Yet Another Attempt to Overturn Prop 13

Get ready for opportunistic attempts to link the overwhelmingly approved Proposition 13 with the California budget disaster. Prop 13 opponents never miss an opportunity to throw rocks at the 1978 law which limited the state government’s ability to tax property owners.

As banks feverishly dump foreclosed homes at cut-rate prices, and as neighboring homes change hands at similar bargain-basement rates, those amounts are enshrined as the new basis for determining property tax until the homes are sold again. Under Prop. 13, that basis can rise a maximum of just 2 percent a year, even if the home is worth significantly more. The consequence is likely to be a revenue crunch for the public services funded by property tax revenues.

[From Property tax revenue plummets with home values]

Prop 13 critics believe that if they say often enough that the measure is bankrupting the state then people will eventually believe them. However, taxpayers and more importantly, the subset of taxpayers who vote are smart enough to understand 3 essential data points that completely discredit Prop 13 critics.

1) The state of California continues to collect massive tax revenues largely on the backs of property owners and sales taxes. The fact remains that California has for all of this decade overspent their revenues, despite revenues increasing by eye popping numbers, as the graph below illustrates (note: these numbers are general fund plus all the extras that the state spends money, your money, on).


2) Critics say that Prop 13 dis-incentivizes people from selling their homes… seriously, how many people in California have lived in their homes for 30 years? It is impossible to get around the fact that home building in California has been an overwhelming growth driver for the state until this year, and what that means is all those new homes added to the previously owned homes that are involved in a sale transaction (which triggers a new tax assessment) are new revenues for the state, in spite of Prop 13.

3) The state’s population is not static, in spite of an exodus of people from the state that is resulting in a loss of people, the state continues to grow in population because of births and illegal immigration. On that latter group, the state has gone out of it’s way to enable illegal immigrants to buy homes, which is one reason why no-doc loans were so popular in the state. First time homebuyers represent new tax revenues for the state.

The housing meltdown will be a major problem for the state this year and likely for the next 3 years as a result of declining values and applications for re-assessments by people who have seen the value of their homes plummet. None of this is the fault of Prop 13, the failure lays at the feet of Sacramento politicians who have completely failed with regard to adhering any semblance of fiscal discipline, and also because the states revenue structure is built on a shaky foundation that is overly dependent on a small number of income taxpayers (fewer than 5% of state income tax payers generate over 50% of the state’s income tax, mostly from capital gains), an already high consumption sales tax that substitutes as an income tax for people on the low end of the spectrum, and lastly, property taxes which then get distributed disproportionately from property wealthy counties in the state to those that are not.

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Stacking the Deck

I fully appreciate the severity of the economic retraction we are currently working through, in fact having written much about it myself here and on my twitter stream. Having said that, I find myself shaking my head in disbelief at the degree to which the media continues to talk down the economy in anticipation, almost hope, that it gets worse.

Case in point, today Good Morning America (I like watching in on Sunday morning) had a segment about declining consumer confidence and they interviewed a husband and wife from a single family, in the kitchen of their very nice McMansion in name-your-favorite-suburb, about their new family budget in light of their economic sentiment. The money quote was when the wife said “we’re absolutely terrified!”.

Tucked in the report was the fact that “the couple both work for the family auto dealership”. Crikey, that’s like asking a homeless person about the state of housing.

The only reason GMA featured this couple is that the producer wanted an interview subject that would present the worst possible forecast on the economy and someone who was taking truly draconian actions in light of current economic condition… yep, someone who works in a “family auto dealership” would certainly fit that bill.

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