Touching the Third Rail: The California Initiative Process, Proposition 13, and the Effort to Fix It

In October 1911, shortly after California progressive Hiram Johnson’s landslide gubernatorial win,[1] voters in a special election passed several measures, among them a state constitutional amendment establishing the California initiative process, giving voters the right to enact legislation.[2] The initiative, referendum, and recall[3] provide the voters equal power to the legislative branch, effectively creating a “fourth branch” of government.[4] The progressive (and some argue populist[5]) movement towards direct democracy measures in several states in the early 20th century intended to satisfy popular demand to wrangle power from entrenched monopolies and “special interests.”[6] However, the next century’s political development showed that direct democracy, and the initiative in particular, has moved well beyond its original intent, to the point that it has often overwhelmed the governing process it was designed to monitor.[7] California has placed a record number of measures on the ballot, and both major political parties have played a significant role of supporting, funding, and benefiting from the initiative process initially designed to countermand their power.[8] Many decried the shrewd “hijacking” of the initiative from its original progressive political purpose to become a signature tool in the hand of various conservative interest groups.[9] Some of the state’s most successful initiative measures were draconian and unabashedly conservative, including the 1996 Proposition 209 (the much publicized prohibition on public institutions’ affirmative action practices), and the 2008 Proposition 8 (banning same-sex marriage).

As a famous example of these measures, California voters passed Proposition 13 by approving it on the June 6, 1978 ballot.[10] The property tax portion of the ballot initiative can be summarized as a limit on ad valorem taxes on real property to 1% of value (except to pay indebtedness previously approved by voters) and setting the 1975-76 assessed valuation base for property tax purposes, thus limiting annual increases in value to 2% per year, and allowing a higher reassessment only upon sale, transfer, or construction.[11]

Prop. 13 added Article XIII A to the California Constitution. Due to its wide support at the time of its enactment, it was long considered the untouchable third rail of California politics.

In 1978, the anticipated fiscal impact forecasted annual losses of local government property tax revenues (approximately $7 billion in 1978-79 fiscal year) and a corresponding reduction in annual state costs (approximately $600 million in 1978-79 fiscal year). Notably, the reduction in costs replaced only 8.57% of the forecasted revenue losses. Many argue the conservative reform of California’s handling of budget shortfalls is prime for reform itself.[12] The measure had a host of unintended consequences, such as the relative decrease in policy-making influence of homeowners as property tax’s share of total tax receipts fell, while it increased the corporate sector’s influence.[13]

After four decades of experience with Prop. 13, Californians supported a measure to consider some of its more egregious outcomes. Proposition 15, which will be on the November 2020 ballot, would amend the state Constitution and partially repeal Prop 13 by eliminating the cap on annual property tax increase for commercial and industrial properties. In other words, commercial and industrial properties would be assessed annually based on their fair market value, not a capped percentage.

Proponents of Prop 15 often point to Disneyland as an example of why this measure is necessary.[14] Disneyland still has its property tax assessed based on its assessment at the time Prop 13 passed in 1978. A study released by proponents of Prop 15 shows that 10% of the state’s corporate properties (the largest ones) would generate 92% of the revenue raised by the initiative.[15] Proponents of Prop 15 believe this revenue could be better used for education, infrastructure, and even boosting the economy after the Covid-19 pandemic. It is also argued that this measure would level the playing field for startup companies that do not have the benefit of low property taxes enjoyed by many older, well-established companies.

We believe there are many good arguments in favor of Prop 15. However, as small-business owners, we have some concerns. As office lessees, we have seen a marked increase in lease costs in Walnut Creek and other areas of Contra Costa County. If this measure were to pass, the costs of increased property taxes would be no doubt passed onto the tenants, including large and small law firms and solo practices. If that were to happen, it may not be feasible for us and many other lawyers to continue to lease office space. Especially in the post-Covid era, many law practices (as well as other organizations, such as accountants, marketing and financial professionals, etc.) would retreat to a virtual platform, and the expected increased tax revenue from some commercial real estate may not materialize.

As we discovered recently, many of us are actually quite able to work from home or from anywhere. Would the passing of this initiative further push small businesses to maintain teleworking for their employees indefinitely?

Perhaps. And, perhaps, that is not a bad thing.

Lawyers, especially women and others with care responsibilities have consistently argued over the past two decades as more and more of our practice moved online and into the “cloud,” that we should allow more flexibility and reduce the requirement of “face-time” in the office to progress our careers. Many women and care-giving men have left larger practices to hang their shingle closer to home and with greater flexibility. The congruence of a major pandemic with an increase of annual lease costs may just provide the necessary impetus for bigger law firms and organizations to implement flexibility programs and cease devaluing the care work their employees must also perform.

[1] Hiram Johnson, California Museum, California Hall of Fame Inductees, Fourth Class (available at https://www.californiamuseum.org/inductee/hiram-johnson

[2] Statewide Initiative Guide, Cal. Secty. St., December 2019 (available at https://elections.cdn.sos.ca.gov/ballot-measures/pdf/statewide-initiative-guide.pdf).

[3] The initiative allows voters to originate, by petition, statutes or constitutional amendments, which are submitted directly to the electorate for approval or rejection. John Allswang, The Initiative and Referendum in California, 1898-1998, p. 1 (Stanford Univ. Press, July 1, 2000). In the referendum, voters can demand, by petition, that a statute passed by the legislature be put on the ballot for popular approval or revocation. (Id.) And in the recall, voters can petition to place on the ballot a proposal to remove an officeholder. (Id.)

[4] Id.

[5] See Sherman J. Clark, A Populist Critique of Direct Democracy, 112 HARV. L. REV. 434 (1998).

[6] Kevin R. Johnson, A Handicapped, Not Sleeping, Giant: The Devastating Impact of the Initiative Process on Latina/o and Immigrant Communities, 96 Cal. L. Rev. 1259, 1260 n.10 and accompanying text (2008).

[7] Allswang, supra note 3, p. 1; Johnson, supra note 5, p. 1260-61 (“Some critics contend that direct democracy benefits well-financed interest groups – often derided as ‘special interests’ – that are able to fund expensive initiative drives and campaigns, thus exploiting the process for their benefit.”); see also Nick Berstoff, The California Initiative Process: A Suggestion for Reform, 48 S. Cal. L. Rev. 922 (1974-1975).

[8] See generally Daniel A. Smith and Caroline J. Tolbert, The Initiative to Party: Partisanship and Ballot Initiatives in California, 7 Party Politics 739–757 (2001).

[9] Johnson, supra note 5, p.1261 (“Activists in pursuit of a conservative political agenda have begun aggressively to employ initiatives as a last resort to undermine the civil rights gains of racial and other minorities bestowed by legislators, administrators, and the courts.”)

[10] Elson Trinidad, June 1978 – California Voters Pass Proposition 13, KCET.org (September 16, 2014) available at https://www.kcet.org/kcet-50th-anniversary/june-1978-california-voters-pass-proposition-13.

[11] Proposition 13 further required a 2/3 supermajority vote of Legislature to enact any change in state taxes designed to increase revenues, prohibited imposition by state of new ad valorem, sales, or transaction taxes on real property, and authorized imposition of special taxes by local government (except on real property) by 2/3 vote of qualified electors.

[12] Jacques Leslie, This reform of Proposition 13 is needed now more than ever, L.A. Times (July 16, 2020) available at https://www.latimes.com/opinion/story/2020-07-16/proposition-13-proposition-15-property-tax-revolt; D. J. Waldie, Reaching for the ‘Third Rail’ of Politics: The Future of Prop. 13, KCET.org, April 12, 2013 (“Government financing in California is in serious trouble, with policy distortions that seem undemocratic, picking some classes of taxpayers as winners and others as tax losers.”) available at https://www.kcet.org/socal-focus/reaching-for-the-third-rail-of-politics-the-future-of-prop-13.

[13] Trinidad, supra note 10.

[14] See, e.g., Leslie, supra note 12 (“Under Proposition 15, high value commercial property such as Disneyland would generate more property tax for the state, but residential and agricultural property would be exempt.”)

[15] Id.