Oct252016

It’s time to reform Proposition 13

VOTERS WARM TO THE IDEA OF REFORMING PROPOSITION 13, BUT LARGE FINANCIAL INTERESTS WOULD VIGOROUSLY OPPOSE ANY ATTEMPTS TO CURTAIL THEIR SUBSIDY.

prop.-13s-howard-jarvisCalifornia legislators face limits on their ability to tax real estate due to Proposition 13, which limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. Ostensibly implemented to prevent government profligacy during periods of rising real estate values, the measure devolved into a tax-shifting mechanism that greatly benefits owners of commercial real estate. California legislators found other taxes to increase revenue.

Proposition 13 tends to limit move-up trading because trade-up owners must endure higher property tax bills, sometimes dramatically higher. There are basis transfers and ways around this problem for certain people who qualify, but California homeowners tend to stay in their homes, trapped by the tax savings. This Wikipedia article discusses the impact of Proposition 13.

California’s Ballot Initiative System

Realistically, the only way to reform Proposition 13 is by ballot initiative. It’s very unlikely legislators would have the courage to reform the law, assuming they saw reason to do so. According to Wikipedia:

Laws already adopted by the state legislature may be vetoed by means of a referendum. To qualify a referendum for inclusion on the ballot, a referendum petition must have been signed by at least five per cent of the number of voters in the previous gubernatorial election. This is also known as a “petition referendum” or “people’s veto”.

People could vote to amend Proposition 13, but it would be an uphill battle. Some time ago, I spoke with a political consultant who specializes in ballot initiatives. He stated flatly that it’s very difficult to pass a ballot initiative if moneyed interests are on the “no.”

Any attempt to reform Proposition 13 would have big-money opponents. Who would you guess? Homeowners wanting to preserve a good deal? Nope. The big money on the “no” would be commercial properties owners and their various organizations — and they will spend whatever it takes to convince homeowners to vote with them to kill any reforms.

The California Ballot Measure That Inspired a Tax Revolt

By CLYDE HABERMAN OCT. 16, 2016

Proposition 13 was an assault on the property-tax structure in California…. In 1978, they approved this ballot initiative by nearly 2 to 1, setting in motion a continuing debate over whether they had acted with beneficent wisdom or with heedless foolishness. Owners of real estate quickly saw their property tax bills slashed. But they, and millions of others, also found themselves burdened with assorted new fees and levies to compensate for lost state and local government revenues.

Many fiscal conservatives actually thought this would decrease the size of the California State government. A clear example of wishful thinking. …taxman

 In California, the birthplace of many American trends, politicians in both major parties have long regarded Proposition 13 as they would a subway line’s third rail: You touch it, you die.

Which they probably would, at least politically. Approving residential housing is almost as toxic to local politicians as proposing Proposition 13 reform is to State politicos.

The 1978 vote shapes the latest offering from Retro Report, a series of video documentaries exploring major news stories of the past and the long shadows they cast. …

His words echoed those of Howard Jarvis, a pugnacious businessman who was a principal architect of Proposition 13, formally called the People’s Initiative to Limit Property Taxation. Jarvis … drew inspiration from another Howard: Beale, the mad newscaster in the 1976 film “Network,” who was immortalized by his signature line: “I’m as mad as hell, and I’m not going to take this anymore!”

Soon after Proposition 13 passed, Jarvis shrugged off concerns about forfeited revenue. “The bureaucrats have just squandered it,” he said. Sound familiar? …

Fans of small government revel in glib answers like Jarvis’s, but California legislators found ways around the problem including Mello Roos taxes, development impact fees, an assortment of other fees, and higher income taxes.foreclosure_notice

His crusade took shape in an era of double-digit inflation throughout the country, and escalating real estate valuations in California. As property assessments soared, so did the taxes on them, at rates too rapid for many homeowners to absorb. The state was primed for a “mad as hell” moment.

Proposition 13 rolled back property values to their 1975 levels, and imposed a 2 percent limit on yearly increases in assessments. The tax on property could not exceed 1 percent of the value. In addition, any attempts to raise many types of taxes were cramped by a new requirement of approval by a two-thirds majority, be it in the State Legislature or at the local level.

Right away, property-tax revenues plummeted nearly 60 percent. The state — led then, as now, by Gov. Jerry Brown— helped keep cities and counties afloat by diverting about $5 billion from a surplus it had accumulated.

At the time it was passed, Proposition 13 was the right thing to do. Jarvis was probably right that bureaucrats would have squandered the money, and our already large California State budget would have gotten much, much larger. Much of the increase probably would have gone to transfer payments.

Unfortunately, a reaction to the time of political extreme resulted in legislation that today merely serves to prevent wealthy commercial property owners from paying a fair share of state taxes.California-Robin-Hood

Over the long haul, fallout from the proposition landed broadly. Property taxes, estimated now at $55 billion a year statewide, declined as a share of government revenue. Hotel, utility, sales and other taxes were increased to take up the slack. As cities and counties struggled to raise revenue on their own, a good deal of power shifted from them to Sacramento, the state capital.

Inevitably, there were winners and losers. Wealthier property owners greatly benefited. So did those owning their homes for decades, given the relatively small annual increases in their assessments. Better to have bought a house in 1975 than, say, in 2015. It is not uncommon in California for an older couple’s tax bill to be appreciably lower than that of a young family living next door in a house that is nearly identical but newly purchased at a steep price. Critics deplore the inequity. On the other hand, older people on fixed incomes are insulated from tax increases they might find punishing.

There are many hands. On one hand, Proposition 13 led local governments to lay off employees and defer essential maintenance. On the other, it impelled them to become more efficient. On one hand, it protected older people from possibly being driven from their homes. On the other, it reduced the turnover of properties, making it harder for young couples to find a nest of their own. On one hand, the proposition’s opponents say it has shrunk the share of property-tax collections paid by businesses, and shifted the burden to homeowners. …

It’s not just what opponents “say.” It’s a fact. Proposition 13 benefits owners of commercial properties at the expense of everyone else. Because property taxes are held at 1970s levels on commercial properties, the net operating income is higher than it othewise would be. This in turn prompts buyers to pay more to own the property and inflates its value. Proposition 13 is a hidden tax subsidy that increases the income and wealth of commercial property owners.

prop_13

What Californians (and others) have also learned is that you get what you pay for. People want their roads repaired, streetlights installed and schools kept open. All of them cost money. And that means taxes. San Jose, Calif., is an example of how a decline in property tax collections can pinch badly, as a February article in The Atlantic showed. Because the city lacks a thriving commercial district, it is hard-pressed to generate sales tax revenue.

califtaxrevolts

One of the bogus objections commercial real estate owners spout is that higher taxes on them will ultimately cost consumers more money. It’s a lie. The free market for goods and services determines how much consumers will pay for anything; businesses can’t pass their costs on to consumers. Businesses may decide not to operate, but none will pass costs on to consumers.

When Proposition 13 was passed, one of the main selling points was to prevent property taxes from rising so people on fixed incomes wouldn’t be forced to sell because they couldn’t afford their property tax bills. However, Proposition 13 was modified by Proposition 8 to allow property taxes to rise after a price crash so state and local governments wouldn’t be locked into low tax revenues from reassessments during the crash.senior_eating_dog_food

Whether by accident or by design, Proposition 8 negates one of the primary selling points of proposition 13, and as lenders work to reflate the housing bubble, California homeowners, including those vulnerable residents on fixed incomes — fixed incomes greatly reduced by the federal reserve’s zero interest rate policy — the most vulnerable residents may be forced to sell — or worse yet, face foreclosure as they must chose between paying taxes and paying their mortgages.

The only thing that’s certain is that homeowners will face higher property tax bills. Will that force seniors to sell or into foreclosure? Back in the 1970s, this fear was enough to prompt the passage of Proposition 13. The lobbyists and campaign managers who want to preserve the benefits for commercial property owners will undoubtedly lie to scare the hell out of seniors to keep the special benefit that hurts everyone except commercial property owners.