Transcription
[Music]
Our second panel has been um asked to speak to the way the private actors um both business and individuals supported and then reacted to um changes in the wake of Passage to Prop 13. We are fortunate to have four distinguished panelists um who over the years have um devoted their expertise and their insights into studying these impacts. Uh, we're going to follow the same format that Jack used in his first panel. Uh, give frankly too little time for our four panelists to U cover all that they have uh come to to know about 13, but then leave about a third of the panel time to take questions and expand on their insights. Let me um briefly introduce the four of them and turn the mic over to uh Dave door.
First, our first panelist is uh Dave door, who um before 13 was the chief consultant of the assembly ran tax committee and so saw the coming storm and then was there uh to help the legislature um imp uh deal with with the impacts of 13. After leaving the legislature, he went to work for Cal tax, so he's been thinking and studying and writing about the impact of 13 uh for its entire um history. It is safe to say that he has trained um generations of legislators and staff, and all of us are really indebted to him in Sacramento for helping shape our thinking about the tax structure.
Our second panel uh will be Professor Terry Sa Sexton, who uh is a professor of Economics at CSU Sacramento, who's been long involved in considering uh the uh interaction between Public Finance and the effects of tax limitations. Together with Prof with Dean Sheffron, she's published a couple of really uh seminal pieces, one published by the University U Cambridge University Press and the other by PPIC on uh the impacts of 13 um, and she'll talk to us about the propensity for people to move in light of the uh assessment practices of of 13.
And um our third panelist is Dean Sheffron, who is a professor of economics and Dean of the um School of Social Sciences at UC Davis, where he also directs the um Center for State and Local Taxation. He's also been a board uh member of the National Tax Association and taught at Oxford, LSE, and Princeton, as well as uh Davis. He is going to talk to us about an issue that's already come up, and that is the questions of equity uh with respect to Prop 13.
And our last panelist is uh uh Professor Bill Fishel, professor of Economics at Dartmouth, but he's also had um visiting professor appointments at Davis and Santa Barbara. His his research has been to try to um look at um voting behavior and their impact on uh tax initiatives, and uh he's going to revisit one of the um his famous hypotheses about whether um school equalization funding formulas uh had a hand in affecting whether 13 passed and its continuing support. With that, uh let me turn the mic over to [Applause].
Dave. Thank you, John. Some of you may not know this, but John Decker is a property tax reformer in his own right. Uh, he was a member of the team in 1995 that put through the most significant property tax assessment reforms since passage of Prop 13. So make that note for the the group in case you may not know that. Diverting from what I was going to talk about for just a sec, based on some of the the basically the questions this morning and about equality and inequality, I think we've most of you probably aren't familiar with or forgotten about what it was like prior to Prop 13. What the assessment system was like? As mentioned, I worked 14 years prior to the passage of Prop 13 for the Assembly Revenue and Taxation Committee, and we did many, many studies, and I got confidential data on assessments from the Board of Equalization. You think disparities are bad now? You ought to have seen what the disparities were prior to the passage of Prop 13. You had properties assessed at a fraction of 1% to property assessed at 300% or more when they're supposed to be equalized. The other thing that that's not realized is that under an ad valorem assessment system, you do not assess it 100%. No county ever assessed it 100%. If you were doing a really good job, you got it maybe to 90%. Many counties fell below 80%. So that the assessment levels under an ad valorem system do not equate to a market system, even if it is an ad valorem system. So with that, uh, background, I'll go on to to Prop 13.
Some people think that Prop 13 was written in stone. It came down from the mountain and hasn't changed. But just like all of us, we've all changed in 30 years, so has Prop 13. It's uh, it's changed in a variety of ways. It's changed through legislation, through regulations, primarily by the State Board of Equalization, through interpretation by assessors, through court decisions. And we've had many, many court decisions because many of the terms in Prop 13 were not defined, led to a lot of disagreements over exactly what they meant. So we have a large body of law interpreting uh some of the most fundamental parts of Prop 13: what is a change of ownership, what is new construction. And uh, the other aspect is the voters have also changed Prop 13 in a number of subsequent elections.
So I don't know how many of you picked up this this pamphlet that I put out today. Uh, this is a sum, it's more than a summary, this is a a chapter of a a book. It's the second edition of a book I put out eight years ago. Now it's being updated to 2008, and this chapter is complete. So I had it back there. I don't know how many have. I go through Prop 13 and take each one of the sections. I I do it by section. Taking Prop 13, section one is the property tax rate limit. So I explain how that's been interpreted and what all the issues were, how on what issues could the state and local government override Prop 13. And we've had a number of decisions on on that issue. Then we go into the allocation, which somebody mentioned, uh, the legislature said as allocated by law to mean we will allocate the property tax. And this explains that's that's probably produced more bills in the legislature than almost any of the other parts of Prop 13 because everybody seeking to get a larger share of a fixed pot. It's a zero-sum game. So the no property tax cities, for example, initially they didn't get any property tax out of Prop 13. They didn't have any to start with. It was it was distributed in the same percentage of the total that you had before 13. You had 5% of the pre-13 property tax, you got 5% of the post-13. So no property tax cities wanted in. So legislation was passed to give them a share at the expense of everybody else. And this battle over allocation has gone on. We've had the shifts of property tax to originally to local government, back to the schools, back to local government, back to the schools. But the allocation as it stands now is roughly in the same proportion that it was prior to Prop 13, with the schools getting about 53 to 55% of the total. And of course, that benefits the state under the school finance formulas. The uh, the problem is now that voters decided to lock our formula. When we kind of chuckle about because we know how it was put together, they locked it in the Constitution with Prop 1A, oh, two or three years ago, when that was on the ballot, saying the formula allocation is is this is this proportional system. So anyway, we deal with all the issues uh relating to how the property tax is is uh allocated. That was one of the issues that that we had to decide.
Then we come to section two of Prop 13. Section two deals with the acquisition, what we call the acquisition value assessment system, which was upheld in in uh Amador Valley initially, and then Norling or Han at the US Supreme Court. Then I go into the various aspects of that. Declines in value. Initially, there was no decline in value. We've seen several changes relating to how we treat declines in value. There was the issue of of what property is covered by acquisition value. Now we we know from The Prop 13 that it didn't include state-assessed property and didn't include uh local personal property. But did it include special provisions in the Constitution for golf courses, for governments, or assessed property taxes for property they own outside their jurisdictions? Initially, the legislature said that's not covered because there was a separate constitutional provision. Well, we have a court case that says it is. So that changed Prop 13. We go into many of these these uh changes that came about. New construction, for example. There was no definition of new construction. The Board of Equalization uh initially said there was any improvement that extended the economic life of a property. Well, that we thought was much too broad and would have created many reassessments. So we legislature changed that to it had to make the the new construction made a property equivalent of new before you could reassess. So the average home improvements are reassessed. So we're going into what is new construction. One of the most difficult, controversial, and an area where you have many court decisions is what is a change of ownership. And I'm running through this fast because I don't have enough time to talk about all this. As many, many pages, but I'm just giving you the flavor, and you can pick up a copy if you there aren't any left, I'll be glad to to provide you. On this goes through all the the legislative regulations, court decisions, and changes the Constitution. For example, somebody did mention the uh parent-child exemption adopted by the voters. Then the voters adopted the parent or the child, grandparent, grandchild exemption. So that was put into the con the Constitution. We also had the exemption for seniors to acquire a comparable dwelling in the same county and be able to move their base year. That was added to the Constitution. So you've seen this proposition grow and change over the over the 30 years that that we've uh we've uh had it. We had the definition of value. What is definition of value? The 2% limit and how that's to be applied. So we have had many changes.
Now I want to move on to how it evolved in terms of uh what has happened in terms of burden. And this has been this focus of a lot of questions today, and you should have this. Initially, there was a myth that Prop 13 shifted property taxes to business. But if you analyze the data correctly, and this is all from State Board of Equalization data, there are two types of properties not subject to Prop 13: state-assessed property and personal property. If you look at homeowner property, that's grown at 8.3% a year on the average. Business property property has grown at 8.5% a year, and that's contrary to the conventional wisdom that somehow this burden was shifted to homeowners. Another table in this shows home home values and business values as a percent of market value. Home values are about 66% over the period that we're measuring, and business values were about 75% of market value. These also based on State Board of Equalization figures.
I also want to comment, as Joel talked about this, the acquisition value system has put in this kind of uh counter-cyclical effect. As as property values raised quickly, it dampened assessments. As proper property values plunge, it fills in the trough because properties that are well below market continue to go up, and those changes of ownership that produce a 300% increase offset maybe the 10 to 20% increase of the properties that are going down in value. And if property 1 wasn't there, the state budget and local budget would have a major crisis this year because of the way property tax values are dropping. But because it's kind of it's kind of a rainy day fund in a sense, it smoothed out the hill peaks and valleys. That's another chart in this handout. It's a final chart, so you can and pick that up and look at that. And I'm think I'm been noticed that I'm running out of time, and uh, happy to answer questions. And if you don't have these, I'll be happy to provide them. [Applause]
Hi. Um, I'd like to start out by thanking Isaac Martin for inviting me and uh, also to thank IGS for hosting this wonderful birthday party. Um, when I'm going to talk a little bit about today, and I'm going to try and go through these slides relatively quickly, so feel free to ask questions afterwards, is uh, one of the impacts that Prop 13 has had on individual homeowners and how it's affected their behavior with respect to their decision when to move, and when not to. Um, interestingly enough, 30 years ago, we were all concerned because we were taxing people out of their homes. We were they were being forced to move. And now today, um, they can't afford to move because of Proposition 13. Is what we call the lock-in effect. Um, and I'm trying to find my arrow keys. So, just to demonstrate this lock-in effect, suppose that you purchased your home in 1980 for $200,000 and um, it was then assessed at the purchase price and you paid 1% tax, so your tax was $2,000. 25 years later, in 2005, given the 433% increase in housing prices in California over that 25-year period, your home was now worth over a million dollars. Um, fortunately though, due to Prop 13, your assessment only went up 2% per year. So in 2005, this same house would be assessed at just over $328,000, giving you a tax bill of $3,281. Of course, if you sold that home home in 2005 and went and bought a comparable home, you sold it, took all of the money you had invested in that home and so forth, and put it into another home of equal value, your taxes would have been 1% of that over $1 million price tag, or a tax bill of $10,657. So that's a difference of over $7,300 a year, over $600 a month. And I would say back in 2005, that would have bought a lot of gas. I'm not so sure today, but um, and I'm going to come back to that gas issue um at the end of my talk because that is relevant.
So another thing is that if you, in 2005, if you sold that house and decided to go to something smaller, a smaller valued house, say a $500,000 house instead of a million dollar house, your taxes still would have been $5,000, still more than what you would have paid on that original house that you bought in 1980. So the point here is that there is a moving penalty. There's a disincentive to sell that house and move, and there are all sorts of consequences um that are um that we'll talk about. Um, let me first of all address both uh this lock-in effect at a theoretical and an empirical level. Um, from a theoretical standpoint, there's no denying it. There's there's all sorts of simple models out there. Steven Art and I um in our some of our research back in uh the early 90s developed a simple model where we showed that in fact, this lock-in effect um can produce some uh relatively um significant mobility distortions, as much as 19%. And of course, that could vary anywhere from keeping a household in their home for an additional 12 years compared to a conventional property tax to maybe as little as four months. Um, we can show um also that this impact that it has on the household will vary with the tax rate. The higher the tax rate, the more inclined you are to stay put. The higher your house value, the more inclined or the longer you'll stay put, and the higher the appreciation of property, the longer you'll stay put. So that's from a theoretical standpoint. What do the what does reality tell us? Well, there are several empirical studies that have looked at this um lock-in or mobility effect. U one of the earliest was Nii, who um compared some metropolitan areas in California, three in California, seven from outside California. He was looking at short-run impacts. So he looked at um 1975, 1978, 1982 um data that was provided by the Census Bureau and their American Housing Survey and found that there was a significant increase in housing tenure, how long people stayed in their houses after 1978. And of course, it would be quick to U attribute that to Proposition 13, but in fact, that that was a uniform effect. It was not only in the California metropolitan areas but also the non-California areas. So in in terms of short run, it didn't really California really wasn't standing out, probably due to in part to the um high mortgage interest rates that we saw um in the late 70s and early 80s that was discouraging mobility.
Sto, Charles, and Stevenson looked at um data from between 1995 and 2000, sort of examining the longer-term effects. And um, they found of course some statistically significant differences in the proportion of houses in census tracts um in Cal two California counties, Orange County and Sacramento County, um, and also counties in Illinois and Massachusetts. So a lower proportion of houses had sold in the California areas, meaning that uh people were in general, this would be interpreted that people in general were staying longer. So a little bit longer-term effect.
Ferrari um did an interesting study comparing the impacts of passage of Proposition 60 and 90. 60 and 90 were the propositions that gave um, I will call them pre-seniors now that I am one of them, and seniors um, the ability to transfer their Proposition 13 assessments to an equal or lower valued property, first of all within the same county under Prop 60, and then 90 extended that to reciprocal counties so that they they could keep that assessment um and take it with them more or less. And interestingly, he found that after um looking at 1990 data, that uh 55-year-olds had a 25% uh higher likelihood of moving than 54-year-olds. So people waited till they were 55 and they could take it with them and then moved. And um, he didn't find that sort of discontinuity in any of his control groups, which included California households in 1980, but he also looked at Texas households in 1990, he looked at California renters in 1990, and didn't see that increased likelihood of moving among 55-year-olds in any of those control groups.
Another study was I and White um compared California homeowners to Texas and Florida homeowners and and um used Census data going back to 1970 um and found that there was an increase in the response um, in other words, increased tenure among California households. And interestingly, found that that varied geographically across the state, where in inland parts of California, there wasn't much difference, maybe a difference of only about four months. But as you moved to the coastal areas where property values were rising faster and generally higher valued, that there was a much larger impact, as high as um three years in the San Jose area.
Evidence from other states. Other states have assessment limits like California, with acquisition value. And this was a study Siss and Pandy looked at the effects of an assessment freeze in one of Georgia's counties, where the assessment level was frozen until it's resold. And they found that that there was no impact of the benefits of that on the probability of households moving. So they found no lock-in effect. And interestingly, a very recent study done in Florida um suggests that there's no impact there. But Florida just passed Amendment 1 and gave portability to all homeowners. So they can now all take their assessed value with them, at least up to um a benefit as high as $500,000. But here, the empirical study in Florida showed no impact between 2000 and 2006. They studied 20 counties and looked at the average length of um tenure for homeowners in those counties, and in fact found that the average tenure declined between this two these two years, rather than increased as theory would suggest.
So what are some of the consequences of this lock-in effect? There's an excess burden. This type of uh behavioral distortion will cause an efficiency cost. And I'll give you some estimates of that in a second. Also, there's this notion that if people are not moving because of the moving penalty, then maybe it's um leading to increased commutes. So maybe if your job changes, rather than moving with your job, you stay put and end up commuting longer. And I'll show you a little evidence on that. Um, there are more modified properties. People, instead of moving from a 3-bedroom to a 4-bedroom house, are adding that 4-bedroom on. And so our stock of housing is changing, including a smaller stock of entry-level housing. So these are some some of the negative impacts. On the positive side, of course, we hear the argument about neighborhood stability. We've heard that before, and that, you know, clearly um perhaps it's having that effect. Effect, people are staying longer, neighborhoods are more stable. I've also seen some arguments on a higher quality of housing stock, although um my empirical observation doesn't necessarily um support that. But um, I have seen this argument that people are um doing more repair and maintenance. Not sure about that. In terms of the excess burden, when we did our simulation model on the um mobility of effect, we also estimated the loss um, the welfare loss associated with that lock-in effect or distortion, that moving penalty. And we found that it can be as high as uh 4 and a half% of the tax revenue collected. And also importantly, that that excess burden or welfare loss will increase with the tax rate and the rate of inflation in housing prices. And how am I doing? Okay. All right, I'll quit rushing. This is my last slide.
The last thing I'd like to point out is um, in in in terms of the potential effect on commuting. I looked at here the uh number of people from within metropolitan areas that are commuting to outside those metropolitan areas. And here the argument is that, for example, if your job, if you work outside the area, why wouldn't you move there? Because probably housing is going to be cheaper, as opposed to we see a lot of people commuting from outside the area into the area to work because they can buy cheaper housing outside the area. So this these are commuters that are living in the metropolitan area and commuting outside the metropolitan area to work. The white bars or the lighter colored bars are the percentage change in the number of commuters to outside the metropolitan area between 1980 and 1990. So after propos for that first 10-year period, basically after Proposition 13 passed, and you can see in the um San Diego, San Francisco, Los Angeles, these three metropolitan areas in California, that percentage is considerably higher than some of the other metropolitan areas across the country. Perhaps a better comparison is to look at the proportion of the workforce in these metropolitan areas that is commuting outside the metropolitan areas, and the change in that proportion um over the same 10-year period. Again, is considerably higher, average in close to 50% in the California um metropolitan areas compared to much lower percentages um outside of California and the other um metropolitan areas included in the chart here. So that this is sort of um initial evidence on maybe this commuting effect, although we might argue that this could get reversed now with uh the rapidly approaching $5 a gallon for gasoline, that maybe these people will uh find that this moving penalty will be overtaken by the price of gas, and they will move closer to their jobs, which should bring a windfall of property tax revenue right as these homes sell and they buy new homes in the outlying areas. So um, that's the end of my comments. Thank you. [Applause]
One. Okay. Well, thank you for this opportunity to uh speak with you today. I'm going to circle back to the question of fairness that we've touched on earlier. And my my my my as my remarks go, you'll find them going from the liberal side to the more conservative side. Now, perhaps that mirrored my own evolution and thinking on this, or um, or perhaps it's where I was sitting on the podium. So the first thing I'm going to do is I'm going to show uh some data uh from our previous work about some of the disparities uh that were created. And I'll I'll give you an update of what those probably are likely to be today. I'll give you an argument, I call it a tortured argument, but it's actually an argument that's been given today that's not terribly tortured about why Proposition 13 might be fair. But then I I'll step back and say, well, look, what are we comparing Prop 13 to? What about the other states? What about other normal property tax systems? And I'll talk about in fact how they're not very beloved at all, and they have their own difficulties. And I I'll argue that we have to put Prop 13 in comparison. And I'll come back to this certainty point that Joel and other people have talked about today.
So what did Prop 13 do? It rolled back assessments to 1975 values when it was passed in 1978, and then it was a maximum 2% increase until sold. The terminology you'll be using, the base years, the last year since you sold the property. The disparity ratio is a ratio of the market value to the assessed value. And as Terry mentioned and other people have mentioned, you can either modify a property or you can uh uh as opposed to moving. And that that turns out to affect your understanding of what the disparities are. Now, if uh, here's some data from Los Angeles County. And the way to read this is, if you take the first row where it says SF HO, that's single-family homeowner property. Let's look at the property that wasn't modified. And in the next column for 1991, we estimated using very elaborate methods and lots of data, the average ratio of market to assessed value for those properties that had were basically were in existence since 1975 and hadn't been sold. And by 1991, 16 years later, they were selling for five times what they were assessed for. They constituted, in the next row going over, the next uh column, 43% of all the properties in that category. Now, if you move ahead to 1996, which is the next two columns in that in that game, in the first row there, uh, there was a recession, and so property values came down. And the market value, the ratio of market value to assessed value for those old properties, the ones with the biggest inequalities, was only 3.84. And notice the percentage that had declined because of some of those properties turned over eventually. Those 70 7 those properties in 1975 get sold, and there's fewer of those in existence now. You might say, well, what is it today? Well, I don't have exact same data today. But what I did is I took the Case-Shiller housing price index, which said from 1996 to 2008 in Los Angeles, housing prices went up by a factor of 2.8, including the current recession. And the assessments would have gone up by 28%. And if you do the math and apply it to the 1996 number, this number, this disparity ratio for 2008 would be um about eight, roughly around eight, 8 and a half or so. But this percentage would have gone down quite a bit from 33. My guess would be about in the low 20s. So what you're going to see over time as housing prices continue to rise, typically more than 2% a year, there'll be a very small number of properties with very large disparity ratios, and so they'll make great newspaper stories, but that really won't be the whole story because the number of properties is very small that are being affected.
Now, if you go to the bottom row, which says CI, as commercial industrial, and the Y means that these are very large properties that were modified. You maybe have a piece of land, you put new buildings on it, and so forth. If you go over to the last column, you can see there's still 43% in 1996, 43% of those properties from 1995, 1996 um still had the 75 base year. Meaning these very, very large commercial industrial properties don't get sold. And so that's what some people were alluding to today, that the turnover of housing, of of homeowner property, is a lot faster than very, very large commercial industrial properties. The column, the row right above it is your your mom and pops, and they turn over a lot faster. So your barber shop in the mall turns over faster, and they don't get a special deal. But your Transamerica Building and your other very large buildings do get a a special deal. When a recession comes, it promotes equality. The bottom line shows what happened in Santa Monica from 1991 to 96. What happened was the the market to assessed value fell from seven down to 4.3. In West Covina, which is not as rich as Santa Monica, uh, there was um a lower initial market value to assessed value, but it fell less. So recessions are good for equality.
The other thing we did in in 1991, in the early 90s, we matched up data. We got from the Franchise Tax Board with the property tax data, and we did the experiment that someone talked about today. Suppose you had a revenue-neutral change in the property tax among all homeowners. You cut the rate but raised everyone the market value. Who would win? Who would lose? Well, it turned out the elderly would lose. 82% of the elderly in Los Angeles would have been hurt by that reform. And the reason is because they were concentrated in these 1975 oil properties. And second, rich homeowners would have um benefited, again, would have been benefited against poor homeowners because rich homeowners actually changed homes more often. So a revenue-neutral Prop 13 reform, at least back in 1991 or so, would have hurt the elderly and hurt the poor. And that's another reason why it wouldn't have passed back back then.
Now, what'll happen over time? Well, we did some projections a few years ago and estimated that by, not by about eight years from now, in 2016, only about 15% or so of the properties would have that 75 base year. So the the most extreme examples of inequality will disappear. Now, they won't disappear entirely because of this this uh father-to-son, grandchild-to-grand from grandfather-to-grandchild provision. But but but eventually they they will shrink. They'll still make great newspaper articles, but they'll shrink in numbers. And it's also true that these large commercial properties, these modified ones, will turn over very slowly. So the Transamerica Building will still have a pretty big advantage.
Now, here's the tortured argument that I wanted that I I I mentioned, and it's an argument that was mentioned today. Suppose these initial disparities disappear, and that everyone who owns a property holds on to it for roughly the same period of time. Let's say seven years. After seven years, you sell the property. And moreover, housing appreciation is smooth, let's say 5 or 6% per year. Well, then over time, what'll happen? If you take a snapshot, it'll look terribly unequal. But over your lifetime, everyone will in fact have the same lower effective tax rate. And so it'll just be the case that uh, in your seventh year, before you uh move into a new property, you'll have a lower tax rate, and then it'll jump up. But everyone will be in the same boat. And so Prop 13 would be uh would be equal, would have equal effects. Now, this is not a realistic assumption because property tax, property prices go up and down, and these initial disparities don't don't dis uh don't um disappear. But on the other hand, this is the logic of why people feel comfortable with Prop 13 because they know it's their turn, right? They know they're going to get their turn. And that's what Joel mentioned uh earlier today. And so although this argument is not fully realistic, it does explain the intuitive appeal of Prop 13.
Now, stepping back, what's the alternatives out there? Well, the fact is is the property tax universally is regarded as a worst tax. Um, it's only the gasoline tax in recent years has has creeped up in unpopularity. Of all the state and local taxes, is clearly the worst tax. And virtually all the states have some form of property tax limitation. There are no pure systems out there. And some states like California and Florida and a few others explicitly reject market value taxation altogether. Now, why? Well, under the traditional tax criteria, there's two ways of thinking about taxes. They could be a pure benefit system, that is, you you a tax provides direct benefit, just like you purchase a good and service, or it could be based on ability to pay. And on both criteria, the property tax has some difficulties. Education in most states is socialized, but the tax is local. So the benefits aren't really tied directly to your tax. And as a wealth tax, it's not an ideal wealth tax because if you hold your money in stocks and bonds, you're not taxed, but if you hold it in property, you are. But I want to emphasize the last point here, the taxpayer exposure to risk, which has come up a little bit. Suppose you have a community with a fixed amount of revenue they have to raise, and they can adjust the rate based on the assessed values in the property. Then what'll happen is that your property tax bill will be based on the ratio of your assessment to total assessments in in that jurisdiction. And so what happens if other assessments in your jurisdiction change, even if yours doesn't? So, for example, a new mall opens outside the community and reduces the market value of the mall all within your community. Total assessed value in the community will go down. If your assessed value stays the same, your property tax bill will go up, even even though nothing has happened to your property. If foreclosures hit part of the community, again, your property tax bill will go up. All this creates taxpayer uncertainty, and and taxpayers don't like this uncertainty. The second line here, the second bullet from Adam Smith, I don't think Joel, Joel and I were drinking the same water today. I actually, there's there's an article by a fellow named Anderson where I actually um, he's written a lot about uncertainty, where I actually pulled this from. But all but the uncertainty is perceived as unfair. And these examples about the mall coming and and raising your bill even though your property hasn't gone up seems patently unfair. And so people do strive for this certainty.
So so let's circle back a little bit to Prop 13. And there's really two types of property tax systems that we can talk about. There are what I'll call budget-based systems and rate-based systems. A budget-based system is like the one I just talked about before, where you have a fixed amount of revenue you want to raise, and then what you do is you adjust the property tax rates to do that. So if all property doubled in value and you wanted to raise the same amount of revenue, you just have to cut the rate in half, and that would raise the same amount of revenue, and all the property bills would stay the same. A rate-based system, though, is the opposite. The rate-based system is when the tax rate is fixed in place, and then any change in assessment would lead to directly to changes in your property tax bill. So if you have a 1% tax rate and your property doubles in assessed value, then your rate would go up, your property tax bill would go up. Now, the problem before Prop 13 is we were a messy mixture of both worlds. And Isaac's book um, he talks a bit, he talks about a lot about this in the first few chapters, describes the world in any county. We had fragmented jurisdictional authority. A lot of different units could impose sales taxes, the school, the county, the city, the mosquito district, and so forth. There was very loose coordination among these jurisdictions, so that meant there really wasn't an overall revenue target that was operating. Moreover, the assessments were done on a different basis. Some were done on a more frequent basis, some were done less frequently. And so the result of this is when your house was gone up in value, it wasn't this situation where all the houses and all the property was reassessed at the same time and the rates were lowered. It was very likely that if your assessment went up, you would get stuck by a higher bill. And that meant higher property tax bills for certain time periods. Eventually, that might readjust, but not in a time of rapid inflation as we saw in the 1970s. And also, I think at a very important point, it'd be very likely in that circumstance to see a major shift in um, in valuation or in bills between different types of property. So if commercial property wasn't being assessed as frequently as residential property in a time of inflation, you'd have a shift toward commercial property. And Frank Levy, many years ago, in The Public Interest, provided some evidence that that occurred just before Prop 13. So naturally, in that case, homeowners were were were upset.
What do we have now? Well, now we have, in my terminology, a pure rate-based system with assessment caps, at least until you sell. And we have Adam Smith certainty for property owners. But we also have, of course, a complete loss of local discretion for property tax revenue. And we have, I I think, you know, some adverse fiscal consequences. The main one not being the level of revenue, but but both the centralization at the state level and also the uh uh lack of transparency that Peter and other people have talked about. Now, of course, California voters have adjusted. This is a different survey. All the surveys for the last 25 years have shown the same thing: that people think Prop 13's basically a good thing. This is from a PPIC survey. Likely voters said Prop 13 is a good thing, 6% to 33%. I'm not sure what the others were were were thinking about. And moreover, half were comfortable with the fact that rising prices with rising prices, recent buyers will pay more for similar properties. So people understand that feature of Prop 13. They're generally fairly comfortable with it, and it's because they think eventually they'll get their turn.
So two last thoughts here, and this is what I would like to leave you with. When you when you think about Prop 13, you shouldn't think of some idealized other system. There are no other other idealized systems out there. What is the property tax alternative you comparing it to? And if you're comparing it to another alternative, what restrictions will they have? As we just heard from Terry, you know, Florida has a system now where it's not just the elderly that can keep that move the recess value. Any homeowner can move the recess value within the state, and there's still turmoil within Florida. There's turmoil because the people who aren't voting from out of state are complaining. And as other property values are going up. And the other question you have to address is how does the resulting fiscal system work on an overall basis? So it's not just simply what the property tax system does, but how it fits into the broader scheme of things. And we'll hear a little bit more about this uh this afternoon from some of the later papers.
Now, what I call simple changes, I think would help. These some of these would be clear, might be rejected by the voters. I'm a great believer, as an economist, in compound interest. So at 2% a year versus 4% a year makes a big difference, right? In 2% a year, you double your money in um 36 years. At 4% a year, you double your money in 18 years. So if property values had gone up, if the if the Prop 13 limitation had been 4% a year, the inequalities would be less over time. But I I doubt that would pass straight up on a ballot without something else on it. I also think it's it's reasonable to try to restrict the benefits of assessment limitations to homeowners. Florida, in fact, has that provision. Their Prop 13 provisions don't extend to commercial industrial property. And because of the reasons I talked about about the very large properties don't turn over, my own preference would be to restrict that. Now, whether that'll occur by the time when all the gray hairs are still here or not, I'm not sure. But those are two um uh minor reforms I think would improve the equity. But I don't see the core feature of acquisition value um taxation changing because it does provide a core value of certainty. Thank [Applause] you.
More than 10 minutes. Okay. No, it's official up there. It's up. The PDFs. Okay. How do I? How do I move navigate this like this? And then and then down for just X Mees end. How do I? Is there a page down? Page down is just this. That's actually lined down, but that's all right. Okay. Okay. I'm not I'm not the high-tech guy. Um, in case in case you have not concluded that by your all by yourself, I'm the out-of-state guy. Um, what I want to know is um, how many people in this room were were just just were born or lived a substantial fraction of your life outside of California? Okay, more than half, I'd say, but just by my guess about that. Um, so so thank you for inviting me to California to talk about uh Prop 13. I wish you could do something about this weather. That is, I wish you could transfer it back to New Hampshire.
I came to uh uh Prop 13 almost reluctantly as an idea. I actually had not been aware very much of it because the 13th anniversary is also marks four days before my son was born, my first and only child was born, and so I was not really paying attention to Jarvis-Gann. I was paying attention to Braxton Hicks. Guys, you're supposed to get that. Okay. Um, so so but Prop 13 did did come on my radar screen fairly quickly. In 1980, I moved to UC Davis to teach for a year and and liked it, and everybody was talking about the consequences of of of Proposition 13. So that got on my radar screen. And then it got onto a sort of more personal radar screen when I went to UC Santa Barbara to teach for a year in 1985. You notice a pattern here. Um, and uh, and my son was in second grade. My first and only son, and he's going into second grade. We shopped for school for public schools. We turned turned down a really nice house because it was in the worst school district in Santa Barbara and ended up in a very modest vacation cottage in what we were told was the best school district in Santa Barbara. And my son went to the Forest Peabody School. He was in second grade. There were 35 other students in that class. The poorest district in New Hampshire, all funded by property taxes, would be utterly embarrassed and not tolerate a class size like that. This is a terrible thing that's happened to education in California, if we can lay this on Proposition 13. In 1991, I spent a year at Berkeley. Pattern continues. My son is in eighth grade. I call up friends, cohorts to see where they send their which school they send their kids to in middle school. I discovered that none of the people I knew in Berkeley sent their kids to public schools at all. That's a really sad thing to say. Something's happened to the public schools in California. Prop 13 is partially to blame.
I'm going to address the question of the prior question of what caused Proposition 13. There are about 30 million people in California, and they have, and so there are about 30 million reasons, uh, explanations for causes of Prop 13. I think it's my hypothesis that Prop 13 was caused by a noble experiment, the Serrano decision, San Mateo versus Priest, which came down in 1977. I'm actually going to switch this. The first part here is is simply to acquaint you with a few articles that I read and that I wrote, and two articles that are in opposition to mine. So I want to give my my opponents, my worthy opponents, a little space here. Isaac's already talked, and Kirk, Kirk will talk next. Instead, I want to look at this at this chronology, which I take from a UCLA Law Review article back in 1992, 2004. And um, I want you to look at the at at basically at four of the events here. November 5th, 1968. We've actually been through this before. We talked about the the Watson W initiative to limit property taxes to 1%.
Of market value, it did not have. It did not have "welcome stranger" assessment. We called this "welcome stranger" because the stranger, really, welcome to raise your taxes. Uh, uh, uh, did not, it did not have the assessment rules. But, but then inflation wasn't very serious back in 1972, so, so that wasn't, wasn't a big deal.
One really looks kind of like Prop 13. It's a miserable failure. Only 32% of the voters voted for it. The first Serrano decision comes down in 1971, but it doesn't say how to fix things. It just says there's a problem that you've got to fix. Inequality in school spending has to be fixed. Watson 2 comes down in 1972, and it fails almost as miserably as Watson 1. People do not want to limit the property tax, and as, as, as Watson 2 suggested, send the responsibility for financing schools to Sacramento to have the money come back to the county and be redistributed among school districts of the county. They wanted local control of schools. They wanted to see that their property taxes, most of which went for schools, were being spent in their local districts because they could see that even if you didn't have kids in school, your real estate, your community would become more attractive if you had better schools. There used to be a connection, as there still is in New Hampshire, I can assure you, uh, uh, a connection between property tax payments and what you get by way of schools.
What happened after that? What happened after 1972? Between 1972 and 1978, the voters seem to have changed their minds, really radically. 100%, almost 100% swing in the fraction of votes. I'm tempted to point at this when I need to point at that. Second line down, Watson 2 initiative passes by 34%. Third line down, sorry, what? I'm sorry, Watson 2 is defeated by, is by, by that, uh, uh, 34%. June 6th, 1978, 30 years ago, Prop 13. Get a pointer. It passes. Essentially, Watson 2 passes. There's, there's a little bit of difference, but not much.
What happened in between? What I maintain happened in between, and, and people can tell me this is part of the post-Hulk aopr Hulk fallacy, and maybe it is, but is Serrano 2 became law and became implemented. So that local voters in school districts, who formerly saw some connection between what they paid in property taxes and the quality of their schools, no longer saw it anymore. After Serrano 2 was, after Serrano was implemented by AB 65 in 1977, the voters said, "What do I need the property tax for?" The property tax has always been the least, least, uh, lovely tax, and I want to get rid of it. They took the first handy initiative. I'm sorry, I don't think it was the genius of Howard Jarvis that sold this. I think it was that the voters no longer saw any connection between their rising property taxes and the quality of their schools. Their schools weren't getting worse, but their property taxes were going up.
What's my evidence for this? Part of my evidence in this rather slow-moving U graph here is what I call the swing between the variable here is the swing between the Watson 2 in 1972 and the Jarvis-Serrano initiative in 1978 by school district. Here is my insight. I think to this rather than as the field poll quite sensibly does, ask a stratified sample of Californians what they think about the initiatives and things like this. I wanted to look at school districts because what Serrano had done was something to school districts, not to individuals. So everybody in Los Angeles Unified School District, largest in the state, of course, was affected essentially in the same way. And so I want to know something about how school districts responded, how they, how they, uh, swung between. So the average swing for the state was close to 100%. By school, by school district, the swing in vote between the defeated Watson and the victorious Jarvis initiative varied a great deal, almost linearly with value per pupil. Why value per pupil? Because value per pupil was what the Serrano decision keyed on. It said value per pupil was no longer to be any basis for distinctions in spending between school districts. That was what was to be equalized. Places like Beverly Hills had high value per pupil. Back in '72, Beverly Hills completely rejected the Watson initiative. Come 1978, they're much more favorably disposed towards the Jarvis initiative than they were before. Big swing in the votes.
The biggest swing, lest you think this is just about rich people, by the way, the biggest swing in Los Angeles County. This is just Los Angeles County. I did this because it has a lot of school districts that match up by city. Votes are only by city, not by school district, so I'm stuck with this sample. El Segundo. You've been to El Segundo or at least you've flown over it. It's right next to LAX, a moderate income place south of LAX that has an oil refinery and a lot of business from LAX and a lot of middle-class people. Back in '72, they had no use for any property tax limitations because they had very low property taxes and pretty good schools. They had an oil refiner tax, very high value per pupil. Come 1978, they no longer can use that value per pupil for their own schools. They got to send it to Sacramento to be redistributed to other more deserving school districts under the Serrano decision. And so El Segundo radically changes its mind, a 250% swing. Los Angeles, as you'd expect, would be about in the middle of this. Compton is way down. It's the, it's the highest percentage of African-Americans in, in, in Los Angeles County. And, uh, the distinction here was Mr. Watson, Phil Watson, was, was very careful not to offend African-American sensibilities in proposing his initiative, and Howard Jarvis was not. Let's wait for the question to answer on the, on this one. Uh, but he did. I have it from African-Americans. It's not something I made up. Um, so, so this is evidence, at least, that the radical change in, in, in California's, California was not due to, uh, uh, just that Californians are different from the rest of the country, which is kind of what the rest of the country thinks. But as I point out, most of you are from the rest of the country. Uh, it's not like you, uh, are, are radically different from, from, from the way other people think.
My last slide here is my not perfect. There's no perfect evidence in social science here. Not perfect evidence that this is not a general tax revolt. This is a tax revolt aimed at school taxes. It's school taxes that most upset, that were going up most rapidly in the late 1970s in an attempt, a worthy, noble, admirable attempt to comply with Serrano. Serrano versus Priest could have been complied for, complied with by equalizing expenditures at a low level, which is kind of what we do now. Instead, the legislature, filled with liberal Democrats who liked education, wanted to raise average spending to a fairly high level. And so they were using the inflation-driven property tax revenues as a way of redistributing wealth from the high-wealth districts to the low-wealth districts in order to increase spending. They wanted to spend more, raise the level up was the, was the general, uh, uh, uh, rule here. So what the Jarvis initiative, what Prop 13 did, was take a hit all across the board. I don't have to describe that. The BE vote is what I do have to describe. It manifests itself as Prop 8, a competing initiative, but it's a competing initiative that offers almost as much tax reduction for the average voter. It actually confers B benefits upon renters, which Prop 13 does not. Uh, it's well-targeted. At the time it was introduced, the legis, in, in March of 19, 1978, Prop 13 did not have a majority in the polls. People were aware of what Prop 8 and the Bear Bill actually were were supposed to do. The Bear Bill got most of its money by creating a split roll system, lowering homeowner assessments but keeping commercial and industrial assessments way up there. They were going to do the heavy lifting for the property tax. But the Bear Bill and Prop 8 had what I think is a fatal flaw, necessarily fatal flaw, because of the Serrano decision. The Bear Bill and Prop 8 exempted from any of its provisions school taxes. School taxes were to remain fully taxed. And so the, the difference between BE, the Bear Bill and the Jarvis proposition wasn't so much in the amount. It wasn't so much in the targeted, uh, uh, audience. The BE bill, in that respect, sounds actually better. Both promised very big tax reductions, but the BE bill would not reduce your school tax assessments or property tax payments for school purposes by a penny.
Here's how the voters reacted to these two things. We know that the, that Prop 8, the Bear Bill, lost by, it's got only 47%. But these were not, their bill was written in such a way as to assure the voters that if it passed, but Prop 13 passed by a larger margin, 1% margin or more, Prop 13 would prevail. If you're really an anti-tax voter, you should have voted for both of these things. The slope of this line should be positive, not negative, if the, all the, all the voters wanted was to reduce their taxes, period. I don't care how it was. This was a selective property tax revolt. The Bear Bill did not give the voters relief from school taxes, and that was its fatal flaw, in my opinion. There are other reasons why there might not be a perfectly positive correlation between the Bear Bill and the Jarvis vote. The Bear vote and the Jarvis vote, after all, Jarvis said, "Don't vote for Bear," and vice versa. But that all that means is it's not going to be perfectly correlated in a positive way. It does not explain why it is perfectly negatively correlated. If a student comes to me with a diagram like that, my first suspicion is you're making it up. Uh, uh, that you, you do not in social science see correlations that line up like this. So this to me is fairly strong evidence that this, what we are looking at in Prop 13, is a selective tax revolt. It is a, it is selective because the voters were told by the California Supreme Court, again, for all the most benign kinds of reasons, that their property taxes could no longer buy them better schools. And the voters, I think, quite sensibly said, "Chuck the property tax. Let Sacramento finance it." Thank you.
[Applause]
Before we turn the question over to the floor, any comments from the panelists? Um, I want to respond to the person who, who were asking about the issue of racism. Uh, the, the, um, Howard Jarvis was never explicitly a racist. And, and maybe he wasn't a racist himself, but much of what he said was construed by blacks as being racist. For example, when, when he was told that Wilson Riles thought that that that that that Proposition 13 was a really bad idea, would be disastrous for the schools, uh, Jarvis responded, and I think I am quoting, "Oh, he's just low IQ." That has all of the code words for for racial classification, and blacks took it at, took to mean exactly that.
Dean, I, I just want to say that the, the fact that the Serrano system is in place now, we actually do have relatively equal financing, has, uh, really does matter as we think about public finance going going forward in California. Because if you ask yourself, are voters going to raise their own taxes in order to, uh, pay for more garbage or better water systems and so forth? They kind of shrug at that. They're really interested in schools. But if the courts are going to enforce very strict equality across school districts, then you're not going to be able to have a massive change in the property tax system to raise your, to raise taxes for schools. And so the, the, the $200 figure that Mark De Camillo showed earlier, that's sort of what we do with partial taxes now. People do vote for those, but that's very different than putting an ad valorem tax on the schools, which I'm sure will be challenged immediately in the courts and ruled unconstitutionally.
Da, you, how, okay, hold on. Before I start the Q&A, I just want to announce that we now do have in the back of the room photocopies of many of these presentations, and we'll be adding more soon. And that also, everything will be on our website on Monday of these presentations. So come back and visit us then, too. Um, Bill, just to comment and maybe to differ from your interpretation, which I guess if you read our book, you know we differ from it already. I mean, I think one difference between economists and, uh, uh, political scientists who study voting behaviors is the economists sort of have an over-rationalistic, uh, confidence in the way voters think about these things. And I think the fact of the matter is, first of all, that, um, the BE, the choice between BE and, uh, uh, 13 when it, when it was framed and as it came up in the end of the campaign, was so overwhelmed by public distrust of anything that the legislature was doing at that point. And it was so clear that what Bear was was some way of weakening, uh, 13, that I think, you know, the kind of visceral, uh, feelings that were evident on the Walter Cronkite, uh, uh, uh, newscast just overwhelm that kind of, oh, you know, stuff that I suspect most voters don't even really know about the kind of detail about Serrano and ad valorem taxes and the components of the property tax and so forth. I think it's just, it's unrealistic to think that that penetrates down in that way. But beyond that, actually, if you start looking at the internal analyses of how people voted or said they voted, one of the big differences across the state, all subgroups, all all school districts, was people who had kids in schools, uh, were much more likely to vote for against Prop 13 than people who didn't have kids in the school. So if they were just so, so upset and so unhappy and so think, well, you know, the schools are going down, or my local schools are going to be so terrible that I, you know, that why not just, you know, exercise my hostility by voting for Prop 13? That's not consistent with that, that finding. And, and finally, just one last point about the Watson 2, Watson initiatives. I mean, you can, I think the post-hoc propor-hawk point that you pointed at yourself is probably valid. First of all, both those initiatives were defeated in part because the politicians reacted by putting in some homeowner, you know, by, by some salves. Homeowner exemptions were created, then homeowner exemptions were were increased to soften the blow of the property taxes. And then add on top of that that in the six years, uh, between '72 and '78, and this is again the problem with the ecological analysis of the kind that you have up there, that sure Serrano happened, but a lot of other things happened at the same time. The main thing that happened at the same time is that the escalation of real estate values raised these taxes way, way up. So, you know, I don't dispute that that may have been a factor. It may have been a factor among some people, but it's hard to see that that was really the driving force.
One final point, if I may. Isaac's comments, and which is also discussed, was discussed earlier this morning, and is spelled out in the Sears-Citin book, which we're not trying to sell, so, you know, this is just kind of a plug. We point out that in the immediate aftermath of Prop 13, a whole bunch of other tax changes were made, all of which were designed in some sense to create certainty in taxation. The main thing was, of course, the indexing of the state income tax. And indexing, in some sense, is like the limit on the, uh, the 2% assessment limit. It's a form of increasing certainty. So I just think it's a more complex story than Le, than laying this this huge thing just to this one highly calculated response to, uh, Serrano. Not to deny that that was may have played a part for some people. I also point out that, uh, Ronald Reagan campaigned against both Watson initiatives, and he was fairly influential. He did not campaign against Jarvis. He didn't campaign for it either. No, but he was very active in in opposing the two Watson issues. Yeah.
I, I want to just make a couple of remarks in response to Jack. The majority of voters back then, and a much larger majority of voters, don't have kids in school. So if you just think it's because kids, in people with kids in school are the only people who you, parents who have kids in school are support the public schools, are the only ones who'd vote for them, they'd always fail, uh, at every level. Uh, what people used to have was a connection between their community and their community and their property values by way of the schools, and now they don't. The Serrano decision took that away, and Proposition 13 drove this, this silver stake through the heart of, of, of that connection. One last point I would just make is California wasn't the only place where real estate values were going up. They're the only state that got a as severe and long-lasting a property tax revolt. And, and I think that's something social scientists have to try and explain.
Hi, I have a couple of comments and a question. I'll be real fast. Um, first, for Professor Stone, I'd like to make one recommendation. That last slide you showed about the effect on commuting and Prop 13. There are other factors that would have fed fed into that increased commuting. It's a multivariate. I would probably not include it. Um, secondly, um, I would love to have Dr. Professor Fischel at some point define "swing" again. I mean, I didn't really hear a good definition. And the third is a question for the panel at large, and that is, why aren't we talking more about an income-conditioning, uh, Prop 13 where, you know, those have below a certain income would have gotten the the certainty of taxes, and those above wouldn't? I mean, it's almost like Prop 13 is a form of rent control where there's no distinguishing between upper and lower income earning people.
Professor Stone, you want to? Yeah, I, thank you. Um, I realized that what I put up there in terms of the commuting was just intended to be suggestive, and that's, uh, the basis of some research that I'm working on. And there are, you're right, there are other sorts of factors, lots of things that happen between 1980 and 1990. And, and what I'm hoping to do is sort out, uh, whether or not any of the differences or how much of that difference can be attributed to Prop 13. Um, but just looking at that raw data, um, is suggestive. I think that there may be some impact.
Professor Fischel, uh, swing. Wanted to, my, my definition of swing was the percentage change between the yes vote for Watson 2, 1972, and the yes vote for Proposition 13 in 1978. So it's a measure of how much the voters, they don't have to be the same people, obviously, the voters changed their minds about property taxes. The big, bigger the swing, the bigger the change in mind about property taxes.
Hi, um, this is, uh, Professor Fischel. I'm in, I'm looking at your, um, at your chronology, which I lived through, um, and wondering, uh, why, uh, you skipped over the, um, major change in school finance that occurred in 1972 under SB 90, when Ronald Reagan put in the, the property tax, but where we established revenue limits and also lost some of the ability to, um, use property taxes for such things as, um, benefits for, um, benefits for staff. The, um, and because, uh, they're already, that all that was probably a bigger change than, um, AB 65, when it came about. Number one, but also, um, having campaigned, uh, having walked to talk to a lot of people on trying to get them to go for, uh, Prop 8 over, uh, over Prop 13, I'm, I'm afraid you give them a much, you give the voters a much higher level of awareness and sophistication, um, than than was present there. Uh, I, I think they're looking at their property tax bills and, and unfortunately, not at their schools.
If I, if I respond, the, I am aware of SB 90 and, and the whole rigmarole. Chronology compresses a lot of events. Uh, the response to Serrano was a slow-moving activity. It was kind of like an avalanche builds up speed. And SB 90 was the beginning of this all. I really, this is why I, I wanted to start with '72. This was before SB 90 actually took effect. So, so the '72 initiative, but I could have started with '68 with J, with Watson 1 in '68 and, and, and that could, but, but you're right to, to say there, there needs to be more nuance in, in how school finance changed over this period. It's not inconsistent with my story, but, but as to voter rationality, this is something we, that political scientists and economists differ with all the time. Political scientists say, "Informed voter is a contradiction in terms." And, uh, and economists say, "But, but, but, but wait, informed home buyer is a contradiction in terms." You ask people, did, were they aware that this is a better school district or that the school district points were 28 different, you know, 28 higher percent higher than the next school district? The answer is no. They never know. Never know details like that. Nonetheless, when we do regressions trying to explain school, trying to explain home values between school districts, we find it's they're acting as if the voters, sure as heck, know what the difference is. Uh, so, so all I can do is to give you this sort of, uh, uh, uh, uh, notion that that there's somebody, there's something about the majority. I mean, there, the majority is actually coming back in social science, wisdom of crowds and things like this, as aggregators of knowledge, political markets, uh, uh, uh, so, so I, I don't want to be, uh, I don't really want to apologize for assuming that that these votes actually aggregate accurate information. I think the voters, not individually, but collectively, knew what they were doing.
I'd just like to add something to that. Very perceptive, because SB 90, the, the revenue limits in SB 90 were fairly radical, and they were specifically designed to deal with the Serrano decision. And I had to go down to Los Angeles and testify in the trial that SB 90 solved the problem. Judge Jefferson wouldn't listen to it. Voter overrides, there, you can do voter overrides. Dave and I have enough gray hair to have been around on the stump during Jarvis-Gan, and I kind of disagree with you. I'm more inclined toward Jack Citrin, but, but, and Dave being the midwife of AB 80, among other things, in the legislature, we remember when Jesse Unruh came down to San Francisco and said, "The assessors have the power that even the Barbary pirates would enjoy or would envy." And assessors, Phil Watson went into the assessors' convention to try to get approval for his initiative. He got one vote out of all the county assessors because Russell Walen of San Francisco and Quinn of Los Angeles controlled the assessors' organization, which was a major fundraising factor in California politics at that time. And leg, and supervisors could pass a budget without any responsibility for tax, and they'd say to the assessor, "You get the money." The legislature could pass unfunded mandates until the local governments, the assessor is going to get the money, and so on. On the stump, what we were learning is that the people were afraid they were going to lose their homes because of this unbridled spending. It wasn't just education connected. It was not education connected per se. Now, I think what, what I'd like he is some comment on the reform of the property tax system and the ultimate capping of the property tax system, related to the overall tax structure of California, and whether the property tax was a somewhat outmoded tax because it goes back to agricultural America, and how that relates. And Dave, I think you're probably best equipped to comment on that. All the others may do.
When the assembly did its made study, I think we heard from Malcolm Davidson, who was then noted professor here at the University. He said the property tax fails two basic points: it's wrong in theory and doesn't work in practice. But from, from that point on, the legislature and Jesse Unruh were campaigning for reduction of property tax, and that was central to everything that was going on for the, that whole period. And, uh, that didn't happen. And that was part of the frustration was that the legislature and the, the proposals that came out of the assembly, rolled, killed in the Senate. So it wasn't surprising that by 1978, with the rising assessments, that voters decided that nothing would be done. But they also had the experience prior to Prop 13. We talk about the uncertainty because of the assessed value growth. Grow, the bigger uncertainty. We had an area called Watson's Wasteland, Los Angeles, because of what Joel mentioned, the assessor was using what they called highest and best use. So not only if your house next door goes up, they could, the assessor could say, "Well, that's a better site for a gas station." And we had examples all over LA County where this was going on. So he just didn't rise, your assessment didn't rise with real estate market. It rose with whatever the assessor thought your property could be used at, other than in the use it was being used at. So this highest and best use concept, which Prop 13 now is, is pretty much, uh, limited, was another major factor, not just the rising assessments.
One thing, one thing I haven't heard today at all, and I'm sorry I didn't mention it in all of this search for causes, is, um, the enormous changes in California, uh, society and in culture and in demographics, um, between the early '60s and particularly at the postwar period with this high level of optimism and enthusiasm, and, uh, and the late '70s, with, uh, the coming of all, a lot of the dis product of all the development, crowding, pollution, immigration, a whole series of things that it seems to me contributed. The Watts Riots, you name it. There's a whole range of things that has seemed to me contributed to, uh, the Free Speech movement, you name it, uh, that contributed to an undermining of the public enthusiasm and optimism about the state. Does that make any difference?
I'd say, Peter, there's, too many causes, too little time. Uh, I actually think there's one cause, and, uh, was mentioned peripherally, but I'll say it again. It's the inflation that ex, that started taking root, uh, in the early '70s, late '60s, early '70s, that eventually went into real estate. And, and basically, our institutions were fragile with respect to that inflation. Our taxes weren't indexed. Our assessment system was archaic. Uh, our, our jurisdictional fragmentation meant that, uh, increases in value would lead to higher bills. We weren't prepared for that. And I, I think that was probably the biggest single change. You, you look even in the news clips, you had an inflation czar. We don't have an inflation czar today. Gerald Ford had the, the Whip Inflation Now pins, right? They had the convention. Jimmy Carter was, you know, so this was the, this was our our obsession. And what happened is eventually, as inflation went up, the relative price of real estate went up relative to, uh, general prices, as, as expect, as people moved into real equity, into real real property, and, and I think that was probably the single biggest driving factor. Our institutions, you know, low with low inflation, these inequities that we've been experiencing for 30 years probably could have persisted for another 30. But with high inflation, we took things to the breaking point.
I want to partly agree with with Steve, by the way, that inflation was a big deal. And, and, and that to some extent, Prop 13, the, the Serrano, Prop 13 connection that I see was had element of a perfect storm, perfect bad storm, in which the inflation is driving up home prices relative to other prices. You've got a Serrano decision where you've got to get more tax revenue. How are you going to get it? If, if you took either one of those in isolation, I think it would have been much more, Prop 13 would have been a much dicier proposition. But that still does not explain to me why this, why we're talking right now, 2008, 30 years afterwards. Usually, when states respond to a particular combination of events, and the event goes away, eventually the state's voters and representatives fix it. It's, that's not what happening here.
This is the last question. Thanks. I, I, I appreciate this idea that there was a kind of perfect storm in an epoch that, uh, both in some sense, uh, led to the demise of, uh, the society and the optimism that that Peter's written so well about. But also, uh, more broadly, I suspect that right now, we're actually at the beginning of what will be a chain, a series of chain reactions, that will, in part, be nested in the property tax system as we, as we see the public fiscal under pressure. My question is, for for Stephen Terry, your excellent work on the quantitative dimensions of Prop 13 moving through time. The analyses that you focused on today were kind of beginning point and current point, more or less. Do you, so that, you know, the, the tick, in particular, the 1975 versus the present, and so on, 1980? Do you have a sense of what the average lock-in, what is like, if we took the average home out there in California, about how many years ago is it purchased? You know, what's the gap then? Because there's a drama for sure if you go from the 1980 to the 2005, as in that wonderful example. But how about on, on average, how much of a, of a rigidity and a lock-in is there by, you know, using that that approach?
There's, there's a couple of different ways you can do it. The Board of Equalization, because of the Railroad Act, has to come up with an estimate of market value for railroad property versus other commercial property. They publish that yearly. And so basically, properties are probably, they claim commercial properties are probably about 20% under assessed. Is that, that's about right, John? Um, I think Dave's been looking at that. Yeah. About 75% of, 75%. And I, and, and averaged over all types of residential property is probably roughly similar. So there's probably like a 25% discount, uh, averaged over very new properties and the very old properties. And, um, uh, it's hard to do because, um, uh, our data collection to this day is pretty archaic across every, every county has its own system, and it makes it's a, it's a nightmare for researchers, uh, compared to some other places. But I'd say about a 25% discount or so off of off of market value for assessed value.
Professor Sexton, should we give you the last word in terms of this lock-in? I, I don't know if I made, if the point really came across, but, um, even though in theory, everything's, you know, and people's gut reaction is, yeah, rather than paying $77,000 more, I'm going to stay in my house, I'm going to add on or whatever. But what all the empirical evidence suggests is that it's a pretty small impact. And if it's keeping people in their houses maybe a year longer than otherwise would be the case, I'm not so sure that that's really adding that much neighborhood stability. And, um, all of these other factors. So, um, again, in terms of the lock-in effect on residential property, um, there's, I don't think there's any denying that there probably is some, but the empirical evidence suggests in California and other states that it really isn't a huge, uh, amount. Now, there's the other issue that there's always also a lock-in effect or a mobility effect on businesses and in other words, they have the same sort of incentives to, um, maybe rent instead of own or to, um, add on or change things or not to move when it's, um, economically efficient to do so. And there's really no empirical evidence, and there's really no studies out there that have, uh, attempted to measure that impact. And I think that that's still an important question.
So, as you can see, we could have gone for another hour and a half. Please join us, uh, at the reception at the end. Maybe we can continue this conversation. And in the meantime, please applaud, uh, our wonderful panel.