Academic Articles Public Policy Taxes

Did Serrano Cause Prop 13?

Passed in 1978, Proposition 13 was a ballot initiative to amend the state constitution to limit property taxes to a 1% of a homes value. The amendment also capped the annual growth rate in property value assessment at 2% per year until the house is resold.


William Fischel (1989) argues in “Did Serrano Cause Proposition 13? â€? that an earlier court case was the true motivation for the reform. Serrano v. Preist (1971) was brought about because of concerns that rich areas had more funds to devote to their neighborhood’s schools. California was not a land of equal opportunity for all youngsters in the eyes of the court. The judges declared property tax finance of local schools to be unconstitutional and thus education funding was provided almost exclusively from the California general revenues.


While many economists would argue that taxes are distortionary and Proposition 13 was a positive development, the Tiebout model would beg to differ. Charles Tiebout recognized that when public goods are excludable and provided by a variety of jurisdictions, those with high preferences for the public good will live near others with the same preferences (and vice versa). Education is a perfect example of this. Those with kids tend to live in higher property taxed neighborhoods with better schools, while senior citizens prefer to live in areas with low property taxes and poor schools.


Since Serrano severed the tie between school spending and property taxes, rich families were in essence subsidizing the schools of the poor. Further, affluent neighborhoods could not increase taxes to pay for their own schools since Serrano made this action unconstitutional. Anecdotes exist of thousand dollar bake sales that parents used to get around Serrano but the prevalence of this phenomenon is unknown.


Nevertheless, Fischel claims that parents became frustrated that the link between taxes paid and their children’s school’s expenditure level was broken. This lead to the passage of Proposition 13 which significantly decreased the property tax levels for homeowners and landlords. Since the Tiebout model uses property taxes as the price for education and individuals can choose their desired educational consumption by selecting their neighborhood of residence, there existed a near competitive market before the Serrano passage. Fischel argues convincingly the Serrano decision lead to a Pareto inferior outcome in California.