September 22nd, 2009 11:07am
Prop 13 Repeal: Part I on taxes
by SBE Faculty at SSU
Proposition 13 (Prop 13) was approved by California voters in 1978. One main result, though it has many facets (see igs.berkeley.edu for a great history and description), was to limit the growth rate of property taxes and constrain local municipalities from increasing it at a rate that kept pace with inflation. This maximum growth rate created two winners: homeowners on fixed incomes that could theoretically be financially forced to sell due to rising property taxes that outpaced inflation adjustments to their income and multifamily home landlords which now had a cap on escalating property taxes versus the rent they could charge to keep pace with inflation. Whether residential or commercial property owners gained directly from Prop 13’s tax constraint is difficult to assess.
The two largest changes to California’s economy was that funding for municipalities, specifically schools, was now constrained and property taxes no longer acted as an incentive (or disincentive) toward the optimal allocation of property. As a student in public schools throughout the 1980s, the effects were somewhat obvious on materials available, teachers retained and campus grounds. For commercial property owners, vacant space could lay dormant at a relatively low cost of property taxes, especially during recessions; landlords have a tax disincentive to sell and buy new, higher-priced property, thus commercial property markets did not act like markets anymore. The same held for residential property until that market saw exponential gains in the 1990s and early 2000s.
Now, with California’s fiscal deficit soaring, Prop 13’s repeal is being discussed. In a state that relies on income and consumption taxes (where retail sales tax is a large portion of that), recession implies rising deficits and at some point new taxes or reduced expenditures or both. If Prop 13 was to have its commercial property aspects repealed, and allow property taxes to rise on commercial properties at a faster rate, the effect would be detrimental in the short-term, but should be allocatively efficient in the long-term. Any tax distorts behavior, but this tax would be lesser of many evils. I am not a proponent of new taxes whatsoever; I am a proponent of efficiency. If property is to be taxed, and from a political economy standpoint it is hard to imagine it will always be, beginning the experiment of reversing Prop 13 here is better than no change and a full repeal.
In part two of Prop 13’s discussion, I will talk about the political market in Sacramento and the 2/3 vote on all new taxes which is the portion of Prop 13 that should be repealed first.
These are my opinions; I invite your comments and discussion.
Rob.
sonomastate.blogs.northbaybusinessjournal.com |
