Challenges to Proposition 13

In “If Prop. 13 Goes, We’ve Got to Have a Plan” (Op-Ed Page, Dec. 3), Assemblyman Johan Klehs (D-San Leandro) details the threat that three impending court challenges may result in Prop. 13 being declared in violation of the 14th Amendment to the Constitution, and calls for a careful evaluation of the legal criticisms involved. Such a careful evaluation would show that these equal protection arguments rest on faulty economic analysis, that, once corrected, would destroy their argument.

The legal challenges argue that because Prop. 13 allows owners of more recently acquired parcels of property to be subject to much higher taxes (due to its provision for reassessment up to market value only upon sale), those higher taxes violate the equal protection guarantee that laws be applied in a nondiscriminatory manner. However, this argument remains plausible only if market responses to this provision are ignored. The new property taxes that will be due upon sale are perfectly predictable to both parties involved, and those future taxes are capitalized into lower (than otherwise) sales prices. As a result, the burden of those taxes is borne by the seller; the buyer simply accepts higher future taxes in exchange for a lower purchase price.

Since the buyer is compensated for the increased property tax liability in the sales price, he is no worse off as a result of the reassessment on the sale provision of Prop. 13. Since he is no worse off, there is no violation of his equal protection rights, and the basis for the court challenges disappears.

Despite the failure of these lawsuits to make a cogent argument for their charges, they are being pursued because of the huge windfalls they would generate for those who have bought property since 1978.

Judging from history, the odds that the courts will buy an erroneous argument are large enough that it is worth a shot, given the billions at stake. However, those billions would be extracted from California taxpayers, either through higher taxes of other sorts or lower levels of government services, so that avoiding such a decision based on inaccurate analysis is crucial.

GARY M. GALLES

Associate Professor of Economics

Pepperdine University, Malibu