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Prop. 13 is California Taxpayers Only “Saving Grace”

Proposition 13 is certain to continue to be a hot topic in 2016 and beyond as “reformers” continue to work on mobilizing a statewide effort to enact a “split-roll” that raises billions of dollars in increased property taxes from California businesses.

I have worked in and around Prop. 13 in one form or another for my entire career and have collected more data and research on its impacts that anybody else I have ever come in contact with.

I have since ended that research for the “reform” side, because I came to appreciate Prop. 13 for what it truly is–the last line of defense that California taxpayers have against elected officials who refuse to control “unsustainable” and “unaffordable” spending at both the state and local levels of government. 

For those new to Prop. 13, it is a California ballot measure passed in 1978 that places a 1% limit on local property tax rates, unless a “change in ownership occurs,” and limits assessment increases to 2% per year.

At the state level, Prop. 13 requires that any measure which would raise revenues to be enacted by a 2/3 vote of the Legislature.  At the local level, Prop. 13 requires taxes raised by local governments for a designated or special purpose to be approved by 2/3 of voters and a majority for general tax increases.

 

Stanford University Economist, Roger Noll, stated that “ever increasing, burdensome taxes and fees is the single largest concern facing California businesses.”

 

Sure, Prop. 13 is not perfect, far from it.   But the reality is that there is perhaps no public policy in California that is more effective at safeguarding taxpayers against the inability of California politicians, particularly those of the Democratic stripe, from overspending and then sticking taxpayers with the bill.

With the State of California $400 billion in the red, and most local governments in the same situation, you don’t hear anyone arguing with the fact that California government has a huge spending and debt problem.

Moody’s Investor Services agrees with this assessment, having prepared a report that finds California to be the least prepared state to weather a financial storm due to its fiscal policies and inability to reform its tax system.

Without Prop. 13, California elected officials would have “carte blanc” to push the state’s $1 trillion and growing pension problem onto state and local taxpayers, serving to further exacerbate the problem.  A whole host of other state and local taxes and fees would inevitably become viable proposals overnight in the absence of Prop. 13’s protections.

The ongoing explosion in fees and tax exactions on businesses at the local level is perhaps the best indicator of what would happen if Prop. 13 did not exist—turning an already steady and increasing flow of new local taxes and fees into the equivalent of an unchecked dam-break flood of new taxes and fees on California taxpayers.

Stanford University economist Roger Noll says that the problem of ever increasing, burdensome local taxes and fees is the single most legitimate concern that California businesses express about the state’s system of state and local finance.

Opponents of Prop. 13 cite tax equity and fairness as reasons to “reform” Proposition 13 by switching away from a “change in ownership” trigger for market reassessment to a “periodic reassessment of commercial property at market value.”

Furthermore, reformers say Prop. 13 is not “fair” because it heavily taxes new investment and rewards  “long-time” landowners—resulting in heavily disparate property tax amounts.

They say that the only fair way is to bring all businesses who receive a “tax break” under Prop. 13 up to market value and then send billions of dollars in increased property tax revenues to Sacramento to spend as they please.

My primary issue with this line of reasoning is that Sacramento has already proven that it cannot manage the existing tax dollars it gets from the state’s property tax responsibly so why on earth would we send them a flood of new tax dollars?

Second, the entire state and local tax system is riddled with similar inequities so why are reformers choosing to single out Prop. 13 for “reform”?  California’s major taxes are all characterized by extremely high rates and a very limited or loophole-ridden base.

The result is that those who pay the tax pay full boat, and those who can take advantage of loopholes get a break.  The reality of the situation is that all tax “reformers” in California want to increase tax revenues by leaving the rates the same, closing the loopholes, and sending billions of dollars in increased revenues to Sacramento to poorly manage.

True tax “reform” would be to close the loopholes and lower the base to make the change revenue neutral—but there is not a single tax “reformer” in California that I know of who is pushing for revenue neutral tax reform.

This is the method that nearly all significant successful attempts at tax reform utilized including President Reagan’s 1986 tax overhaul—widely lauded as one of the most successful tax reform efforts of all-time.

Reagan’s 1986 tax reform was “revenue neutral” but hailed by politicians of all stripes for simplifying the tax code, broadening the base and reducing the rates—a win win for everyone, not just those who want more tax dollars.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

Split Roll and the Bottomless Hole

A union-led initiative wants to eliminate Prop. 13 benefits for businesses.

California’s Prop. 13, wildly popular on both sides of the political aisle, is under siege by unions. Using the Orwellian name “Make It Fair,” a coalition led by the California Teachers Association, California Federation of Teachers, SEIU and their friends has decided that they can milk businesses to the tune of $9 billion a year via a new ballot initiative.

As Dan Walters explains, “Proposition 13 limits property taxes on all forms of property to 1 percent of value, plus what’s needed to retire bonds and other debts, and limits increases in value to no more than 2 percent a year, except when properties change hands. Newly constructed homes and commercial buildings are placed on the tax roll at their initial values, but are protected by the limits thereafter.”

While it is true that there are a few loopholes which probably should be addressed on the commercial side of Prop. 13, the promoters of the so-called split roll initiative are using that as an excuse to essentially gut the tax protections for businesses. It is tantamount to owning a smooth-running automobile with an oil leak and being told you should ditch the car. To that end, Jon Coupal and Robert Lapsley joined together in 2014 to sponsor a reform bill that would have eliminated the loopholes. They explain,

AB 2371 was authored by the chair of the Assembly Revenue and Taxation Committee, Raul Bocanegra, and San Francisco-area Assemblyman Tom Ammiano and supported by a broad coalition of business and taxpayer organizations. Most importantly, we also had the support of the California Tax Reform Association (who is pursuing the split roll initiative) as it passed overwhelmingly off the Assembly floor.

But then a strange thing happened on the way to the Senate. The California Tax Reform Association suddenly flip-flopped and withdrew its support in the Senate, saying that AB 2371 was not real reform after all. Why? Because they realized that taking care of a potential problem would actually create a bigger problem for their political agenda to pass a split roll initiative next year. The California Tax Reform Association and other groups want to preserve the ‘loophole’ issue as one of their key messages in the 2016 campaign.

The unions would have us think that the state of California doesn’t receive its fair share of taxes. Of course nothing could be further from the truth, and most of us who pay them as residents and property owners in Taxifornia know it. As San Diego tax fighter Richard Rider informs us:

CA now has by far the nation’s highest state income tax rate. We are 21% higher than 2nd place Hawaii, 34% higher than Oregon, and a heck of a lot higher than all the rest – including 7 states with zero state income tax – and 2 more that tax only dividends and interest income.

CA is so bad, we also have the 2nd highest state income tax bracket. AND the 3rd.  Plus the 5th and 8th.

CA has the highest state sales tax rate in the nation. 7.5% (does not include local sales taxes). Two new 2015 bills seek a combined $10 billion++ CA state and local sales tax increase. At least one will likely pass.                          

CA has the nation’s 2nd highest gas tax at 63.8 cents/gallon (Jan., 2015). Add in the new 10-15 cent CA “cap and trade” cost and CA is easily #1. National average is 48.3 cents. Yet CA has the 6th worst highways.

CA in 2014 ranked 17th highest in per capita property taxes (including commercial) – the only major tax where we are not in the worst ten states. But the median CA property tax per owner-occupied home was the 10th highest in the nation in 2009 (latest year available).

That the teachers unions are promoting another tax raise at this time is especially galling. Due at least in part to the union-orchestrated Prop. 30 in 2012, Governor Jerry Brown has just announced a revised budget which will see billions headed for schools over the next few years, including $3.1 billion for the current year and $2.7 billion for next year. K-12 education funding will increase $3,000 per pupil – a 45 percent boost – over 2011-12 levels.

But is it possible that the unions will be affected by their own proposition? As Mike Antonucci points out, it isn’t clear if they will be exempt from the provisions in the initiative. CTA’s building in Burlingame is assessed at $22 million and its 2014 tax liability was $265,000 or about the same 1.2 percent rate my wife and I pay for our home in Los Angeles. CTA’s and other unions’ tax bills could increase considerably if the prop flies. So it would hardly be a surprise if they tried to carve out an exemption for themselves. (Please keep in mind that that at the same time CTA is trying to stick it to tax-weary Californians, it brings in about $185 million a year in forced dues and pays not a penny in state and federal income tax.)

However, even if CTA and other public employee unions are not exempted, they may figure that they will still make out because that extra $9 billion will enable the state to hire busloads of new employees, all of whom will be forced to pay the unions if they want to work. In short, it will be an investment with a great ROI.

If successful, what are the ramifications of this initiative for California? The Orange County Register points to a March 2012 study from the Pepperdine University School of Public Policy’s Davenport Institute. It found that “adopting such a ‘split-roll’ property tax would result in a loss of nearly 400,000 jobs and $72 billion in economic activity in the first five years.”

Grim news for Californians. However, Texans are grinning ear-to-ear, baking cookies and ordering evermore welcome mats.

Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.