David Lazarus: "We Can't Afford Prop 13 Anymore"

from you and David's lips (0.00 / 0)

to God's ears.

Can we do it?

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by: CarlsbadDem @ Wed Jan 09, 2008 at 18:25:52 PM UTC

I think the question is "how" (0.00 / 0)

Not "can."

Don't get me wrong, Prop 13 really IS a third rail - just touching it sets off sparks if not electrocuting the toucher - and there is still an ingrained resistance among many Democrats to even discussing reform.

Perhaps I'm just a naive young optimist, but I believe the voters in this state would be willing to consider changing it, if we make a persistent and compelling case.

I think the keys are:

1. Emphasize the goal isn't to screw the elderly and the working-class (Prop 13 was never about that to Jarvis and his ilk, but it was a useful selling point, and remains so to this day).

2. Explain to people that they are paying more in costs and lost economic opportunity than they receive in tax breaks. We need to quantify how the higher costs of education, health care, housing, and transportation have all outweighed any savings or benefits that folks have received from Prop 13.

The only reason Prop 13 didn't immediately sink the CA economy is because Pat Brown's liberal system was so successful at producing an educated population that could spur the fantastic economic growth the state saw in the last three or four decades. But that inertia is rapidly fading and soon we're going to be stuck just like Michigan with an economy that won't budge, unless we reinvest in education and health care and transportation.

But too many Californians don't make those kind of economic calculations when they think of taxes. It's too indirect. How many homeowners understand the economists' concept of an "opportunity cost"? No, it's easier to think in terms of a tax bill, figure "lower is better for me than higher" and be content with that. We have to find a way through that.

3. Propose solutions that will give us revenue solutions and a fairer system, solutions that are clearly understood by the public. The California Tax Reform Association's plan are a good place to start.

4. Build a coalition that can accomplish the above educational tasks while also organizing to implement long-term fixes.

I'm sure others can chime in with more specifics; the above is a rough sketch of some basic elements.

You can check out any time you like but you can never leave

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by: Robert Cruickshank @ Wed Jan 09, 2008 at 18:47:33 PM UTC

[ Parent ]

Prop 13 (6.50 / 2)

First of all, the most sensible first reform is simply to split the rolls b/w residential and commercial property. That way, commercial property would pay taxes on the real value of their property. As it stands, Prop 13 is a tax on new business and subsidy for old business. Doesn't seem very smart for the so-called state of innovation.

But even if we do work on the residential side, we can work on targeted tax relief for those who need it, not just for everybody. As Warren Buffet said, he pays a lower tax rate than his housekeeper. That's ridiculous. So, let's make the Buffets of the world pay all of their taxes, and then create programs to provide tax relief for those who actually need them.  

I think?

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by: Brian Leubitz @ Wed Jan 09, 2008 at 22:20:35 PM UTC

Situational judgment (0.00 / 0)

What's always bugged me the most about Prop 13 isn't the idiotic tax structure it imposed.  Sometimes good things pass, sometimes bad things pass.  No, what really irked me was that Prop 13 made it impossible to fix that idiotic tax structure (or anything else) by imposing the 2/3 rule for raising taxes, making it essentially impossible to do so.

The 2/3 rule is restrictive and unfair, first of all because it ties the hands of the government and removes discretion and situational judgment; discretion and situational judgment are key concepts in a progressive political system, whereas strict adherence to arbitrary rules is a key concept in a right wing political system, so it has a negative effect on the state's collective value system as well.  Second, the 2/3 restriction applies only to raising taxes, not lowering them; what's good for the goose is good for the gander, so neither one should have that restriction.  Third, Prop 13 itself did not pass by 2/3, thus constituting an unfair domination of the many by the (comparatively) few.

Now, these are all things I've just kind of always understood to be true.  Maybe I'm oversimplifying or getting it wrong, in which case I want to be corrected.  And having been born after Prop 13 was enacted, I could be identifying battles that have already been fought and lost.

But I think what I've laid out here is the best foundation for an attack on Prop 13.  It rests on fairness and sanity, which both touch political nerves of their own.  I think a lot of people, even if they don't want to talk about paying dramatically more in taxes yet, are ready to admit that placing all these restrictions on the budget (such as spending requirements on different sectors and so forth) is not good policy.  Once the 2/3 requirement is abolished through a situational judgment and fairness campaign, we can begin to have a real conversation about what to do with our state.  

Yes We Kang

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by: I voted for Kodos @ Wed Jan 09, 2008 at 22:41:21 PM UTC

Of course, from the perspective (0.00 / 0)

of the rentier class and the anti-government hardliners who are the true advocates for Prop 13, all of those things are features, not bugs.

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by: jsw @ Wed Jan 09, 2008 at 23:15:52 PM UTC

[ Parent ]

Precisely (0.00 / 0)

Professor Michael Hudson, a trade economist and historian as well as adviser to Kucinich, thinks that Prop 13 and its ilk played a key role in the development of the asset bubble that now threatens the global economy. Hudson made these comments in reply to a Stephen Roach column, and is quoted at the European Tribune:

New homebuyers faced a choice: miss out on home ownership and continue renting at rising prices or take on a lifetime of debt. Tax cuts for property have left a larger land rental value to be capitalized into yet larger loans.

So the financial sector's campaign for property-tax cuts have fuelled the mortgage bubble, coupled with Alan Greenspan's flooding the economy with enough money to drive down interest rates, lengthen maturities to zero-amortization loans, make zero-down-payment loans, "liar" loans with no confirmation of income, and repeal of federal regulation over bank mortgage lending. Mr. Roach's company made billions of dollars packaging junk mortgages. And now he demands more tax cuts for "savers" - his financial sector clients.

Although property tax cuts did not alone create the bubble, they do seem to have been an important contributing factor.

You can check out any time you like but you can never leave

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by: Robert Cruickshank @ Wed Jan 09, 2008 at 23:29:23 PM UTC

[ Parent ]

Naturally (0.00 / 0)

But since it's just them, it seems like there would be some ground to be gained by pointing it all out to everyone else.

Yes We Kang

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by: I voted for Kodos @ Thu Jan 10, 2008 at 00:10:11 AM UTC

[ Parent ]

What if it's a partial repeal? (5.00 / 2)

Why not repeal Prop 13 where it really matters, on corporate properties only? Leave personal or residential property tax law untouched. Kick the bastards in the balls where it really hurts, and keep the electorate happy.

Not sure what the specifics would be: perhaps you'd do it based on zoning? If you made a distinction between property owned by non-living entities and real people, would that cause a legal fight over corporate personhood? (And wouldn't that be a great battle to have?)

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by: mildewmaximilian @ Thu Jan 10, 2008 at 03:05:49 AM UTC

That seems to be a consensus (8.00 / 1)

I spoke about that directly in the diary, as did David Lazarus and the California Tax Reform Association. Brian mentioned it in a comment here, and now you have as well. I think going after AB 80 and the commercial assessments is the way to go.

This is where I wish I knew the law better - as I understand it, the commercial assessments are protected by AB 80 and subsequent legislation, which predated Prop 13 by 11 years. But it is likely more complex.

I don't think we should leave personal or residential property tax untouched - the current system is grossly unfair and archaic - but I also see the value to starting with commercial property.

You can check out any time you like but you can never leave

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by: Robert Cruickshank @ Thu Jan 10, 2008 at 05:49:13 AM UTC

[ Parent ]

Isn't the middle class taking enough punishment? (0.00 / 0)

I used to think that property owners should pay property taxes commensurate with the market value of their property.  Of course, I was a renter then and didn't understand the intricacies of property valuation, mortgage amortization, and tax implications of owning real property.  I figured that if a property increased in value, the owner should pay more in taxes.  If they passed the increase on to me in rent, so be it.

Now that I have a mortgage payment, I understand that a higher property value does me NO GOOD AT ALL unless I rent out or sell the property.  The fact that my house has appreciated since I bought it doesn't put a single penny (remember those?) in my pocket.  Raising the tax rate or assessed valuation on my personal residence is no more fair, and I would argue that it's less fair, than raising sales or income taxes.

Please note: I am not anti-taxes.  In fact, I just moved back to Calif from Washington state where I was possibly the only person in the state who thought that people who made as much as I did should pay income tax!  I oppose increasing regressive taxes such as sales and use taxes because I feel that those who have more money should bear a larger share of the tax burden.  But an increase in the value of real property does NOT translate into having more money.  It may raise the amount I could borrow against my house, but each refi or HELOC carries costs and fees that the elderly and middle class would find prohibitive.

Several suggestions in the comments are interesting.  Separating individual and commercial rolls sounds good, but what about the mom-and-pop grocery store that's been on the corner for 30 years?  (Yes, they still exist!)  Can we draw a line somewhere that exempts small businesses?  Or devise a sliding scale that takes annual profits into account when determining the rate?  Small businesses are in danger of becoming a quaint memory; we need to preserve as many of them, particularly family businesses, as possible.

One way that Washington raises revenue is they assess an "excise" tax on the sale of property.  While some would argue that this would pose a hardship on those who have owned their homes for a short time in these days of declining property values, perhaps it could be treated like the capital gains tax - you'd pay tax on the gain on the sale of property, rather than on the selling price the way Washington assesses it.  It would impose a record-keeping burden on the homeowner to keep track of receipts for capital improvements, which wouldn't be fun while trying to pack up for a move, but it would need to be done eventually anyway.  Homeowners who can't provide receipts for improvements would pay the tax on the selling price minus the purchase price without deducting the cost of improvements.  A homeowner selling property at a loss wouldn't pay the tax.

Assessing fees for fire coverage is doublespeak for privatizing essential services.  You can read why this is such a bad idea at http://rawstory.com/news/2007/...  For starters, "AIG firefighter Sam Crays was saving homes for clients... 'There were a few instances where we were spraying and the neighbor's house went up like a candle.'"  Police, firefighting, and EMT services must be provided to homeowners and renters alike regardless of economic status, and should therefore be funded by everyone.

No, I'm afraid that the only fair solution, other than imposing an excise tax on the sale of property (and vehicles?) is to raise income taxes.  Given that people who are employed full-time are having difficulty making their mortgage payments and finding affordable health care, only a system that scales to a person's income, flawed as it is, can fairly address the needs of our roads, schools, infrastructure, and essential services.

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by: Central Coast Kerri @ Thu Jan 10, 2008 at 03:09:48 AM UTC

We seem to have similar backgrounds (0.00 / 0)

Like you, I just moved to the central coast from Washington. So I understand quite well what you are talking about. People here think Prop 13 is sacrosanct, but it's easier to talk about reforming that than to raise the idea of an income tax in Washington. In 2002 the legislature commissioned William H. Gates (Bill's dad) to study the WA tax system and propose reforms. His commission came back with a plan for an income tax. Governor Locke and the legislature thanked Gates for his time, shelved the study, and nothing has been heard of it since.

I agreed with Gates, and with you, that WA needs an income tax in the worst way. But I also agreed with those who opposed the legislature's cowardly special session late last year to restore the Tim Eyman (a Washington State version of Howard Jarvis for all you Californians) promoted property tax cap measure that the state supremes had tossed. David Goldstein, a friend and my favorite WA blogger, instead promoted a "property tax circuit breaker" that would tie property taxes to income. I have long championed such a plan.

The problem with relying on an income tax is that, as we've seen in CA, it leaves the state subject to a volatile source of income. In a boom, we take in huge amounts of money. In a bust, we lose out. Property taxes can swing as well, but a fairer system would provide more revenue stability and more revenue period.

An excise tax on home sales is a great idea. Germany has a similar but stronger tax, specifically designed to prevent speculation and flipping. That would be something we in CA should examine.

The primary disagreement I have with your comment, though, is the assumption that Prop 13 protects middle-class homeowners. It does no such thing. It is merely an assumption that has stood virtually unchallenged for 30 years in CA. It not only lacks evidence, but it ignores the whole picture.

How many people have lost their homes to rising property taxes nationwide? It's not a national epidemic. Sure, there are specific examples where it has occurred, such as Florida when their real estate bubble peaked in 2006. But in states without a Prop 13-type limit, the middle-class hasn't been kneecapped. And the middle-class is ALREADY facing widespread foreclosure, not because of taxes, but because of the fraudulent lending and speculative activity that created the housing bubble itself.

More importantly, to focus on property taxes alone misses the entirety of the picture facing middle-class Californians. As I explained back in August, my generation - Californians born since 1979 - faces staggering inequality. Because of Prop 13 and the structural revenue deficit it created, we lack proper funding for health care, education, housing, and transportation. All of those, when properly funded in the '60s and '70s, helped build the California middle class and the California economy. The middle-class is now hurting precisely because tax cuts have gutted government's ability to pay for these things.

The other disagreement I have is that it's Prop 13 or nothing. When I say we need to abandon it, I don't mean that we should return to a pre-1978 free for all. The problem is that Prop 13 is a far-right wingnut solution to the property tax question. There were many Democratic, progressive solutions discussed in the 1977 legislative session, but Dems and Governor Jerry Brown couldn't agree, and so momentum went to Jarvis and Prop 13. There are many progressive solutions out there today. Nobody here is talking about putting working- or middle-class homeowners on the chopping block.

Clearly something needs to be done to ensure that working Californians aren't squeezed by taxes, or educational fees, or health care costs, etc. But a fairer system needs to be implemented, and that WILL necessarily entail changes to Prop 13.

Finally, you mention fire protection. The author of the RawStory piece, Miriam Raftery, is a friend of this site, and I think her article on this is fantastic. I wrote about this very issue back in October, How Anti-Union, Anti-Tax OC Conservatives Defeated Adequate Fire Protection in 2005. The OC Register, a notoriously right-wing paper, called me out in their lead editorial a few days later, which spawned my response.

To summarize that exchange, I argued that fire protection was a collective concern of all Californians, and that it should be paid for through taxes. The Register was feeling defensive, but also said they support privatization of fire protection - the kind of thing Miriam wrote about, they love.

I am willing to consider the "fee" Arnold has proposed. If it can be assessed fairly and equitably, and will provide fire protection to all Californians and not just a few who live in burn zones, it might work. But we need to learn more about that proposal. And, I believe, private firefighting such as that which appeared in San Diego should be either outlawed or placed under the control and direction of Cal Fire.

Thanks for your comment - this is an important discussion we need to have about not just taxes, not just Prop 13, but the future of California.

You can check out any time you like but you can never leave

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by: Robert Cruickshank @ Thu Jan 10, 2008 at 06:19:54 AM UTC

[ Parent ]

Thanks for the thoughtful reply (0.00 / 0)

Disagreeing a bit with your disagreement - my concern about the middle class goes back to the reason that prop 13 was enacted in the first place: despite exhorbitant interest rates, property values, and corresponding tax rolls, were rising faster than wages were. My point was simply that tying property taxes to the market value of the property burdens anyone who is struggling to make ends meet. Unfortunately, this now includes the middle class, which, as you pointed out, is contributing to the increase in foreclosures and bankruptcies (sidenote: it disturbs me greatly that some of the foreclosures aren't attributable to predatory lending; I'm concerned that it's possible that increases in property taxes and insurance associated with increased market values nationwide may represent some small part of the picture that hasn't been quantified). Even during the current downturn, most people who've owned their house for more than two years have had their property appreciate at a rate higher than any increases in their incomes.

One issue I took with the Lazarus column stems from my experience in Washington. About "taxing people more heavily when they sell their homes as a way to capture gains from rising property values," he posits, "But this would then leave less money for people to buy their next home, which would depress housing prices, which would slam the economy from a different direction." To which I'd respond, it hadn't dampened home sales in Washington! Home prices were continuing to increase until last month, when prices dropped year-to-year for the first time since 1991 (if you're curious, see http://seattlepi.nwsource.com/... although houses were staying on the market longer in part due to the difficulty of obtaining the second loan in "80/10" financing. I sold my home up there last summer and the buyers almost lost their second loan when instability in the financial sector heated up...

One area where I think we all agree is that some adjustment must, should, and probably will occur to residential as well as commercial property rolls unless we enact the WA-style excise tax. I'd be cautious about tying property taxes to income, though. Fuel and associated food and utility costs are taking a bigger bite out of our paychecks now than they were just a year ago. As with income taxes, we need to take into account the ability of the owner to pay based on net income, not whether a property is residential or commercial or whether the owner is a corporation or individual. After all, if you're going to tie property taxes to income, why not just raise the income tax rate?

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by: Central Coast Kerri @ Fri Jan 11, 2008 at 22:43:56 PM UTC

[ Parent ]

Make the Commerical Market Crash Again (0.00 / 0)

The writer of this article shows no understanding whatsoever for how commercial real estate works.  Repealing Prop 13 for commercial real estate would be disastrous.

1) Much of commercial RE is leased to small business and industry working on a tight profit margin.  A prop 13 repeal would increase their taxes dramatically and landlords would pass this on to their tenants (most business leases mandate this).  This will drive many tenants bankrupt and out of business.

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by: maintour @ Thu Jan 10, 2008 at 18:10:22 PM UTC

Booga-booga! Small Business! Bankruptcy! (0.00 / 0)

So predictable.  Any discussion of the revenue side of the equation is met by the same talking points from the anti-government crowd.  They never have any actual proof and in many cases, the proof runs in the other direction, but the talking points come no matter what.

Progressive income taxes? Business will flee the state! Rich people will flee the state!

Property taxes?  Old people! Fixed incomes! Can't afford it!

Commercial property taxes?  Small business! Bankruptcy!

What's endlessly amusing about this is that there's a whole continent across the Atlantic with MUCH higher taxes, and they're doing just fine.

The only taxes that the Republicans like are regressive taxes like sales taxes that fall most heavily on the poorest people.

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by: jsw @ Thu Jan 10, 2008 at 18:39:35 PM UTC

[ Parent ]

And right on David Lazarus (0.00 / 0)

for writing a "consumer" column with real teeth.  He's awesome.

I am a healthcare activist for the National Nurses Organizing Committee/California Nurses Association.  We are the nation's largest RN union, the nation's fastest-growing union, and leading advocates for single-payer healthcare.

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by: California Nurses Shum @ Thu Jan 10, 2008 at 19:30:35 PM UTC

changing Prop 13 (0.00 / 0)

After thinking about Prop. 13 for a good while I have come to the conclusion that it would be difficult to change.  So what I am proposing is to get another proposition on the ballot that would make all property taxes in California calculated on the 1975 market value.  This might be easier to get voted in.

This would bring equity to this particular situation, but then it would crash the system.  Then let them come up with a more equitable way to tax Californians.

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by: dr/sf @ Wed Feb 06, 2008 at 00:53:01 AM UTC

Prop 13 is not the only Problem (0.00 / 0)

The partial revenue shortfall for education due to Prop 13 should be attacked from two other pieces of legislation that is locking up millions, especially seniors in their homes.  It reduces inventories, especially those early Prop 13 buyers.  Prices tend to rise in middle to upper middle class homes.

Capital Gains at 25% keep seniors in their homes facing large gains over and above the $250,000 all locked-in.  How to get around such as tax?

The 'Step-Up-at-First-Death' provision of the Federal Estate tax legislation originated prior to World War I does just that.  A current surviving spouse can sell their home and all other assets free of Capital Gains.  However, couples in the same set of circumstances pay the gain over and above the $250,000 personal exemption.  

A partial solution for increased revenue for schools best be directed to Capital Gains elimination for all seniors.  It would replace old Prop 13 taxpayers with a new one.  Not to mention freeing up billions of equity to the stock market, possibly annuities.  The Feds nor the State will get the gain if the couple owning the highly appreciated home or commercial real estate if they wait of a partner to die.  

It's been reported by the Wall Street Journal there is $18 Billion of home real estate ownership, down from $20 Trillion in the last year.  How much of it is owned by seniors locked-in here in California.  California is shooting themselves in the foot with these 3 pieces of legislation.

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by: jhall @ Sun Feb 24, 2008 at 23:51:31 PM UTC

[ Parent ]