Jon Coupal: Prop. 13 blameless for state crisis

When California voters approved Proposition 13 by a landslide in 1978, they launched a nationwide revolt for lower taxes. Critics now blame that revolt for our current fiscal crisis. That charge needs to be considered in the light of actual data about property taxes in California.

Prop. 13 limits property taxes to 1 percent of the cash value of property, or the market value of a property, depending on when it was purchased, with subsequent annual tax increases limited to 2 percent. Prop. 13 also imposes a two-thirds majority requirement on the state Legislature for increasing taxes – either by increasing rates or changing the way taxes are calculated.

These provisions have caused Democratic U.S. Sen. Barbara Boxer, Nobel Prize-winning economist Paul Krugman and a cadre of pundits to cry foul. The standard story is that these restrictions 1) force the state to rely more heavily on other taxes, like personal income taxes, because it can’t raise enough from property taxes, and 2) they prevent the Legislature from raising taxes even in times of crisis. The actual tax data tell a different story.

First, Prop. 13 no doubt has benefitted homeowners for more than three decades. That relief, however, was mitigated when housing prices began to eclipse income gains early this decade. The run-up in housing prices and the resultant increase in property tax assessments for homebuyers post-2000 meant huge revenue gains for government. Any Californian who purchased a home in the past decade knows the burden property taxes place on their finances. Indeed, according to the latest census data, California ranks 19th among states for the aggregate level of disposable income required to pay property taxes.

Boxer, Krugman and Co. mistakenly argue that the state relies less on property taxes because of Prop. 13, compared with other states. Again, census data indicates that California ranks ninth for its reliance on property taxes. Put differently, 41 states rely less on property taxes than does California.

Specifically, local governments in California collect 34.3 percent of their revenue from property taxes. In Alabama, which ranks first, it’s 44.4 percent. Contrast this reliance with some of California’s neighbors: Arizona, 36.4 percent; Nevada, 34.8 percent; and Utah, 38.8 percent. This refutes the notion that California is a low property-tax state.

Further, California’s heavy reliance on property taxes and personal income taxes hasn’t meant low taxes in other areas; we have a fairly high corporate income tax rate and the nation’s highest state sales tax rate.

Prop. 13 opponents charge that the two-thirds vote requirement impedes the state government from implementing budgets, even in times of crisis. What the data show is that the state and local governments have had very little trouble raising taxes, to the point of being markedly uncompetitive and dangerously eroding the incentives for work effort, savings, investment, and entrepreneurship.

The state’s budget crisis continues despite the many so-called fixes of the past two years. The Legislative Analyst’s Office recently estimated a roughly $20 billion budget shortfall over the next 18 months. The state’s bond rating was already the lowest in the country when Standard and Poor recently reduced it again.

Blaming these fiscal woes on a lack of revenue because of Prop 13 makes for an easy sound bite, but the charge is factually baseless and counterproductive. To overcome our crisis, California needs a serious debate on solutions, based on actual tax data, not on urban legend and rhetoric.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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