Prop 13 and Inequality: How the 1978 Tax Reform Law Drives Economic and Racial Disparities

Back in 2003, when movie star Arnold Schwarzenegger was campaigning to become governor of California in a recall election that would ultimately boot out incumbent Gray Davis, the Hollywood action-movie star asked billionaire investor Warren Buffett to serve as his advisor on economic issues. Within a day Buffett, who came in with a reputation for speaking his mind, was already stirring up trouble for the Republican candidate he was supposed to be supporting.

Buffett’s comments, which were really just a recitation of facts, were so problematic that Schwarzenegger immediately scrambled to put some separation between himself and his own advisor’s views.

What did Buffett say that was so alarming, so politically damaging, that it sent the world’s most successful Hollywood icon star of his era running for cover? Not too much. Buffett implicitly criticized a California law passed 25 years earlier known as Proposition 13—a constitutional amendment that placed strict limits on property tax rates.

In an interview with the Wall Street Journal, Buffett enumerated a couple of simple facts. Namely, that he owned a $500,000 home in Omaha, Nebraska, and that he paid an annual $14,401 tax bill on that property. Buffett then added that he also owned a home in Laguna Beach, California—a property valued at $4 million. But instead of a tax bill eight times as high as on his Nebraska house, as logic would dictate, Buffett revealed that he paid more than six times less: $2,264, to be exact.

In addition, Buffet said, the tax bill on his Nebraska house had increased by $1,920 from the year before. His tax increase on the Laguna Beach property? A whopping 23 bucks.

The Problem of Proposition 13

The difference, Buffett told the Journal, was Prop 13. The billionaire did not go so far as to call for changes to the law, or call for it to be repealed. But he did say “you can draw certain conclusions” from the contrasts in tax rates on his own properties. “In effect,” he said, “it makes no sense.”

Proposition 13 continues to do its job of keeping property taxes low. Despite the highest average home value among the 48 contiguous states (only Hawaii and Washington, D.C., have higher prices), California has the 16th-lowest effective property tax rate.

As Buffett’s comments illustrated, California’s tax law leads to economic inequities. Studies have shown that Prop 13 has historically favored white, wealthy homeowners and that the law has been a driver both of economic inequality and the state’s seemingly permanent housing crisis.

The Origins of Proposition 13

In the mid-1970s, California’s economy was bustling. After a recession kicked off the decade, things turned around fast. Job growth spiked in 1974 and 1975, while unemployment declined steadily until about 1980. Gov. Jerry Brown, in the first of what would ultimately be four terms as governor, kept a tight grip on the state budget, resulting in a cash reserve of $4 billion by 1979.

Throughout most of the 1970s (and into the ’80s), California’s economy outpaced the rest of the country “often by considerable margins,” according to the state’s Legislative Analyst’s Office. Both personal income and annual growth in employment did a full percentage point better than the country as a whole.

But the rosy picture painted over some real concerns. As the economy raced along, it pulled real estate prices with it. House prices were headed skyward when Prop 13 hit the ballot in 1978. They doubled on average from 1975 to 1979, and as valuations went up, so did the taxes homeowners and real estate investors of all stripes had to pay. Anecdotes of homeowners seeing their tax bills double (or worse) from one year to the next became commonplace.

The state legislature seemed paralyzed by the property tax crisis. In 1977, no less than 22 plans to reform the tax system came through Sacramento but legislators did not pass any of them. Onto the scene came Howard Jarvis, a businessman and local newspaper owner whose true passion was lowering taxes. He had been a tax reform activist for more than a decade after staging multiple failed runs for Los Angeles mayor, campaigning on an anti-tax platform.

In 1977 Jarvis (who died in 1986) was 74 years old, but he had plenty of energy to campaign relentlessly despite little financial backing. He relied largely on Los Angeles talk radio host Ray Briem, whose all-night show (it aired from midnight to 5 a.m. on KABC) featured Jarvis on what seemed like a near-constant basis. Jarvis’s appearances on Briem’s show played a hugely significant role in building support for the anti-tax initiative. They also had the side effect of setting a template for how conservative talk radio could be used to cause real-world political change. That template is still in use today.

On the air, and in interviews, Jarvis attacked what he called the “moochers and loafers” in state government, and sold the notion that his tax reform plans would bring those alleged miscreants in line. Voters bought it, as Proposition 13 passed in 1978 winning an overwhelming 65 percent.

What Does Proposition 13 Do?

Before Proposition 13 became law, local jurisdictions could change their property tax rates every year, if they so desired. The average total tax rate prior to Prop 13 was 2.67 percent of a property’s assessed value. That figure represented the sum of all property taxes levied by all of the jurisdictions in which a property resided. For example, a property may be part of a local municipality, a separate water district, a fire district and so on. Each of these distinct governments may levy its own property tax to fund its services.

Under Prop 13, that aggregate tax rate is limited to just 1 percent. But the law made another change that was perhaps even more important in limiting property taxes. Previously, properties were taxed based on their market value—that is, the price that they would command on the open market. Prop 13 mandated that the actual purchase price of the property would be its value for tax purposes. 

That taxable value is allowed to rise no more than 2 percent per year, which must have felt like quite a relief for homeowners in the 1970s when residential property prices were rising at an average of 11 percent per year. Under Prop 13, properties are revalued only when their ownership changes. At that time, the new purchase price becomes the taxable value. But that valuation may then rise no more than two percent per year.

Governments may levy additional, “special” taxes in some instances, but such taxes must be okayed by 67 percent of voters in the jurisdiction. Prop 13 didn't specify what would make a tax “special.” But it’s been generally interpreted to mean a tax for a specific, or “special” purpose such as paying a debt, or building a new park.

Low Taxes, But at What Price?

Prop 13 remains a seemingly untouchable law, even though polls have shown growing disillusionment with its rigid methods of limiting property tax. A 2014 poll by sociologists at California State University East Bay found that almost 50 percent of Californians disapproved of Prop 13’s rules for assessing residential property, and of the requirement of a two-thirds voter majority to impose special taxes. Only 42 percent agreed that Prop 13 “should not be changed at all.”

That was a significant shift in public opinion from a similar poll in 2008 which found 57 percent of voters saying that they would vote for Prop 13 all over again, if given the opportunity.

Why has there been movement at least somewhat away from the overwhelming support that the law has enjoyed for most of its existence? Recent research suggests that the answer may be a growing awareness of the law’s unfair if perhaps unintended consequences.

Most obviously, the law immediately put a chokehold on state and local communities’ ability to collect revenue to fund schools and other public programs. But the studies, including a 2022 report by the nonprofit Opportunity Institute, also show that the law has primarily served to benefit older, wealthier, primarily white homeowners at the expense of younger generations, and minorities.

By locking in property tax rates, and penalizing homeowners for buying new homes—which come with higher rates due to Prop 13 rules allowing revaluation when ownership changes—Prop 13 has caused homeowners to hold on to their properties longer, reducing the availability of housing and making it more difficult for renters to graduate to homeownership, according to a 2005 report by the National Bureau of Economic Research.

Another 2022 study, by the San Francisco Bay Area Planning and Urban Research Association (SPUR), found that in Oakland, wealthy, white neighborhoods derived significantly larger tax breaks from Prop 13 than those with predominantly minority populations. The length of time the wealthy, white homeowners remain in their homes plays a part in the disparity—but so does the fact that home values in those neighborhoods rise faster than those in the minority neighborhoods.

That makes the tax savings from Prop 13 much greater for homeowners in the higher-income, whiter neighborhoods, according to the report. Black and Latinx homeowners generally pay a higher percentage of their income in property tax, while benefiting less from Prop 13. In Oakland, the SPUR study found, homeowners in higher-income, whiter areas saved more than $10,000 annually due to Prop 13 provisions—about five times as much as the savings in minority areas.

In 1992, a lawsuit seeking to overturn Proposition 13 reached the U.S. Supreme Court. The suit argued that the law violated the U.S. Constitution’s Equal Protection clause by treating certain groups of taxpayers differently for no valid reason, and that it also breached the Constitutional right to travel by effectively penalizing people for moving to California, hitting them with higher taxes than those who already lived there.

But SCOTUS disagreed—by a decisive 8-1 vote. In the majority opinion, Justice Harry Blackmun—who had been appointed in 1970 by Republican President Richard Nixon—acknowledged that Prop 13 “appears to vest benefits in a broad, powerful and entrenched segment of society.” Nonetheless, he and his fellow justices decided that the law reflected the “will of the people” of California, and despite its unfairness, was not “palpably arbitrary.” As a result, the justices declined to intervene in California politics and throw the law out.

So what can be done about Prop 13? Recent history suggests—not much.

The ‘Third Rail’ of California Politics

Warren Buffett’s statements to the Wall Street Journal were tough to refute. The gross disparity in property tax rates did indeed seem to make no sense. Yet Schwarznegger was forced to disavow his own advisor’s words.

The law was popular then and popular now, so much so that it remains the “third rail” of California politics. Any elected official who proposes changes to the law faces an immediate pushback. In the words of Gov. Jerry Brown, speaking to a Los Angeles Times reporter in 2010, “Messing with 13 is a big fat loser.” His imprecation proved prophetic in 2020 when a coalition of public employees' unions proposed a new constitutional amendment that would have loosened some of Prop 13 restrictions on property taxes. The unions managed to get the measure on the ballot in 2020, as Proposition 15.

The proposition drew a broad range of support, in addition to the public employees’ backing. The state’s Democratic Party signed on, as did California’s U.S. Senator Kamala Harris (now the country’s vice president), and former vice president Joe Biden (now the president). Gov. Gavin Newsom, Vermont Senator Bernie Sanders, Massachusetts Senator Elizabeth Warren, the supervisors in Santa Clara, Los Angeles and San Francisco counties, and many others also endorsed the proposition.

Voters, on the other hand, batted it down—52 percent voting to reject the changes to Prop. 13, which had then been on the books for 42 years.