Blog: Prop. 13's End Would Be A Disaster

Prop.13 has protected the middle class for more than 30 years from politicians trying to raise property taxes and grow government. It is now coming under attack.

Governor Brown supported Proposition 30, telling us this tax increase would restore good government in California, make the rich pay their fair share and negate the need for future tax increases. He was, by his own admission, looking out for the middle class. 

A month and a half after the tax increase to end all tax increases and we have an effort, in the California Legislature, to overturn Proposition 13. 

After the promise not to raise additional taxes, here is a major effort toward another massive tax increase. For those who don’t follow such things, Proposition 13 was enacted in 1978 to stop a steady increase in property tax rates. It had reached the point in 1977 where older people, and the lower middle income class, were unable to afford their property tax. After spending years working hard to purchase their home, they were losing them because of a high property tax rates they could not afford. 

There was a tax payer rebellion of sorts, led by Howard Jarvis, which led to fixing property tax rates at 1 percent based on the value of a property in 1975. There could be no more than a 2 percent increase each year. 

In true rebel spirit, Prop 13 also required a two-thirds vote of the Legislature to increase tax rates or tax revenue. The politicians and public employees were rabid in their denouncing this unreasonable attempt by citizens to keep more of their own money. Since then the repeal of Prop. 13 has been a major goal of the California Democratic Party.

Proposition 13 has worked well over the years. From 2000 to 2005 property tax revenue increased in the state by 22.1%. Person income per capita increased at 13.80% and general revenue per capita increased at 21%.  So while the elderly and the middle class were able to afford to keep their homes, revenue increased faster in property tax than in general revenue per capita.

Then, we in California made a terrible mistake. We elected one party, the Democrats, to control a veto-proof majority in the state Legislature.  The Senate Pro Tem Leader, Darrell Steinberg, has proposed doing away with the two-thirds majority vote needed to increase tax rates.  There is nothing to stop this one-party state from doing away with the protection we had over our homes.

I’ve been reading the materials prepared by those who want to overturn Prop 13. It all boils down to the need to get more money to grow the size of the state government. Many are not worried, because they understand the legislature will raise taxes on the rich, and they will be fine. They are mistaken. The rich will be fine. It is those who work who will see a lower standard of living, less opportunity to buy their own home, save for retirement or save to send their kids to college.

It is always the middle class that pays.

Here is how you, the middle or lower middle class income person, will be affected by higher taxes. A good example is to look at what happened in Britain. In 2009-10 there were 16,000 British subjects who reported income of a million or more.  The new government then raised the income taxes to 50 percent. There were 6,000 British citizens who reported incomes of a million or more in 2011. How does it happen that over 60 percent of the millionaires left? Easy, money brings mobility. If you have wealth and your attorneys cannot figure out a way to avoid taxes, you move to a friendlier environment. When the millionaires left Britain they took the jobs with them. They will no longer buy homes, cars, gardening services, dry cleaning, gifts or food in Britain. Who gets hurt the most? The middle class who provided those services get hurt the most.

I’ve had California state legislators tell me businesses will not move from California, because we are the Golden State. Just this morning on the business channel Greg Stanton, the mayor of Phoenix, was talking about his success in drawing high worth individuals and businesses to Phoenix from California.  This same story has been repeated by Governor Rick Perry of Texas.  Right here in
Anaheim, the CEO of Carls Jr., reports most of its expansion in the coming years will be in Texas and not California. Money is mobile, and businesses have a fiduciary responsibility to make money for their stock holders, even if it means moving the headquarters for the business.

However, as money flees California, the infrastructure of government will remain the same size.  You understand, government does not adjust due to business cycles, government always grows. With less income from business, with fewer millionaires to fleece, the burden will by necessity flow down to the middle

If you have a home, and a family, can you afford to pick up and move to a less expensive state? Some may, but most of us have roots here. If taxes continue to increase, less people with money will move to California, so the value of our homes will drop. If our home values drop, then an unchecked legislature can increase property taxes to plug the gap in tax revenue due to lower priced housing. The rich or the poor never pay the price of bad government. The middle class always picks up the tab.

None of this should surprise anyone. The reason this country has worked so well over its history is the system of checks and balances. In California we have committed the one sin that cannot be corrected. We have bestowed absolute power on one political party. What flows from Sacramento will be epic in its destructive nature.

What to do? The only things politician’s fear is getting a real job and losing his power. Start writing letters. Write the governor and his people telling them your plans, for their future, if they overturn Prop. 13. If you are a caller, call your state representative and let him know how you feel about overturning Prop. 13.  Each of us should start talking to people and talking about the effect of losing Prop. 13 on us personally and to our state.

We may have made a huge mistake but it is never too early to start digging out.

As Will Rogers once said: "When you find yourself in a hole, stop digging."

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MFriedrich December 11, 2012 at 12:08 AM
Andromeda, You said "you give your opinion and if I disagree I tell you why I think your opinion is faulty - then you either admit that your comment was in error or you further your own argument. See how it works?" Sometimes matters are gray. Now I know that's uncomfortable. given your propensity to prematurely and unilaterally declare argumentative victory everywhere. I'm still waiting for you to point out which of my opinions was "faulty", without fabricating what I previously wrote or meant. I will not "defend myself" against claims or ideas I never expressed. But I'm a nice person. So let me summarize my view again: Proposition 13 solved one problem, but had unintended consequences. Property taxes are but one important factor in home affordability and a buying decision. In terms of damage to the housing market and over-leveraged homedebtors, rescinding Prop 13 would be neglible, assuming all other factors contributing to high CA home cost ownership and price volatility were addressed. But these factor are very unlikely to be addressed, so the impact of no Prop 13 would be very significant and unfair to old and new buyers. Just trying to help.
Andromeda December 11, 2012 at 12:14 AM
The truth is not pain free. Often it smarts. Mr. Webb's comment was appropriate and to the point. Don't attack the messenger.
jim capistrano December 11, 2012 at 12:16 AM
...birds of a feather...even when they disagree..
Andromeda December 11, 2012 at 12:20 AM
Mr. Friedrich, the larger point is that the repeal of Prop 13 would damage the economy greatly since real estate is a significant portion of our economy. Do you remember those famous works of H. Ross Perot? Namely that "Giant sucking sound." Mr. Perot was 100% correct in his assessment of NAFTA and it would correlate directly to a huge property tax increase on housing in California. But I know that will be hard for you to follow. Oh well. I tried.
MFriedrich December 11, 2012 at 12:20 AM
"No where was the middle class represented." Well, they were supposed to be represented by their local elected members to Congress, Mr. Webb, which I know was an interest of yours not to long ago. But the US Federal Reserve and OMC answer to NO ONE. Congress has zero power over them and their policy, except to eliminate funding or abolish the system altogether. There have been talks of requiring auditing of the Fed.
MFriedrich December 11, 2012 at 12:29 AM
Jim, I understand what you are saying, but most of the supposed value in the housing market was complete and utter fantasy. And like most fantasies involving money and perceived value, it was all *poof* gone in a matter of months, along with entire companies, some of whose ops were based right here in OC. A lot of people during 1999-2007 used to believe that debt=wealth. Not all of these people were middle class or poor, but at whatever socio-economic strata they may have resided at the time, a good number got their clocks cleaned. I'd love Eisenhowerian tax policy to return, but I guess we have the gold standard back nor a pseudo-productive monopoly over manufacturing competitors in Europe and Asia too?
fact checker December 11, 2012 at 12:30 AM
I said nothing about the repeal of Prop 13. It needs revision. Most of the questions you pose have nothing to do with Prop 13. It's logic like that that causes people to vote based on scare tactics rather the real facts. You don't have to be an economist to vote but it helps when people don't misrepresent the actual law.
fact checker December 11, 2012 at 12:36 AM
Liberal union supporter comes to mind. You assume that liberals think only one way. Similar to andromeda reading my post and assuming that I was calling for the repeal of 13 when I clearly said it needs to be revised. I am a liberal and I do support unions as a concept. That does not mean that I can't have a conversation with someone who disagrees. That's how government works best.
sheryl bailen December 11, 2012 at 01:20 AM
Most of you commenting should get together to discuss your issues. We all agree we have a problem. My concern is if I'd have to ever move out of Laguna Niguel. Most of our assets are tied up in the home we bought 32 years ago. If prop 13 fails, where would we live as nicely as we do after full retirement? I support the concept of South California and North California as separate states!
MFriedrich December 11, 2012 at 01:30 AM
If Proposition 13 is revised or changed, and not abolished, the impact could be minimized. The problem is not property taxes themselves, or the % rates. The larger problem is California's housing price volatility. it's 2012, post-crash and the fundamentals are still screwed up because the market hasn't really healed. It's still "not OK" that median home prices are 10x the median income in the county. This is not sustainable. Unfortunately, we're looking at a skewed and messed up Picasso-like depiction of the housing market with ultra-low Fed and mortgage interest rates, low lending standards, no-to low-money down financing (Yay FHA!!!), high loan value thresholds in CA, foreclosure prevention laws and regs (way to go California)! and on top of it all over 11 million loanholders still underwater in 2012. This isvery unhelpful when trying to judge the merits of a rather myopic tax policy decision from 1978 (during the middle of a economic recession too). So yes, Proposition 13 is important and a key factor in the equation. But with all of these other massive explosions and booby traps going off in the background, to declare the end of Prop 13 as potentially "disasterous" in a housing market that hasn't really recovered is an exaggeration to say the least.
MFriedrich December 11, 2012 at 01:38 AM
It was only a matter of time before somebody mentioned "home mortgage interest tax deduction" on this thread. Prop 13 and home mortgage deduction are all subsidies for housing homedebtorship. Are they needed? What would be the long-term impact of removing them? Renters don't get any MID. Nor any write off on property taxes paid. Why not? Their rent definitely contains both in their monthly payment to the landlord. Uh-oh. I'm asking more questions about socio-economic class, aren't I? Too soon? Renters vs. Homedebtors! Fight!
MFriedrich December 11, 2012 at 01:45 AM
Property tax rates affect all payments for housing. Including residential rents. Take the Prop 13 governor off and theoretically landlords everywhere would be raising rents regularly too as they would be hit with higher property tax hikes. One consequence of rescinding Prop 13 could be more people renting and fewer "owning". We're reaching the stage anyway in our service-based economy where buying a home doesn't always make a ton of financial sense, unless you have cash for a big down payment, prices are reasonable and you can stay in it at least 5 to 7 years.
MFriedrich December 11, 2012 at 01:57 AM
"Peasants"? I think you're under the mistaken impression that most of this was restricted to sub-prime lending with the middle class and poorer as the primary targets. It was not. http://financemymoney.com/wp-content/uploads/2010/03/option-arm-recast-chart-march-2010.gif A substantial amount of loan instruments were Alt-A and Prime loans as well. These imploded just as specactularly, and affected families across the socio-economic spectrum. From $700k/yr families in Newport to $50K/yr folks in Delray Beach, FL. Mortgage equity withdrawal was a big contributor. http://1.bp.blogspot.com/-ShQwpJ-cipc/UHLvOKyUaFI/AAAAAAAASaY/mrJ50vG1Bgg/s1600/MEWQ22012.jpg The banks offered it. People ate it up. I stand by my statement that CA residents and the majority of Americans do not exhibit a lot of financial discipline and restraint.
MFriedrich December 11, 2012 at 06:40 PM
Aside from Prop 13 changes, homedebtors in OC should consider the following other government austerity changes that are very likely in the future: 1. Reduction or modification to the HMID (home mortgage interest deduction). It will not be eliminated, but the tax benefit/entitlement will probably be dramatically reduced, thereby increasing the cost of homeownership and slowing home appreciation/price rally in OC. 2. Perhaps worse -The FHA may reduce the current conforming limit on FHA loans from $729,750 to $368,000. This would crush the OC housing market because 90% of home loans are FHA (private lending has been wiped out thanks to govt intervention). This will cause builder sales to plummet. This would have an "interesting" effect on those housing projects in Lake Forest by KB Homes where they advertise "Low $700s". At some point OC housing market will finally collide with fundamentals. No longer can it be how much you can borrow, but rather how much you actually earn and save that should drive local housing prices.
Yeparoo December 11, 2012 at 07:22 PM
mf - No HMID deduction in Europe. No Fannie-Freddie-FHA in Canada. Is the homeownership market in the US better off? Doesn't matter, those are POPULAR things, can't get rid of POPULAR things.
fact checker December 11, 2012 at 08:02 PM
What about those whose assets are all tied up in their homes that were purchased after Prop 13? They pay a lot more property tax than you do. How is that equitable?
tiny December 11, 2012 at 08:18 PM
The ones that came before were the bold pioneers that tamed the wilderness. Home of the free, land of the brave; these were fearless free peoples that crafted civilization and created the golden state.
tiny December 11, 2012 at 08:36 PM
Like the heroic statue at the upper campus at CSULB.
Andromeda December 11, 2012 at 08:54 PM
Crush the housing market??? heh. Bring it. That will be the only way we would have a snowball's chance in Hades of leveling a listing ship. Chances are about 80% that it's going to sink regardless of what action they take now since we've gone beyond the point of no return. But that is what happens to debt-loaded societies eventually. I just hope that the Baby Boomers are forced to suffer since it was the Baby Boomers who did most the damage. It wouldn't be fair for them to be able to transfer their egregious sins to the young kids.
Alberto Barrera December 11, 2012 at 10:42 PM
bbq, heh
Alberto Barrera December 11, 2012 at 10:45 PM
So what I'm getting from this blog is that I should live with my parents for the next ten years or so, and then rent for the rest of my life.
Capo Parent Too December 11, 2012 at 10:55 PM
Do you have a source for this, the only reasonable thing to do with Prop 13 would do split roll taxes. Because property taxes are so low we wind up making it up in other ways such as sales tax, income tax, etc. Corporate property tax should be exempt from Prop 13 since so many can change hands and have the property taxes from the original sale grandfathered in, the burden of property taxes has fallen more and more to homeowners rather than commercial real estate. So for right now I haven't heard anyone proposing to do away with it, they can't vote it out, it needs to be done in another manner. So right now, what you wrote is all speculation. All I see when I google Prop 13 is Willie Brown wants to get rid of it, he's not in the legislature though and has NO POWER to do this.
Capo Parent Too December 11, 2012 at 10:57 PM
With property taxes so low our housing costs went UP, it's part of why we had such a big bubble.
MFriedrich December 11, 2012 at 11:00 PM
A better idea is to shack up with a job creator, or somebody way more wealthy and less irritating than your parents. But yes, that's the takeaway. Owning a home in OC going forward is going to be one big pain in the backside, especially if home values head southward due to modifications to above trifecta: 1. Prop13 2. HMID 3. Stupid FHA loan limits for OC market
John Webb December 11, 2012 at 11:03 PM
No Alberto, here is what I would like to see you get out of this blog. The citizens of California got tired or politicans taking their money, and voted themselves some relief. Since then, the politicans have been trying to undue this act by the citizens. They are ready to try again. We need to stand up for ourselves and say enough. We do not have a revenue problem, we have a spending problems. We need to stop this class warfare and pull for one another. You may not have a house today, but you may in the future. You may be wealthy today and poor tomorrow. If we cheer on success and pull for each other, we will all do better. That is what I was hoping you would get out of this blog.
MFriedrich December 11, 2012 at 11:17 PM
Agreed. I don't think there's really any political will to revoke or modify Prop. 13. As stupid and short-sighted as Prop 13 was, today it's probably a good thing we have it, because most of the "normal" states in our union calculate the cost of running the government and divide that by total property value in a given jurisdiction (state/county) to get a millage tax rate. Cost of running the government!?? Just imagine trying to apply that math in California. Given our CA govt costs and grossly inflated property values, we'd be talking 15% or something dumb like that. No way. Now HMID and FHA loan limits? Hell yeah. Those sacred cows are definitely going to get a serious look by Congress. They won't be eliminated, but I predict that both will be amended downward to boost government revenues.
MFriedrich December 11, 2012 at 11:19 PM
Housing might be a good cash-flow investment right now, assuming of course you could find any supply.
Alberto Barrera December 12, 2012 at 02:08 AM
I already knew that John, I was just addressing the unspoken economic side of your blog. When I agree with what a writer says, I normally don't comment on the content of the article, unless there is a portion that I don't agree with or I question the statistics or sources used.
Alberto Barrera December 12, 2012 at 02:21 AM
The housing market will price me out before I even get enough savings to even apply for a loan. We're destined to have another housing bubble, and I'm afraid we're not going to see interest rates this low for decades.
Alty48 December 21, 2012 at 10:48 PM
Mr. Webb does not say in his blog that owners of commercial real estate benefited under the original rules of Proposition 13: if a corporation owning commercial property (such as a shopping mall) was sold or merged, but the property stayed technically deeded to the corporation, ownership of the property could effectively have changed without triggering Proposition 13's provisions. Under current law, a change of control or ownership of a legal entity causes a reassessment of its real property as well as the real property of entities that it controls. Corporations often avoid reassessment by limiting portion of ownership by purchasing in groups where no single party owns more than 50%. For example: In 2002 wine barons E&J Gallo purchased 1,765 acres of vineyards in Napa and Sonoma from Louis M. Martini. But the deal avoided a reassessment, because 12 Gallo family members individually obtained minority interests. In other words, before Prop 13 corporations paid 45% of the property taxes in California. Today big corporations pay only 8%. On top of that, since the passage of prop 13 in 1978, the vast majority of home owners no longer enjoy prop 13 property tax reductions because the vast majority of California home owners have sold their homes and bought higher value homes. http://www.sfweekly.com/2012-01-04/news/prop-13-one-market-plaza-assessor-real-estate-money-taxes-california/3/


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