27 August 2021 — 0954 mdt

California’s Proposition 13, Big Sky Style

A property tax limiting constitutional initiative
probably will be on Montana's 2022 general election ballot

CONTENTS
Overview
Making the ballot
CA Prop 13
Effect of Prop 13
Heavy Prop 13 reading
Minority veto of taxes

Update, 29 August 2021. Ballot Issue 8 is in its third iteration, which may differ significantly from the second iteration described below.

When middle and low income homeowners fear they will lose their homes because rapidly rising property values will raise their taxes to unaffordable levels, they may vote for almost any kind of tax relief — including tax relief that significantly damages a society’s ability to provide needed, and demanded, governmental services.

Property values in western Montana, especially in Flathead and Gallatin Counties, are skyrocketing. The last legislature failed to pass mitigation measures, especially for low income elderly homeowners. And now, predictably, a Brobdingnagian chicken — Ballot Issue 8 — probably will roost as a constitutional initiative on Montana’s 2020 general election ballot.

Similar to California’s Proposition 13, which passed handily in 1978, the second iteration of Ballot Issue 8, according to Montana’s secretary of state:

Limits taxes on real property to 1% of property value.
Establishes 2019 valuations as the basis for calculating property taxes.
Provides for reassessment after transfer, construction, or significant improvement.
Requires other tax increases on real property to be approved by 2/3 of voters.

Presumably, Ballot Issue 8 covers all property, commercial as well as residential.

Former HD-69 Rep. Matt Montforton, a Republican until 6 January 2021, and Montana’s state auditor, Republican Troy Downing, are sponsoring Ballot Issue 8. Others may be involved.

Ballot Issue 8 is under review by state agencies. After securing the necessary approvals, the sponsors must collect at least 60,359 signatures statewide (10 percent of the votes cast in the last election for governor), as well as 10 percent of the last gubernatorial vote in at least 40 legislative districts.

Data for you. House district signature requirements: PDF by SecST, spreadsheet with census data and district to county matches by Flathead Memo.

Will Ballot Issue 8 make the ballot? Bet on it.

Signature gathering for Ballot Issue 8 probably will be bankrolled by wealthy property owners. A $500,000 gathering effort would not surprise me. That would virtually guarantee getting the initiative on the ballot.

And if it makes the ballot, the probability that voters will approve it is high — even if every major newspaper in Montana opposes it. Low and middle-income homeowners in the state’s fastest growing counties are both frightened by sharply rising property valuations and angered that the legislature is not coming to their rescue fast enough.

One can, however, argue that the 2021 legislature did take a step toward a rescue by passing Rep. Dave Fern’s (D, HD-5, Whitefish) HJ-36, which established an interim committee to:

… pursuant to section 5-5-217, MCA … study residential property taxes.

[The study must include:]

an overview of how residential property is valued and how this compares with other classes of property;
analysis of property taxes paid on residential property and on other classes of property;
consideration of how state, local government, and school funding policies impact residential property taxes;
a review of property tax assistance programs and tax credits available for residential property and exemptions and abatements available to nonresidential property; and
options for mitigating residential property taxes, including a review of legislation considered in the 2021 legislative session.

The interim committee will report back to the 2023 legislature.

Ballot Issue 8 probably cannot alone sufficiently reduce taxes on those, such as low income, elderly homeowners, who most need relief. The legislature does have tools to address their need, but those tools do no good if they stay in the toolbox.

What was California’s Proposition 13?

It was the 1978 solution of a lobbyist for owners of rental property, 75-year-old, Utah born, Howard Jarvis, to rising property valuations resulting in taxes low and middle-income homeowners were having increasing difficulty paying.

Every major newspaper in California opposed Proposition 13, but the voters, who outnumbered editorial writers, approved Jarvis’ initiative by a no doubt margin.

What did Proposition do? What was its effect decades later?

The Public Policy Institute of California’s Proposition 13: Some Unintended Consequences, by Jeffrey I. Chapman, summarized Proposition 13:

Although poorly written, the basic rules of Proposition 13 were relatively straightforward:

The maximum property tax rate was set at 1 percent of the value of the property.
The value of the property was set at its 1975-76 level but was allowed to increase by the rate of inflation, up to 2 percent each year.
Property could be revalued only upon a change of ownership.
No new ad valorem property taxes could be imposed.
Any special taxes (which were not defined) needed to be approved by two-thirds of the voters.
Finally, the distribution of the property taxes that were collected was to be done "according to law," and since no such law existed, one had to be created.

Prior to the adoption of Proposition 13, local agencies established their own separate property tax rates and received the proceeds of the tax. For the first time in the states history, the state was put in charge of allocating the proceeds of the locally levied property tax, with the rate and base defined by the statewide initiative.

In June, 2018, PPIC released a two-page summary of Proposition 13’s effect 40 years after it’s adoption.

Hiltzik and the legislative analyst's report

In his 30 September 2016 column for the Los Angeles Times (cached version), Pulitzer Prize winning Michael Hiltzik reported:

Last week, the state’s respected Legislative Analyst’s Office weighed in with a worthy new look at the most common claims about Proposition 13 and how well they hold water.

The study by Carolyn Chu and Brian Uhler of the Legislative Analyst’s Office clarifies much about the law and strips away plenty of underbrush accrued in the debate since 1978. Perhaps most important, the authors underscore how much we still don’t know about the measure’s impact, largely because the state hasn’t compiled statistics needed for the discussion.

That’s a reminder of the most enduring fact about Proposition 13, which is that California was not prepared to deal with the consequences of its enactment — and still isn’t.

Proposition 13 blindsided policymakers, who had to scurry to bring existing laws and assessment practices into compliance. They had to funnel revenues back to cities and counties that stood to lose billions in property taxes. Municipal losses were backfilled from the state’s multibillion-dollar surplus, which itself had fueled much of the discontent with property tax rates. Since then, legislative and ballot-box tweaks to the law have become a recurrent feature of California politics, because its inadequacies keep surfacing.

Chu and Uhler validate some common notions about Proposition 13. One is that it’s been a particular boon to wealthier Californians. “Because higher-income households own more, higher-value homes and Proposition 13 tax relief is proportionate to home wealth,” they observe. “The majority of Proposition 13 tax relief (in dollar terms) goes to higher-income households.”

They calculate that two-thirds of its tax benefits go to those with incomes above $80,000, and most of that to homeowners earning more than $120,000. The benefits to renters, by comparison, are speculative. While landlords may pass some of their tax savings on to tenants, the extent to which that happens is unclear, they say.

Although the dollar value of P-13’s tax benefits mostly go to the wealthy, who for the most part did not need a tax break, low income homeowners may have realized significant tax relief — relief that in some cases may have outweighed reductions in government services and increases in fees. Montanans who oppose Ballot Issue 8 should keep stay mindful of that, as there are far more hurting low and middle-income homeowners under the big sky than there are wealthy property owners.

Below, a few graphs from the Chu-Ohler report.

Heavy reading on Proposition 13

Proposition 13 and the California Fiscal Shell Game. McCubbins and McCubbins. The California Journal of Politics and policy, 2010.

Property Tax Limitations and Mobility: The Lock-In Effect of California’s Proposition 13. Wasi and White. Working paper 11108, National Bureau of Economic Research, 2005. Proposition 13, Revisited. Danforth. Stanford Law Review, 2013.

A minority veto on tax increases is bad public policy

Ballot Issue 8 requires that tax increases be put to the voters, who must approve the increase by a two-thirds majority.
A two-thirds majority requirement gives a one-third plus one minority the power to veto a tax increase. That’s the inverse of majority rule, and it’s intended to make raising taxes almost impossible. That’s not wise, as there may be emergencies that require a prompt tax increase that a majority, but not a supermajority, would approve..
It’s also not wise to deprive the legislature of the power to levy and raise and reduce taxes. If the legislature fails to act, or acts wrongly, legislators can be replaced, and a citizens initiative to reverse the legislature’s decisions is available.

Note. On 23 August, The Center Square reported on Ballot Issue 8 in a story titled Frontier Institute: ‘Something needs to be done’ about Montana property taxes.