Prop 13 Repeal: Part I on taxes
Proposition 13 (Prop 13) was approved by California voters in 1978. One main result, though it has many facets (see http://igs.berkeley.edu/library/htTaxSpendLimits2003.html for a great history and description), was to limit the growth rate of property taxes and constrain local municipalities from increasing it at a rate that kept pace with inflation. This maximum growth rate created two winners: homeowners on fixed incomes that could theoretically be financially forced to sell due to rising property taxes that outpaced inflation adjustments to their income and multifamily home landlords which now had a cap on escalating property taxes versus the rent they could charge to keep pace with inflation. Whether residential or commercial property owners gained directly from Prop 13′s tax constraint is difficult to assess.
The two largest changes to California’s economy was that funding for municipalities, specifically schools, was now constrained and property taxes no longer acted as an incentive (or disincentive) toward the optimal allocation of property. As a student in public schools throughout the 1980s, the effects were somewhat obvious on materials available, teachers retained and campus grounds. For commercial property owners, vacant space could lay dormant at a relatively low cost of property taxes, especially during recessions; landlords have a tax disincentive to sell and buy new, higher-priced property, thus commercial property markets did not act like markets anymore. The same held for residential property until that market saw exponential gains in the 1990s and early 2000s.
Now, with California’s fiscal deficit soaring, Prop 13′s repeal is being discussed. In a state that relies on income and consumption taxes (where retail sales tax is a large portion of that), recession implies rising deficits and at some point new taxes or reduced expenditures or both. If Prop 13 was to have its commercial property aspects repealed, and allow property taxes to rise on commercial properties at a faster rate, the effect would be detrimental in the short-term, but should be allocatively efficient in the long-term. Any tax distorts behavior, but this tax would be lesser of many evils. I am not a proponent of new taxes whatsoever; I am a proponent of efficiency. If property is to be taxed, and from a political economy standpoint it is hard to imagine it will always be, beginning the experiment of reversing Prop 13 here is better than no change and a full repeal.
In part two of Prop 13′s discussion, I will talk about the political market in Sacramento and the 2/3 vote on all new taxes which is the portion of Prop 13 that should be repealed first.
These are my opinions; I invite your comments and discussion.
Rob.
OK Professor, let’s repeal the commercial property aspects of Proposition 13. At the same time, let us cut expenditures by cutting the salaries of a large portion of the bureaucracy’s higher paid employees. The state will run more efficiently if the numbers are cut by resignations and/or the realization that they are often overpaid for the services they provide. We can start with the high salaries of prison guards. My question is How can we accomplish a more efficient and less costly public service community.
PS I worked for the state for 4 years as a civil engineer and realized that if I stayed another 3 or 4 years, I would be trapped by the great retirement and other benefits, as many of the senior engineers were at that time (Dept. of Water Resources). So I went into private practice.
by Stan Feingold and Roz Edelson
California’s public programs keep shrinking or disappearing: schools, social services, libraries, parks. Government at every level seems starved for funds, and the explanation is always Prop 13.Something has to change.
by David Strange
Efficiency is about market activity. As long as the state government is more worried about equity than efficiency, the sluggishness will continue or will be simply transplanted to a later date. You are absolutely correct something needs to change. One way to take on more fee-based systems (toll roads, etc.). Long road ahead.
by SBE Faculty at SSU
Dr. Eyler,
I am caught in the middle of the Prop 13 dilemma.As a retired teacher on a fixed pension with Sonoma County homeowner’s taxes. I am able to stay in my current home in Rohnert Park. However, I am upset about the lack of financial support to our local schools. When I compare the high homeowner taxes in my native state of Minnesota and the wonderful financial school support there, I can’t help but wonder what would happen if Prop 13 were repealed. Would the resulting increased taxes go to fund education in this state? Maybe! Would my homeowner’s taxes increase? Maybe! I think your idea of a partial reversal of Prop 13 might be interesting. What do my fellow classmates think?
by Linda Beltz
In 1978 I voted for Prop 13 because I felt that the rapid rise in the assessed value on our 23-acre-property, together with its corresponding rise in property taxes, would force us into selling our homestead. Market “efficiency” caused property in California to be assessed (and taxed) at its “highest use value,” which meant that the market valued stable communities less than it valued economic growth. Prop 13, in promising to slow things down, was the public’s angry rejection of market efficiency.
Today many of us feel that Prop 13 was too blunt an instrument and that it has been accompanied by too many unintended consequences. If adopting Prop 13 was seen at the time as creating a more equitable state, surely we can now see that it has produced the most inequitable of results. Those of us who continue to live in the same homes that we did in 1978 are paying but a fraction of the property taxes paid by our newer neighbors. Where is the equity in that?
As to what we should do about this untenable situation, I feel that we do not have sufficient information to make informed decisions. I’d like to know how other states finance their operations. Before jumping into the fire again, I’d like California to seek out successful examples of how social equity and market efficiency can be balanced.
by Richard Conrad
What would happen to the real estate market if we repealed the commercial parts of Prop 13? Is this a good plan in the middle of a recession? When I voted for Prop 13 in 1978 I thought it was just for owner occupied housing, and it would restrict the state’s bureaucracy. Sorry, I was wrong. Nancy
by nancy Henry
The problem I have with adding taxes is that there is zero discussion of how out of control with spending our state is. I am talking about the legislature.
A lot of prison guards make more than the Governor now. Looking at CHP raises, they have been way above inflation for years now. And pensions are out of control.
No one wants to deal with spending other than to use a chainsaw approach of furloughs and cutting whole programs.
Employee pay for unionized employees is a lot of the problem in this state.
Do something about that and then we will talk about tax increases.
by Michael Haley
When are we all going to wake up and realize two things:
1. The initiative process in CA ties the hands – and makes less accountable – our elected officials.
2. If we want services, we need to pay for them – that means higher taxes.
Again, we vote for additional spending through initiatives, only to vote new initiatives that prevent them from being paid for.
The level of greed in this country is simply astonishing. We have more billionaires and millionaires than most countries and yet we have people living (and dying) on the street without healthcare. Meanwhile poverty climbs and the middle class is disappearing.
It’s time to pay up – all of us. We need a progressive tax structure. CEOs wonder why people can’t buy their products – the tax policies in CA makes it hard for customers to afford them. And while we’re at it, it’s about time we give our CA based retailers a break and start taxing out of state internet shopping and downloads.
One of the first things our Governor did was to cut the vehicle license fee. Huge mistake. Now we’re in a shortfall and can’t afford anything. Enough is enough - time to pay up for the services we all benefit from.
by Jason Davies
Good stuff, folks. The likely scenario is that new property taxes would go to local schools in part, but if the repeal would be for deficit funding, it would be some years before the schools received any kind of a boost. There are a lot of funding measures out there that sell bonds to fund schools and use assessment on property taxes to pay for them. Measure D in Western Marin and Sonoma Counties is such a measure. If the commercial property portion of Prop 13 were to be repealed, it would likely send the commercial real estate market into short-term problems, maybe even force some bad property situations to end, and the long term should be more efficient and provide more taxes. That is not necessarily equity. Thanks!
by Robert Eyler
Prop. 13 is sacred with the people who vote. The people are hit constantly with more sales taxes, fees, permit charges, etc. Thus they are not going to change the one piece of legislation that has allowed them to stay in their homes.
by Ruth Waltenspiel
I moved to Sonoma County from Princeton, New Jersey three months ago. Our property taxes in NJ were twice the amount I am paying here. High property taxes in NJ are driving retirees out of the state in droves (I am one of them). At the same time, those communities that were willing to tax themselves did support outstanding public schools systems. Unfortunately, many communities were unwilling and unable to raise property taxes for that purpose. In addition, the State of New Jersey traditionally did not transfer proportionally high amounts of tax revenues to local communities from the state-wide income and sales taxes. This changed when the state supreme court ruled that the 25 or so poorest school districts had to be supported by the state to equalize school funding. So, even though economic efficiency might be your criteria for developing taxation policy, I think issues of equity are and will always be linked with efforts at tax reform.
by Dennis Buss
While Proposition 13 has had a detrimental affect on schools, cities and counties, it is not the primary problem today with the budget shortfalls as some critics claim.
Our schools continue to suffer from too much administrative overhead, out of control pension and health care costs, and constraints by Teacher Unions.
Our cities and counties have yet yet to significantly slow down their run away retirement and health care costs.
It is easy for these institutions to blame Proposition 13 rather than deal with the fact they have long term financial problems that transcend current terms of elective bodies.
Proposition 13 applicable to commercial properties probably should be repealed. The commercial market have more effective mechanisms to deal with increased cost where the homeowner does not.
by Vern Smith
Thank you for another great post.
I look forward to many more entries with high quality info.
I’m a marketer myself and your information always seems to get my business brain going!!
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by Realtor
One of the reasons that Proposition 13 passed was the feeling that there was no rationality to the process of assessment. I can remember many people going to the assessors office to find out what the assessed values were on properties in their neighborhoods (me included). It was befuddling, similar properties had widely varying assessment. One thing you can say about Prop 13 is, you know what the rules are. You may not like them, but you know exactly how properties are assessed. Our assessor at the time made the comment the one shouldn’t look for equity in property assessment. You can imagine how that comment went over.
by Brantly Richardson
Good thinking- let’s repeal Prop 13- then hand over the rest of our money to the gov’t-
When that happens you will have the same issues-
not enough money for this- not enough for that-
The same people who swore that lottery proceeds would go to the schools- depleted the schools original funding lines-
You expect them to honor a’committment’ that Property tax increases will go to the schools?
If you do- you believe in the tooth fairy- and global warming-
by Bill Goodwin
What percentage of property owners are covered by prop.13?
by Jack Allen Williams
Stan and Roz. You are both idiots. You want to cut prison guard salaries?? The people who risk their lives guarding the murderes and child molesters who would otherwise be on the streets in our communities and around our children… How about you two geniuses take a shift at San Quentin and see if you would take a pay cut after that shift. Better yet, get back in your volvo’s and just stay at home. Next time you two clowns decide to express cutting salaries on people’s jobs of which you know nothing about, do some research on what the job entails.
by Joe Prison guard
Why does everyone discuss Prop 13 when there is a simpler solution? 11% of our budget goes to incarcerating criminals. Some of their facilities are unfairly nicer than schools! Let’s move them all out to Death Valley and run a prison camp like Sheriff Joe Arpaio where they can eat baloney sandwitches, wear pick undies and move rocks all day..living on $.87 per day.
Next, cut off ALL services to anyone who broke our laws by entering our country illegally. This will free up schools, prisons, hospitals & welfare funds for American CITIZENS who deserve it. Send them back!!!
by Pookie
I can remember folks having to sell their homes due to the fast rising property taxes back in the 70′s, but the voters also wanted to send a message to stop the outlandish spending by the state. I am sick and tired of Prop 13 being blamed for lack of money for the schools when Sonoma Co. has at least 40 school district with administrators trying to protect their jobs. And, since 1978 many homes have been bought and sold along with new construction of homes with price tage exceeding $800m which all get accessed at current value. In fact I read where the average house turns over every 7 years.
by Ron Starkey
Prop 13 is a Formula method of trying to control taxes and spending. It is not fair taxation – new buyers and those that have moved are paying too much and those that can stay put get out cheap. Control of government spending should be from the opposite end of the system – budget control and decisions for funding based on programs. Then the level of taxes as a percentage of accessed value could go up or down as needed. This would tax property owners fairly. Alternative sources of funds should also be reviewed, and used, based on what services are being provided. Gasoline taxes to support transportation, for example.
by David Jackson
I want to hear Professor Clarke weigh in on this.
by ssualumni