How does the 1978 Proposition 13, known as “Prop 13,” impact school funding in California?

  • The last time California was near the top of the nation in terms of school funding was 1965, when it ranked 5th. In 1978 – the year Prop 13 passed –California was 14th out of 50. The next year, the state fell to 22nd place. In 1988, California fell below the national average for the first time and never recovered (SOURCE: As of 2014, the state ranks 35th (SOURCE: Governing calculations of per pupil current spending data published in U.S. Census Bureau Annual Survey of School Systems). So what is “Prop 13” and how did it have such a deleterious effect on public education funding?

    “Proposition 13, adopted by California voters in 1978, mandates a property tax rate of one percent, requires that properties be assessed at market value at the time of sale, and allows assessments to rise by no more than 2 percent per year until the next sale. This means that as long as property values increase by more than 2 percent per year, homeowners gain from remaining in the same house because their taxes are lower than they would be on a different house of the same value. Proposition 13 thus gives rise to a lock-in effect for owner-occupiers that strengthens over time. It also affects the rental market, both directly because it applies to landlords and indirectly because it reduces the turnover of owner-occupied homes.

    As a result of Proposition 13, there are obvious distortions in the real estate marketplace. A striking illustration was described in 2003 when financier Warren Buffett announced that he pays property taxes of $14,410, or 2.9 percent, on his $500,000 home in Omaha, Nebraska, but pays only $2,264, or 0.056 percent, on his $4 million home in California.” National Bureau of Economic Research

    A similar imbalance exists in Menlo Park, where 60% of single-family homes within MPCSD’s boundaries have not been reassessed in over ten years, including 35% of all single-family homes that have not been reassessed in over 20 years. Property taxes are paid on the assessed rate, not the market value, of the property. Thus, property owners pay vastly differing amounts in tax even when the properties lie within blocks of each other, depending solely on when the property was most recently assessed.

    Before Prop 13, districts could count on tax income to meet their funding needs. They set their budgets, went to the county assessor, the property tax rate was set, and schools collected the money they needed. In 1978, California school budgets were upwards of $9 billion. The following year - with the passage of Prop 13 - those budgets were slashed, nearly overnight, by $3 billion--one third of the money available for local schools. Now, districts are limited to the funding they either receive from the state (for lower income/lower property value districts) or can raise on their own through local property taxes and donations (for community-funded districts). MPCSD is a community-funded district, and therefore must make up most of its budget through local taxes and donations to the MPAEF. Because the district cannot control the property tax revenues it receives, the only significant way to secure needed additional funding and avoid significant reductions is through the local passage of parcel taxes.