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California with Prop 13: A State of Fear Mongering


Jon Coupal’s new op-ed in the Orange County Register is an understandable response by the President of the Howard Jarvis Taxpayers Association to what is starting to happen in California: The growing recognition that Prop 13 was a terrible idea that has had far more negative consequences for the state’s economy than positive – and that it needs to go. The Howard Jarvis Taxpayers Association is largely built around maintaining the myths and innuendo that have kept Prop 13 the third rail of California politics for over 30 years. When those myths start to unravel, its representatives need to step into the public sphere to rev up their propaganda machine.

Mr. Coupal’s arguments continue to be little more than hollow fear stories based on the same distortions that have represented the front line of defense for supporters of this 1970’s debacle for decades. The fact that he can’t come up with a logical, reasoned defense is because there isn’t one for this regressive and ultimately destructive constraint on the state’s ability to fairly raise revenues through this channel. This is the case I made both in my testimony about Prop 13 to the State Assembly and in my previous article on No Nonsense Economics.

Consider his approach and arguments:

1. Diminish those who disagree with you

If you don’t have a reasonable argument, insult your opponents. Mr. Coupal accuses those who support the dismantling of Prop 13 of being members of the ‘far left’. After all, you can best defend your position by making the other side out to be fringe radicals—who wants to agree with fanatics? He ends by stating that anyone who supports the abolition of Prop 13 is “unhinged from reality.”

Personally, I am not affiliated with either political party, and my views run the gamut, from left to right, depending on the topic at hand. I don’t use ideology or party loyalty to guide my views.

Mr. Coupal doesn’t seem to know – or care – that my favored idea for eliminating Prop 13 comes within the context of an overall reform of the state’s revenue system. This includes reducing the sales tax on goods, creating a small service sales tax, lowering and flattening the personal income taxes, and reforming and reducing corporate business taxes. Then, toss in a healthy does of spending reform, particularly a massive overhaul of the unsustainable public pension system. Hardly the views of a socialist.

However, I have been asked if I would approve of tossing out Prop 13 out even if it did not come in the context of overall reform. Although a less ideal strategy, the answer is yes. Grand bargains are few and far between. If we wait for such a tactic, Prop 13 may end up being with us for another three decades. Better an incremental approach, where we deal with one injustice at a time. I can think of no better place to start than this rule.

2. Use an unrelated anecdote to make a false argument

Speaking of being unhinged from reality (aka, unconcerned with the facts) Mr. Coupal next creates horror stories of government run amuck as a result of a lack of control on property taxes. His single example is Cook County (Chicago), where property taxes collected over a decade “went up 48%, more than double the 22.5% rate of inflation.”

What he doesn’t say is that the large majority of the property tax increases in Cook County are because property values rose faster than inflation over the course of that decade. Complaining about paying more property tax under this circumstance is like being upset that you have to pay triple the income tax because your wages have increased by 300%. Even flat tax advocates agree that this is the way taxation is supposed to work.

The argument Mr. Coupal is making is that the property tax increases in Illinois is a symptom of government run amuck—a function of “growing public pension and benefit obligations.” Funny, we have had over 30 years of Prop 13 in California. Has the law led California to be a fiscally conservative state with no budget gaps or spending problems like Illinois? Have we avoided the long-term pension sustainability problem? Of course not. We’re in worse trouble than most states on these fronts. Prop 13 has done nothing to prevent it.

It is also telling that he pulls Illinois out as his example. Why? He could have used any place outside of California because not one other state in the nation – not one – has anything remotely similar to Prop 13 on the books. Instead of Illinois, why not use Texas? The Lone Star state is typically held up as the model of business friendliness and fiscal constraint by commentators like Mr. Coupal. Does he know that Texas has property tax rates that are well over twice what they are in California? This is one of the reasons that state manages to avoid a personal income tax.

In short, he took an immaterial example of increasing property taxes and tried to make a connection to Prop 13. As the contrast between California, Texas, and Illinois shows, Prop 13 is neither a necessary nor a sufficient condition for controlling the size of government. By his own logic, Prop 13 has been a complete failure.

Indeed, one might argue the opposite. Far from being a valuable control on government excess, Prop 13 has led to worse budget problems in California. When Prop 13 was first put into place, neither the sales tax nor the income tax rate was as high as it is today. All Prop 13 did was force the state to increase rates on other revenue sources in order to make up for the gap. It has also led to the excessive centralization of state funding.

And this has been a problem. If you think the surge in property taxes in Cook County is worrisome, it is nothing compared to the surge in revenues seen by California in the late 1990s, driven by our state’s dependence on highly cyclical income tax revenues. Taxes on capital gains pumped almost $20 billion into the state’s general fund in 1999, and then dropped to almost 0 by 2001. The net result, we all now know, was a spending binge by our state government to match none other, and then a massive budget shortfall, followed by the unprecedented recall of a sitting governor. The state is still grappling with the long run structural budget gap that was created by this turbulent period.

Mr. Coupal’s issue with Jerry Brown and “his big-spending” allies also misses an important point: California is not a high tax state – it’s a dumb tax state. Total state and local revenues as a share of this state’s economy puts us right about in the middle of the 50 states. California’s high-tax reputation comes from the fact that it relies too heavily on business-unfriendly personal income and corporate taxes. This is largely because of the restrictions on property taxes. Quite apart from being the savior of California’s economy, Prop 13 is largely to blame for the broader ‘bad business climate’ that Howard Jarvis railed, and Mr. Coupal continues to rail, against.

3. Dance around the elephants in the room

Mr. Coupal also, unfortunately, works hard to scare property owners with tales of the unrestrained circumstances that led to Prop 13 in the 1970s. He asks the question—“who could afford to pay more than twice their current tax bill?” The answer is all those folks who were buying properties and bidding prices up. If property taxes were so detrimental to the market, we would have seen property prices fall, not rise.

Mr. Coupal never once mentions the biggest issue with Prop 13: the grossly unequal treatment of taxpayers. He states, with apparent disregard for irony, that “California has always taxed commercial and residential properties at the same rate.” Actually, no. Ever since Prop 13 went into effect, we tax those with the longest length of ownership at a considerably lower level than those with less tenure. Prop 13 created a special class of citizen and he wants to keep it that way. While he rails against rising taxes for those who own land, he never once considers those who are newly entering the market—the young families buying their first home, the new small business trying to get off the ground—who are forced to pay full rate on their first property bill.

Indeed, he doubles down on this claim by bringing up small businesses, the “backbone” of the California economy. Small businesses are typically the youngest, and hence do not gain from the protection on property tax increases that larger, older firms do. Who really benefits from Prop 13? The long-term property barons of California. Whether Mr. Coupal’s claim about small business is willful ignorance or sheer hypocrisy isn’t clear.

What is clear is that his defense of Prop 13 is a shrill attempt at fear mongering, using broken logic hidden behind pointless sound bites. I only hope that Californians are beginning to see through these distortions and view the reality of one of the most regressive tax policies in the nation. And I stand by my essential point—I can’t think of one reason why Prop 13 should exist.

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