We can’t afford Prop. 13 anymore
Proposition 13 has overstayed its welcome.
I say this as my colleagues Marc Lifsher and Evan Halper bring word elsewhere in the paper today that Gov. Arnold Schwarzenegger wants to impose a fee on property insurance premiums as a way to help close the state’s estimated $14-billion budget gap.
That’s just dandy, isn’t it? A surcharge on insurance that’s based on a property’s replacement cost, and hence much of its market value. That may not be an honest-to-goodness property tax increase, but it’s about as close as you can come without getting your hair mussed.
I know I’m asking for it by even suggesting that Proposition 13 is doing more harm than good. But this topic resurfaces from time to time, and this should be one of those times.
Schwarzenegger is expected to declare a state of fiscal emergency this week to deal with the budget mess. He proposed a constitutional amendment in Tuesday’s State of the State address to give him more power over California’s finances.
It’s pretty simple, though. Either we spend less money or we raise revenue, or both.
All things considered, our friends in Sacramento aren’t going to suddenly discover the value of frugality -- unless packed schoolrooms, broken bridges and crumbling levees are your idea of satisfactory quality of life.
So that means we need to get our hands on some extra cash. And like it or not, that means taxes. That’s a bad word, I know. But it’s how things work in the real world.
Proposition 13 is as good a place as any to start if we want to raise some serious coin and we want to do it soon.
“It’s terrible economics,” said Lenny Goldberg, executive director of the California Tax Reform Assn. “We have the heaviest tax on new investment and no tax on windfall.”
What he means is that Proposition 13 allows the state to reach deep into the pockets of people and businesses that buy property at market value. But it does precious little to get a piece of the action from those with long-held properties that have soared in value over the years.
Quick refresher: Proposition 13, passed by voters in 1978, caps taxes at 1% of a property’s assessed value. That value can go up only by 2% a year. Properties are reassessed any time they’re sold. Then the 2% annual limit kicks in again.
Proposition 13 is frequently referred to as the third rail of California politics because it’s so dangerous for a lawmaker to touch. And that’s certainly understandable. I don’t know of a single homeowner who’d willingly sign off on a potentially huge increase in property taxes.
That is, unless you’re one of the richest guys in the world. In 2003, billionaire Warren E. Buffett, while serving as an economic advisor to then-candidate Schwarzenegger, suggested that maybe it was time to revisit Proposition 13.
He pointed out that the tax on his $500,000 home in Omaha increased by $1,920 that year. Meanwhile, the levy on Buffett’s $4-million house in Laguna Beach, which he bought for less than $100,000 in 1971, rose by just $23.
Schwarzenegger in effect told Buffett to keep his big mouth shut.
Many Californians seem resigned to Proposition 13, enjoying its protections while owning a home and then stomaching the idea of possibly paying way more than their neighbors when they buy into a new community.
Arnie Siegel, 81, owned a condo in Brentwood for 27 years and, like Buffett, never had to worry much about property tax increases. Last year, he bought a new condo just blocks away for $1.3 million and his property tax jumped by $12,000 a year.
“It bothers me that I have to pay it,” Siegel told me Tuesday. “But that’s the reality of it.”
Similarly, 32-year-old Amy Huber and her husband moved from a condo in Brentwood last summer that they’d owned for three years into a $2-million home in Pacific Palisades. Their annual property tax soared from $6,000 to $25,000.
“That’s how it works,” Huber said. “Somebody bought a house near ours a couple of months later and they’re paying more than we are.”
Goldberg at the California Tax Reform Assn. knows that any change to residential tax rates would be a tough sell. So he favors starting with commercial property, which is indeed the right place to begin.
Assessing all commercial property at market values could add $5 billion more to state coffers, Goldberg estimated.
“The assessment of commercial property is the biggest hole in the state’s tax system,” he said. “It’s completely indefensible.”
Long-term owners of office buildings, shopping centers and hotels should be paying their fair share to support surrounding infrastructure, Goldberg argued, rather than forcing more recent investors to shoulder the bulk of the burden.
If the older portions of the Disneyland resort were assessed at the same level as newer ones, he observed, Orange County would be raking in millions of dollars more each year in revenue. This, in turn, would make the county less reliant on assistance from the state.
“It’s only fair,” Goldberg said.
Not so, retorted Jon Coupal, president of the Howard Jarvis Taxpayers Assn. and keeper of the Proposition 13 flame. A so-called split roll -- separate tax structures for commercial and residential property -- would be a terrible idea.
“Sooner or later, it’s going to come back to consumers in the form of higher prices for goods and services,” Coupal said.
In any case, higher taxes shouldn’t even be an issue, he said. “We don’t have a revenue problem,” Coupal insisted. “We have a spending problem.”
That’s one way of looking at it.
Residential taxes are trickier. Even Goldberg doesn’t have a slam-dunk way of making levies more equitable without forcing many seniors and working-class people out of their homes.
Base values would need to be reassessed, but it’s unclear by how much. Annual increases would have to go up from the current 2%, but, again, it’s unclear by how much.
“It’s not going to happen until someone can figure out a fair way to do it,” Goldberg said.
One possibility: taxing people more heavily when they sell their homes as a way to capture gains from rising property values.
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.
All I know is that the Mickey Mouse fee on property insurance that Schwarzenegger is proposing is little more than a stealth tax hike, a nickel-and-diming of Californians to avoid more difficult political decisions.
Rethinking Proposition 13 wouldn’t be easy. But it would be right.
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