Beacon Economics was surprised recently when a speech I was scheduled to give was cancelled a couple of weeks before the event. We later learned that my talk was called off because at least one or two of the organizers were upset about my opinions on Proposition 13. If you remember, Prop 13 is that horribly regressive, unfair, and destabilizing cap on property tax assessments that California decided to inflict upon itself many years ago in 1978.
While I’ve never concealed my opinion on this issue, I was not planning to talk about Prop 13 at this event – revenue policy in California is not exactly front and center in an era of sequestration cuts, European recessions, quantitative easing, and other pressing issues. But it wasn’t the content of the talk the organizers were worried about—I simply was not welcome because I didn’t have the ‘correct’ opinion about Prop 13. It’s nice to know blackballing still exists in the world—McCarthy would be proud.
I tell this story because the backers of Prop 13 have every incentive to try and silence critics like myself. They have repeatedly managed to block efforts to reform the system over the years with intimidating warnings about how important the law is for the state’s economy, and how devastating it would be for seniors, minorities, and everyone else in this already over-taxed state, if it were repealed. But a series of recent scandals, a new push for legislative action, and every day logic is starting to crack the façade.
First, the backers of Prop 13 have created an artificial past – one where massive waves of foreclosures pushed the elderly out of their homes, and where rules were needed to prevent that terrible outcome. What’s wrong with this picture? There was no foreclosure crisis in the 1970s. Yes, property prices (and taxes) were rising, and yes that provoked a voter backlash. But that’s where the story ends. There was no wave of foreclosures, there was no desperate crisis. There is not another state in the nation that has anything like Prop 13—and they all have seniors who are housed, plenty of investment in real estate, and of course a thriving small investor class of commercial property owners.
As for the ‘how can you tax an overtaxed state’ argument, in reality, while California is often perceived as a high tax state, its taxes and fees as a share of income are about 15th in the nation. We are not a high tax state, we are a dumb tax state—overly fond of placing high taxes on small bases while leaving large portions of the economy under taxed. I have never advocated getting rid of Prop 13 and then handing the additional revenue over to expand government spending. Rather, the additional revenues that would come from dismantling Prop 13 should be used to reduce the over-taxation on state incomes. While this would not reduce taxes per se, it would certainly make the state more tax friendly.
I always marvel at the fact that the most vocal critics of California’s high marginal tax rate also tend to be staunch supporters of Prop 13. Really? They often point to Texas as a model of how to be business friendly (no income tax!). Do they know that the average property tax rate in Texas is around 3%? Beacon Economics conducted an analysis a year or so ago where we estimated what would happen to California if the Texas tax system was applied here. Amazingly, overall taxes would only drop by about $2 billion. There is no free lunch.
Then of course there are the scandals. It has become increasingly apparent that Prop 13 has nothing to do with seniors and everything to do with commercial real estate. When Prop 13 was enacted, property tax on commercial was approximately the same as on residential. Today, taxes on residential land are twice the taxes collected on commercial properties. This is because commercial property owners have figured out all sorts of legal ways to avoid reassessment when transferring ownership (these strategies wouldn’t apply well to residential space).
Want to see how it works? Watch this video from Bloomberg News. If your blood doesn’t start boiling, you may need a transfusion.
For those who would try and silence me about the evils of Prop 13—good luck. Accuse me of being a grandma-hating, tax-and-spend-liberal bent on ruining the state—but it won’t stick. I want a fair system where people’s taxes are not based on how long they have owned their property or how clever their lawyers are. I want a state that is friendly to businesses on an equal basis—all businesses. And yes, I want the state to have the revenue it needs to make basic public investments that will keep California moving forward.