ORANGE COUNTY VOICES : Taxes’ Short-Term Pain Offset by Long-Term Gain

Even though taxes hurt, they may be in the best interest of county residents.

Three months after the announcement of a $1.7-billion loss due to speculative investments in the bond market, Orange County is still struggling to respond to the financial disaster. Time is running short. Repayment of a $1.2-billion debt is due this summer. A default would increase interest rates to the county, or make it impossible to finance highways or schools.

The last wide-scale default was in 1982, when the Washington Public Power Supply System defaulted on its $2-billion debt. The WPPSS mothballed its atomic power plants. The county agencies, however, cannot shut down schools or firehouses.

When the Orange County Business Council recently proposed a settlement plan that includes the possibility of raising taxes, the simple mention of taxes raised a political firestorm. The supervisors stated that they were dead-set against new taxes. We offer the perspective of two academics. We are also homeowners, parents and taxpayers with an interest in the well-being of the county. We believe that increasing taxes is in the best interest of residents and homeowners. This is because property values will decline if public agencies drastically reduce services.

All else equal, increasing taxes makes the county less attractive, and therefore will depress property values. However, one of the attractive features of Orange County is the quality of schools, which are much better than in neighboring Los Angeles County. Thus cuts in spending on schools, presumably leading to worse quality, will reduce property values. The question is whether the negative effect of taxes is balanced by the positive effect of school quality.

To answer this question, we turn to a classic study by Professor Wallace Oates of the University of Maryland. The study dates to 1969, but has been confirmed many times.

Suppose taxes are increased by $1,000 (about $2.75 per day) for each household. Oates estimates that the higher taxes would reduce the market value of a $200,000 house by $7,300. Suppose further that the added revenue goes to local school districts, allowing them to avoid cutting their budget. Then, the price of a house would increase by about $11,000. The net effect is that a tax increase will increase property values by $3,700.

Anecdotal evidence is consistent with fear of lower services. First, some business activity is down. The 1995 Orange County Executive Survey, conducted by UCI’s Graduate School of Management, reports that 53% of small firms find the county not attractive, up from 30% before December. Also, executive search firms report difficulties in attracting recruits to the county and in retaining county residents.

Second, real estate sales have been put on hold, or canceled because of the uncertainty caused by the bankruptcy. Imagine a family that was planning to buy a house in Irvine, a city known for the quality of its schools. Now programs will be cut, and prospective home buyers are unwilling to pay the high housing prices.

Therefore, it is in the best interest of residents to consider all options to make up the deficit, in particular raising taxes. This should only occur after all alternatives have been exhausted, and taxes should be subject to a sunset provision, and not to entrench a bureaucracy.

The irresponsible inaction so far is perhaps due to the sheer magnitude of the $1.7-billion loss. To get a grasp on the size of the loss, imagine an experiment where you laid $1 bills end to end. Then $1.7 billion would reach about 160,000 miles, more than enough to go six times around the earth. The loss is real and large. Slowly but surely, it will hurt our lifestyle.

Once known as a shining example of entrepreneurship, Orange County is now ridiculed as the “bankrupt county” around the world. The response to the crisis, however, will determine how the county will be judged in the future.