You may have heard City staff and City Council refer to the City of Cathedral City being a post-proposition 13 City. What exactly is Proposition 13 and how does it affect local finances?
In 1978, a simple majority of California voters approved Proposition 13, seeking property-taxpayer relief and uniformity, with far-reaching consequences, some unintended. Proposition 13 reduced property revenues by more than half and effectively abolished any local control with regard to the property tax. Local governments still have wide latitude on the spending of the remaining revenues they receive, but the allocation of the tax is controlled by the State Legislature.
Six Provisions of Proposition 13 Affect Local Finance:
- One percent rate cap. Proposition 13 capped, with limited exceptions, property tax rates at 1 percent of full cash value at the time of acquisition. Prior to Proposition 13, local jurisdictions independently established their tax rates.
- Assessment Rollback. Proposition 13 rolled back property values as determined for tax purposes to their Fiscal Year 1975-1976 level.
- Reassessment upon change of ownership. Proposition 13 replaced the practice of annually reassessing property at full cash value with a system based on cost at acquisition. Under Proposition 13, property is assessed at market value for tax purposes only when it changes ownership. Subsequent annual values are limited to this “base year” amount plus an annual growth factor of 2 percent or CPI, whichever is less.
- Responsibility for allocating property tax transferred to the state. Proposition 13 gave state lawmakers responsibility for allocating property tax revenues among local jurisdictions. Prior to Proposition 13, jurisdictions established their tax rates independently and their property tax revenues depended on the rate levied and the value of the property located within the boundaries of the jurisdiction.
- Voter approval for special taxes. Proposition 13 requires two-thirds voter approval for property taxes raised by local governments for a designated “special” purpose.
- Taxes imposed by the State Legislature require a two-thirds vote of the Legislature. In order the change any provision of Proposition 13, it would have to go back to the voters.
Finally, the amount of property taxes allocated to local governments depends on state property tax allocation laws, principally Assembly Bill 8 (“AB 8”). The AB 8 system was designed, in part, to allocate property tax revenue in proportion to the share of property taxes received by a local government in the mid-1970s (those cities that were incorporated prior to the implementation of Proposition 13 in 1978). Under this system, local governments that received a large share of property taxes in the 1970s typically continue to receive a relatively large share of property taxes today. Although there have been changes to the original property tax allocation system contained in AB 8, the allocation system continues to be substantially based on the variation in property tax receipts in effect in the 1970s. This variation largely reflects service levels provided by local governments in the 1970s. Those Local governments providing many services generally collected more property taxes in the 1970s to pay for those services. As a result, those local governments received a larger share of property taxes under AB 8. For example, cities and counties that provided many government services, including police and fire protection, park and recreation programs, and water services, typically receive more property tax revenue than governments that relied on special districts to provide some or all of these services. Local governments not yet incorporated by 1978, which Cathedral City did not incorporate until 1981, essentially fell victim to Proposition 13 and AB 8 and thus receive on average 60% less in property tax revenue than those cities incorporated prior to 1978.
In practical terms all of this means that neighboring cities of a similar size (like Palm Springs and Cathedral City) may receive significantly different property tax allocations. For example, in Fiscal Year 2016-17, Palm Springs was allocated $20.8 million dollars in property tax revenues while Cathedral City received only $3.8 million. This makes it more difficult for Cathedral City as a post Prop 13 city to provide the same level of services as a similarly sized city that incorporated before Prop 13. Therefore, a city like Cathedral City must diversify its tax receipts by relying less on property tax and more on other forms of taxes, such as sales tax and the emerging cannabis tax, to provide services to its residents.