which targeted its benefits to taxpayers with the highest incomes. All of the plans focused on providing relief to homeowners and renters. None of the plans proposed sweeping tax cuts for corporate property.

Throughout the spring, the rival plans worked their way through the Legislature. In the Assembly, the liberal package carried by Willie Brown, D-San Francisco (later mayor of San Francisco and currently a San Francisco Chronicle columnist),  and Bill Lockyer, D-Hayward, was slowly compromised until it was acceptable enough to moderates to win passage from the full house. The Senate, on the other hand, couldn’t make up its mind. Through one committee, then another, and finally with approval on the floor, the senators kept advancing two conflicting liberal and moderate tax plans. It was a preview of legislative schizophrenia that would come back to haunt lawmakers continuously for almost a year.

Try, try and fail again

As Sacramento settled into a molten 1977 summer, an Assembly/Senate conference committee was convened to come up with a compromise acceptable to majorities in both houses, to a governor with re-election on his mind and to an uprising of angry California homeowners. On July 5, the pressure heated up considerably when two conservative activists, Howard Jarvis and Paul Gann, announced plans to take the property tax rebellion to the ballot.

What Jarvis and Gann proposed – the initiative that eventually became Prop. 13 –  was far more radical than any proposal floated in Sacramento. The legislative tax-relief plans all had price tags between $500 million and $1 billion per year. Jarvis-Gann proposed a mammoth tax cut of $6 billion –  a full sixth of all state and local revenues combined. The proposal mandated that the assessed values on every property in the state be rolled back to what they had been in 1975. It put a 1 percent cap on all local property-tax rates. It required that all new tax increases be approved by a two-thirds vote, both in the Legislature and among local voters.

Finally, unlike all the plans in the Legislature, Jarvis and Gann made no distinction between residential and business property. Two-thirds of the $6 billion tax cut would go not to homeowners, but to commercial and income property. At stake was an unprecedented  multibillion-dollar tax cut that California’s corporate leaders hadn’t even asked for, but one with colossal, long-term implications for California’s schools and other public services.

At the Capitol, Brown and legislative leaders labored to get tax relief back on track. Finally, the committee decided to cut the baby in half, blending tax relief with local spending limits and other concessions insisted on by the governor.

When it came to a vote in late August, the Assembly approved the relief compromise,  but in the Senate, it unraveled. Senate liberals complained that too much had been given away and decided to hold out for more by joining with Republicans to defeat it.

That August, as thousands of Elvis fans lined the roads to Graceland to pay their last respects after his Aug. 16 death, thousands of angry California homeowners lined up at card tables in front of supermarkets to sign Jarvis’ and Gann’s petitions.

With just two weeks left before the end of the legislative session, lawmakers began a last frenzied effort to head off the initiative. To appease Senate liberals, the committee beefed up aid to homeowners and renters and crafted a bill that would put tax rebate checks in voters’ mailboxes, while Jarvis and Gann were still collecting their signatures.

The new compromise was brought to the floors of both houses on the last night of the session. With the clock ticking toward adjournment, the tax relief bill once again won approval in the Assembly, but  once again, it went down in the Senate, falling just two votes short. This time, it was the Senate moderates who balked, complaining that the relief plan had become too liberal, and also so complicated that they couldn’t explain it easily to voters. Senate Republicans also withheld their support, smelling a potentially powerful campaign issue for the 1978 election season. Many blamed Gov. Brown for failing to bring the warring factions together.

As the legislative session ended, few may have understood the significance, but when lawmakers went home without a bill, Prop. 13’s passage had been sealed.

Too little, too late

With lawmakers failing to deliver, the Jarvis-Gann juggernaut picked up speed. In December 1977, the campaign turned in 1.2 million signatures, more than double the 500,000 they needed to qualify for the ballot.

When lawmakers returned to Sacramento in January 1978, tax relief was again topic No. 1. After much debate, lawmakers seized onto a bill by moderate Republican Peter Behr of Marin County,  which was shaped into a $1.6 billion, 30 percent cut in homeowner property taxes and a basic tax credit for renters, all paid for by a spending down of the surplus and some limited new taxes on business. The compromise passed both houses on strong bipartisan votes and went on the June 1978 ballot as Proposition 8. Prop. 13 was on the same ballot.

Prop. 13 was opposed by every major Democratic leader in the state.  and also by a long list of prominent Republicans, including two future GOP governors, George Deukmejian and Pete Wilson. Then mayor of San Diego and a candidate for governor, Wilson campaigned against the initiative, calling it “a meat-ax approach.” Prop. 13’s opponents also included the pro-business California Taxpayers Association, along with the Bank of America, Atlantic Richfield, Southern California Edison, Southern Pacific Railroad and Standard Oil of California. The corporations not only not only opposed Prop.  13 but also gave huge cash donations to the campaign to defeat it. The executive vice president of Southern California Edison explained to reporters, “Although business stands to receive at least $4 billion of the anticipated $6 billion in property tax relief, we felt it was time for the private sector to stand up for principle and fight this measure as financially unsound.”

Despite opponents’ warnings that two-thirds of the tax relief would go to business and landlords, that funding for public schools would be slashed, and that the state would take control over local decisions, voters were angry and extremely distrustful of an alternative drawn up by politicians.

On June 6, 1978, Prop. 13 passed by a vote of 2 to 1, carrying nearly every county in the state with wide support across both parties. Prop. 8 lost by a vote of 47 percent to 53 percent.

The aftermath

Overnight, Prop. 13 slashed local property tax revenues by more than half. School districts, counties and cities immediately turned to the state and its then $3.8 billion surplus to fill the gap. Lawmakers approved a $2.7 billion bailout plan to help schools and local governments weather the storm, but the steady trend of cuts in services was set in motion.

In the two decades since [as of 1997 when this article was written], the cuts instigated by Prop.  13 have only grown deeper. California spending for schools went from being near the top in the nation to almost last. Fees at public universities have shot up, public libraries have shut down, and other services from health care to transportation have all suffered from the same steady deterioration.

In the 1990s, when that era’s recession blew a hole in the state budget, Prop. 13 finally came home in full force. In 1992 and 1993, lawmakers reversed the Prop. 13 bailout, like a vacuum cleaner switched from “blow” to “suck”, and grabbed $3.6 billion in local property tax revenue to help balance their own budget.

Twenty years later, it is important to remember how the tax rebellion began. It was about people living in the little houses they bought in the 1950s for $15,000 who suddenly faced property-tax bills based on real estate prices 10 times that. They grabbed onto Prop. 13 for protection, and two decades later they are still holding on.

What we’ve forgotten, or never understood, is the massive corporate giveaway that tagged along for the ride.

Over time, houses get sold, and, under Prop. 13, get reassessed based on what they are actually worth today. Corporate skyscrapers, however, have a loophole. As long as the same corporation holds title, as long as the logo on the door remains the same, the building continues to be taxed based on what it was worth more than two decades ago. The Center on Budget and Policy Priorities, a Washington, D.C., think tank, has estimated that this one loophole in Prop. 13 costs California schools and local governments between $3.5 billion and $5 billion per year.

In 1978, California’s corporate leaders fought the corporate windfall in Prop. 13. Today, they guard their lucrative “skyscraper loophole.”  In 1991, when legislation was introduced to have corporate property (not homes) periodically reassessed to its current value, business leaders descended with all their political muscle and killed it in its nest.

What California really has are two Prop. 13s: the one that protects homeowners and the one that still doles out two-thirds of the relief to the owners of corporate and income property.

In 1978, we failed to make that distinction, and it has cost California bitterly. Maybe, after two decades of crumbling schools, skyrocketing tuition, and painful cuts in public services, it is time to take another look.

[Update: In 2000, Prop. 39 made one change in the processes established by Prop. 13: Local school bond measures now need approval by a 55 percent majority, rather than two-thirds, to pass.]

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