Equalize Taxes, but Save Prop. 13 : Don’t Let State Cloak a Revenue Hike in the Guise of Fairness

The U.S. Supreme Court’s decision striking down a West Virginia county’s “welcome stranger” system of collecting property taxes will probably not knock out California’s Proposition 13.

However, most Californians feel that the question of fairness and tax equality created by Proposition 13’s method for assessing property--a method in which houses purchased after 1978 are taxed at a much higher rate than those those that have remained in the same hands since the passage of the initiative--is a valid subject for debate. Indeed, in 1987 Paul Gann and I joined Assemblyman Ross Johnson (R-La Habra) in an unsuccessful attempt to equalize these residential property taxes.

The trick is to achieve equality without giving up the benefits of the Proposition 13 tax reduction: a healthy economy, predictability in taxes, frugal government and, most of all, the assurance that we will not lose our homes to ever-increasing taxes.

There are a number of alternatives to consider. One solution may be a “split roll” in which residential property owners pay different taxes than do owners of commercial property. Proposition 13 protected individuals from paying taxes on the paper profits on their homes, but it also protected income-producing property.

It is estimated that businesses pay two-thirds of all property taxes, and they also benefit from two-thirds of the tax savings under Proposition 13. So, while Proposition 13 has saved taxpayers $121 billion during the last 10 years, businesses have saved $80 billion of that amount.

When it comes to raising revenue for government, looking to business as a way of sparing the individual taxpayer is an old idea. A champion of business, Alexander Hamilton, wrote in the Federalist Papers that, for government, “Revenue must be had at all events. In this country if the principal part be not drawn from commerce, it must fall with oppressive weight upon land.”

More than 200 years later the business leaders who made up the core of the LA 2000 Committee appointed by Mayor Tom Bradley recommended in their report on the city’s future that property taxes should be increased. If the business community believes that new property taxes are required, let that tax fall on the business side of the split roll.

The question that we must ask about the split roll is: Will it cool our economy?

Another oft-suggested equalization plan is to adjust the 1% property-tax rate downward on fully assessed property so that the total revenue collected won’t change, but the collection will be more evenly distributed among those who pay. The problem with this solution is that there will be a big jump for the homeowners who have not moved since Proposition 13 passed. Many would lose their homes under such a system.

It is time to realize that the property tax is not the all-purpose tax that it once was. In today’s society the property tax doesn’t allow for all protected to share the burden. Proposals to raise the property tax to fund police and schools and welfare ignore the fact that everybody, not just property owners, benefits from these programs, and that all should share the burden.

For example, under the rent-control laws of Los Angeles the owners of residential property cannot pass on a property-tax increase to their tenants. Therefore we could accomplish a raise in property taxes in which more than a million residents would not have to pay a tax increase.

Perhaps the answer to property-tax equality is to eliminate the property tax and substitute a sales tax and/or a local income tax.

For residential property owners the property tax is an income tax; they pay their property taxes out of their incomes. The residences certainly do not raise any income to pay the taxes.

While there still could be fees tied to specific property-related services like garbage collection, a local income and/or sales tax, controlled by a vote of the people, would widen the base of all taxpayers paying for government services and infrastructure. More taxpayers paying the cost of local government should lower the cost for everybody.

These taxes would be tied to peoples’ economic growth, and the dollars to government would increase only as the people bettered themselves. The taxes would not outstrip the people’s income growth as would the property tax, tied to the value of a house.

The disadvantage of this plan is that people do not like the income tax. It is a disincentive to produce. Sales taxes are a disincentive to buy.

Other proposals will be suggested. Some will use the excuse of equality as a method to seek large tax increases. While the people are interested in tax equality, they are not interested in large tax increases.

An important message that many voters sent with Proposition 13 was to spare the individual homeowner from putting up his house as collateral against the cost of an ever-increasing government. In solving any question of fairness, that message is still appropriate today.