Fiscal Trap: Why California’s Local Tax Architecture Sabotages the Climate Transition
Much of our climate future is already set in stone. Our ability to transition infrastructure to reduce the impacts of that future, however, remains possible. From residential housing and municipal buildings to roads and public transit, the built environment dictates our energy footprint, our resilience to climate impacts, and the carbon emissions we generate. Shade canopies can cool overheated city streets, retrofits of the aging housing stock can protect residents from temperature extremes, and electric buses can cut emissions from public transit. The most critical question in climate adaptation remains the one least effectively addressed: How do we pay for it?
In California, the mechanisms we use to answer this question are fundamentally flawed. Historically, local public goods have been funded through property tax revenues. Property tax revenue stays within the county where it is collected, with state laws controlling its distribution across more than 4,000 local special districts, cities, and counties. However, Proposition 13 limits the ability of local governments to raise revenue. Passed in 1978, this proposition capped tax rates at 1% of assessed value and restricted annual assessed value increases to 2%. Prop 13 left the division of that 1% to the Legislature, which passed AB 8 in 1979, fixing each local agency’s share at roughly its pre-1978 level. Raising new revenue is just as difficult: special taxes require approval from two-thirds of voters, a threshold set by Prop 13 and expanded to additional categories of taxes in 1996 by Prop 218. With their share of property taxes fixed and new taxes hard to pass, cities that want to fund climate retrofits or clean infrastructure must take money from existing services like emergency response and public health.
Estimates of the cumulative local property tax revenue lost since 1978 are as high as $1.1 trillion.1,2 Each year, California suffers an estimated $25 billion to $35 billion local property tax gap compared to standard market-rate reassessment models used in other states.3 Meanwhile, the state’s primary dedicated climate engine, the Greenhouse Gas Reduction Fund (GGRF / Cap-and-Invest), collects between $3 billion to $5 billion annually. Investor-owned utility (IOU) ratepayer programs and grants for building decarbonization and low-income weatherization such as LIHEAP and the Energy Savings Assistance program contribute only $800 million annually for the entire state.
Without reliable long-term capital budgets, communities must fund municipal decarbonization, weatherization, and affordable housing through a complex patchwork of competitive, short-term mechanisms. Initiatives like zero-emission retrofits, weatherization assistance, and affordable housing development have been shifted onto complex financial vehicles, such as Low-Income Housing Tax Credit (LIHTC) syndications, competitive grant cycles, cap-and-invest revenues from the state Greenhouse Gas Reduction Fund, state climate bond measures, and private financial intermediaries that tack on substantial transaction fees.
While external grant and debt pathways would exist regardless of Proposition 13, its statutory framework severely constrains their effectiveness. Local governments, hamstrung by revenue shortages, must devote their limited funds to essential infrastructure and public services. Anything extra requires running expensive, highly contentious electoral ballot initiatives, renewing parcel taxes, sales tax add-ons, and local bonds year after year. Decades of aggressive litigation by organizations like the Howard Jarvis Taxpayers Association (whose namesake was the champion of Proposition 13) have further narrowed local fee authority, reducing basic public maintenance to a perpetual campaign. Ultimately, this leaves local governments with very little room for local climate action or long-term decarbonization.
Proposition 43 is the latest legislative push to lock in funding systems that are either perpetually depleted or prohibitively convoluted. By restoring a strict two-thirds voter threshold for citizen-led special tax initiatives, Proposition 43 aims to reverse recent court rulings,4 which established that voter-initiated local special taxes require only a simple majority (50%+1) to pass. If enacted, Proposition 43 empowers a 33.4% minority to block critical local investments in housing, transit, and climate resilience. Raising the threshold to two-thirds majority closes one of the few remaining avenues communities have to take meaningful climate action.
Ultimately, Prop 43 is a symptom of a larger structural crisis in how California provides public goods. In the energy sector, investor-owned utilities (IOUs) are currently positioned as primary administrators for ratepayer-funded climate programs. By using ratepayer dollars to fund electrification rebates, utilities create a capture loop: households become dependent on utility-administered incentives, even as those same utilities hike electricity rates to unaffordable levels.
At the same time, publicly owned utilities (POUs) are incapacitated by other propositions sponsored by the Howard Jarvis Taxpayers Association. Propositions 26 and 218 immobilize POUs from levying progressive rates based on consumption without triggering a lawsuit. Additionally, local governments can only raise dedicated local funds for climate or infrastructure by passing local ballot measures that require two-thirds voter approval. This creates an uneven distribution of climate investments statewide and forces local governments to rely on more regressive sources, such as sales tax. Instead of funneling climate dollars through fragmented utility programs, the state should deliver direct, long-term public investment that lowers overall energy rates.
Whether Proposition 43 passes or fails, California’s approach to infrastructure funding remains flawed. While there are clear ways to synergistically fund climate adaptation and our crumbling infrastructure, our current public funding system leaves us with no long-term capital money to achieve either.
1 https://calbudgetcenter.org/resources/proposition-13-at-40/
2 https://itep.org/california-prop-13-avoid-repeating-past-mistakes-property-taxes/
3 https://lao.ca.gov/publications/report/3497
4 These ruling include: California Supreme Court’s decision in California Cannabis Coalition v. City of Upland (2017) 3 Cal.5th 924 and subsequent appellate rulings (e.g., City of Fresno v. Building Industry Assn. (2020) 59 Cal.App.5th 220)
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