Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Monday, June 13, 2005

Prop 13: How Direct Democracy Ruined California

Hi Gang,

A few weeks ago, Dr. Strangelove suggested we have a discussion about the nature of democracy and how it is or isn't like republican government. This week, Law Talking Guy posted his thoughts about direct democracy in California. This latest posting got me going about one of my favorite things to dislike: Prop 13 (it's right up there with agriculture subsidies). US West and I got into a bit of debate about Prop 13 that kind of got off topic. So here is a post mainly about Prop 13.

If you would like a detailed account of Prop 13's effects on California, check out this PBS documentary "From First to Worst."

Here are the two features of Prop 13 that I think are most important. First, it decoupled property taxes from the market value of the property. Second, it required that all bills that are not budget neutral (so anything that costs anything) pass the state legislature by a 2/3 majority. These two features dominate California politics today.

The property tax feature has effectively defunded all local government. Making local governments dependent on bail-outs and revenue dispersal from the state government in Sacramento. This concentrated power in Sacramento. But while the power was being shifted from local governments to Sacramento, Prop 13 also imposed a 2/3 majority requirement on all budget decisions. This meant that while Sacramento had more and more authority, it was institutionally prevented from using that authority effectively.

I believe that Prop 13's backers used direct democracy to set up an unassailable conservative regime in a liberal state. And, ironically, while this regime was established through direct democracy, it resulted in a far more centralized regime than before, a regime less accountable to the voters than before. They have set up a permanently centralized (more disconnected from the people) and dysfunctional (less efficient) state government. Now they use that disconnect and dysfunction (caused by Prop 13) as an excuse for one right-populist ballot measure after another.

Defenders of Prop 13 argue that retirees need it to stay in their homes in a real estate market gone wild. But this begs a number of questions. First the rhetorical question: why do people retire to Florida and Arizona instead of Manhattan or San Francisco? Now the real questions: Do the elderly have the right to live in houses they can't afford? Do they have a right to live in the same towns they always lived when they retire? The same state? If they do have these rights, how much should the rest of society be expected to pay in order to subsidize their lifestyles? How many cops on the beat, fire stations, emergency rooms, or school buildings should the rest of society sacrifice so that elderly homeowners won't have to sell out and move out?

I know that last question sounded rhetorical but it's not intended to be. Prop 13 made a massive change in how the wealth of California was distributed and spent. There were winners (mainly elderly homeowners) but there were many losers as well. I think it is valid to ask how much should we rob Peter to pay Paul.

And even if the property tax part is justifiable, what about the 2/3 majority part? In my opinion, I would gladly trade away the entire referendum procedure in exchange to repealing the 2/3 majority requirement. That one section of that one ballot measure has so badly disrupted state government in California that almost any price would be worth its reversal.

OK, Let the debate begin!


Anonymous said...

I do fear that California may ultimately prove what I fruitlessly try to tell many former econ majors and libertarians:
Economics ain't everything. Political structures must be functioning -- the state must be functioning -- or all the entrepreneurship in the world won't help. Lower taxes don't matter a damn either, if important public goods cannot be provided by a broken state. I fear this may be our fate. Some voted for Arnie because they perhaps understood this at some level. But that's like selecting an undertaker as your doctor. 

// posted by Law Talking Guy

Anonymous said...

Ah, RBR, you know you are going to call me out with this. I think you are an absolute curmudgeon for wanting to turn out old people. Will you support state funding for their nursing homes? They aren't all rich folks migrating from New York to Florida, you know. Many of them aren't living in homes they can't afford, nor are they sitting on million dollar assets. Many of them, like my 81 year old mother, paid for their homes long ago and own them free and clear. This will soon change, however, because boomers have no qualms about taking out 30 year mortgages on $2 million hones at the age of 60. And I think that is the group, RBR, that causes you to raise your objection.

Actually, I don't disagree with you. In fact, I agree with you 99.8%. And if you all haven't seen From First To Worst, you should.

But I think it is useful to understand why 65% of the voters voted in favor of Prop 13 in 1978 rather than passing Prop 8, a more moderate attempt at tax reform. It was, afterall, a tax revolt. Prop 13 sought to "fix" was not just rapidly rising property taxes. It was also an attempt to rationalize property taxes. California had an ad valorem where county assessors would periodically reassess properties and then aim for a reasonably uniform assessment. It turned out that the assessments were rarely as uniform as one would have hoped. The number of properties assessed differed from county to county, year to year. And the variance  in values was huge both within and between counties. Basically what you paid in property tax was really a matter of how lucky you got with the assessor. This is known as "arbitrary taxation".
Prop 13 was also an attempt at wealth redistribution. Some school districts and cities were markedly better off than others. The differences were often drawn along ethnic lines. In the interest of maintaining some semblance of egalitarianism among the classes (something long since lost), and prop 13 was born. Both of these issues were legitimate concerns. You should never be taxed out of house and home at any age, especially in an arbitrary taxing system. And for the record RBR, it wasn't millionaires that were suffering at the time, but average citizens. At the time, property taxes were rising quite rapidly and indiscriminately.

Prop 13 has failed in many ways. For starters, the inequality across counties is just as bad if not worse now than before. Public services are becoming more privatized, schools especially. It has created friction between state and local governments. It has created even greater problems of tax equity among the counties giving rise to "donor counties" who give more than their fair share to the state and don't see the services in return. And local governments are unable to adjust to shifting priorities and tax dollars keep disappearing into some black hole.

This means that local government must turn to bond issues and increases in sales tax for revenue. This latter tax is, in effect, typically conservative since sales taxes always affect poor people more so than the wealthy.

So I, and many others in this state, agree that tax reform is a must. But Prop 13 is the first rail in state politics and I don't see any hope of changing it too soon.


// posted by USWest

Anonymous said...

Let's not get caught up in straw men. The most significant effect of Prop 13 was to shift the tax burden from businesses to residences. In 1978, about 2/3 of all property tax revenue was commercial; it is now less than 1/3. The reason is that families move every 5-10 years on average, but commercial properties remain in trusts and are leased. Of course, the value of commercial property is recouped by its owners through rent, so there is no reason not to tax them on an ad valorem basis. Repealing prop 13 for non-residential property would increase tax revenues dramatically without affecting homeowners.  

// posted by LTG

Anonymous said...

All of these points underscore my basic complaint that referenda are a poor way to make policy. If you look at the text of Prop 13 (there is a link to the original text on the "First to Worst" website), you'll see a pages long text of complex tax code written in impenitrable legalese. I doubt 1 voter in 20 actually read it all the way through and I doubt half of those really understood its implications.

So what we had was a situation where local assessors were acting in an unpredictable and seemingly abusive way. Rather than fix that problem Prop 13 disconnected property taxes from property values. Now we have a system that largely benefits commercial property owners that is presented as protection for residential property owners.

Policy is complex and nearly always multi-dimensional. Referenda are fundamentally ill suited to making good policy in these cases.

As for the rights of old people. US West is implicity saying that society has a responsibility to subsidize the property ownership responsibilities for the elderly. Fair enough. Now, who get's the bill? How much is too much?

Also, my comment about Manhattan wasn't an allusion to millionaires but to the skyrocketing property values there. The people who leave Manhattan to go to Florida aren't all rich. Many are more or less middle class folks who can't afford to live in Manhattan on their fixed incomes. My point was that it is actually very common in high cost housing markets outside California for the elderly to expect to have to move when they retire. That's all.

My main point is: Prop 13 is a rotten solution to an irritating problem.

My secondary point is: Do the elderly have a claim to a costly subsidy to sustain a life style they no longer can afford? If they do, how much subsidy is reasonable? How much should the rest of society sacrifice so that the elderly don't have to move to Nevada or Arizona? 

// posted by Raised By Republicans

Anonymous said...

I don't think anyone was pushing forward any strawmen. RBR just had many points that he seemed to want to discuss. And LTG's is correct about the burden shifting. In fact, across the federal and state tax systems, businesses have gone from paying around 15% of the tax bill to below 5%. The difference has been shifted to the citizen. Oh, but we can't tax businesses because then they might close or move to China! Ooooooooo.

Referenda are a bad way to make policy. So, having learned this lesson with Prop 13, the governator has called for yet another special election in November (at huge cost to voters) so that he can end-run the legislature on 3 ballot propositions. And of course, this means that every loony with a piece of legislation will be out with a clip board gathering signatures to get his pet cause on the ballot. I bet you 5 bucks that we will end up voting blinding on something like 15 measures, half of which will get tied up in the court system at yet even more cost to tax payers. So has the system been taken over by special interests? Absolutely. It's how weak legislation gets around the legislative process.

Considering how often people move and the problems communities face with this constant migration, I think it isn't out of line to give incentives to get people to stay put. Say that if you have lived in your home for 10-15 years, you will get a reduction in your tax bill. Chances are that after that period of time, you aren't going to sell your home to recognize market value. Remember, market value is a paper investment until you actually sell it. The ad valorem system is ok so long as the housing market stays stable. But when you see these huge spikes in the market, or when you are in a bubble situation, ad valorem can be a problem, punishing the very people who are trying to live, old as well as young. And considering that real wages are either stagnant or falling, you would risk having property ownership limited to only the most wealthy. Of course, in California, that is now the case anyway. So I agree with LTG that you have to shift the burden back to businesses.

// posted by USWEST

Anonymous said...

The "straw men" comment was related to the debate over whether we somehow needed Prop 13 because of the elderly. My reply was that the more important issue was commercial taxation, and the primary residences of those over 60 years old would be a negligible exception to make to any general law if need be.

The other problem with Prop 13 is that it increases tax rates. Because the amount of income coming from homes 20+ years old is so small, the taxes on new homes are set at the legal maximum - giving CA one of the highest nominal percentage rates in the country. The rates should be reduced on new homes.

My proposal to reform Prop 13 is:
1. Re-assess all commercial property, on an ad valorem basis. Maximum increases of 20%/year (or some other phase in figure).
2. Allow taxes on residential property to increase at the rate of inflation (approx. 3%). Reassess value every 5 years, but never more than 20%/year increase. If the property is valued at more than $2 million (adjust figure for inflation) then allow greater increases.
3. Reduce nominal tax rate to 1% or lower. Require nominal rate to decrease to .9% or .8% if total revenue increase is too dramatic.
4. Keep Prop 13 in place for the primary residences for persons over 60 years old (no increase in tax bill).
5. Allow property taxes to be raised by simple majority vote.
6. While we're at it, put strict limitations on authorities of homeowners' and condo associations.


// posted by Law Talking Guy

Anonymous said...

I think we would all agree that LTG's proposed reforms to Prop 13 would make a great starting point for a legislative compromise on the issue. Oh, but wait, the direct democracy format doesn't allow for compromise. Oh well.

I guess the Progressive activists who pushed this stupid procedure on us back 100 years ago weren't the James Madisons of their day. 

// posted by Raised By Republicans

Anonymous said...

Suppose a person buys a home, lives in it, abides by the law, pays their taxes, and otherwise lives as a good citizen. What gives government the right to price someone out of their home, especially when we see just how poorly our money is used?

Your argument that they can't afford the home is a bogus one. I bought a home I could afford absolutely, PITI was about 30% of take home pay. Suddenly, over a ridiculously short period of time, the house tripled in value. Without prop 13 my taxes would have tripled... pushing my home nearly out of my reach. What did I do wrong that I deserve to be kicked out of that house by a greedy government ( or perhaps by greedy people who have learned you CAN vote yourself other people's money)? The mortgage hasn't changed, my insurance hasn't changed, and there's no way anyone could realistically have said "Gee, I better take into account the fact this house will triple in value over a 5 year period....." when computing what they can "afford".

The fact of the matter is that California is in a bad way for two reasons: we're spending far too much money, and we're spending it badly. The tax burden per capita (even in adjusted dollars) was lower in the 60's while the were building the best road, school, and water distribution systems in the world. What's being built now for over 100 billion? They can't even figure out traffic on the 101, but there's money to determine a dark colored car causes more greenhouse gasses to be emitted.

Anonymous said...

My friend and I were recently discussing about technology, and how integrated it has become to our daily lives. Reading this post makes me think back to that debate we had, and just how inseparable from electronics we have all become.

I don't mean this in a bad way, of course! Ethical concerns aside... I just hope that as technology further advances, the possibility of copying our brains onto a digital medium becomes a true reality. It's a fantasy that I dream about almost every day.

(Posted on Nintendo DS running [url=]R4[/url] DS SKu2)

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