Don't Be a 'Girlie Man'
April 19, 2005
As long as California is projecting a potential $10-billion deficit, governor, now is the right time to reconsider Prop. 13. Come on . . .
By Lee Green
Lee Green last wrote for the magazine about the U.S. Forest Service.
April 17, 2005
OK, you've been in office nearly a year and a half now, and we've yet to see any evidence that you're willing to curl, thrust, jerk, bench press or even touch one of the heaviest issues in California's political weight room. As Warren Buffett famously hinted during your campaign, it's time to do some heavy lifting, governor.
In fact, let's go back to that Buffett thing. Here's a man who knows finance better than Einstein knew physics, and who manages money better than California does. Actually, everyone manages money better than California does, but Buffett has proved to be especially adept -- so adept that you cast him as an economic advisor during your campaign. He had barely warmed his chair, though, when he did something frowned upon in politics: He spoke the truth.
Buffett's truth, you'll recall, concerned California's property tax-limiting Proposition 13, the most famous ballot initiative in American history. He casually mentioned that a system enabling today's homeowners to pay property taxes based on what their houses were worth when the Bee Gees topped the charts "makes no sense," particularly for a state barely clinging to solvency. In a blink he had done the unthinkable: tarnished the Holy Grail we call Proposition 13, the state constitutional amendment that California voters overwhelmingly approved in 1978.
What were we to make of such blasphemy? If you landed the governor gig, would you step out of character, wander off script and take a hard, open-minded look at Proposition 13 and all of its consequences? Your spokesmen immediately assured us that you would not. "Warren Buffett is speaking about his own philosophical position," one declared, suggesting that you weren't about to be swayed by opinions you didn't already hold. "Arnold Schwarzenegger has supported Prop. 13 for 25 years. He will be a fierce protector of Prop. 13."
"My position is rock solid in support of that initiative," you confirmed. More memorable, though, was your rebuff of Buffett, the world's second-richest Homo sapiens: "I told Warren if he mentions Prop. 13 one more time he has to do 500 sit-ups."
At this point you're probably wondering why I'm dredging all of this up again. After all, that was nearly two years ago.
Here's why: Buffett was right.
Forget politics for a moment and let's be honest. If Proposition 13 were one of your Hummers, you'd drive it straight to the shop for repairs because it's running rough and leaking oil. Worse, it's backfiring. Many of the best and the brightest in economics, law, public finance, public policy, planning and tax theory believe that Proposition 13 -- born out of homeowners' anger over rocketing property taxes and government indifference -- has caused or contributed to some of the state's most pressing problems. Granted, it didn't unleash the economic Armageddon prophesied by its opponents, and we certainly can't hold it responsible for the state's current fiscal fiasco, which owes its existence to executive and legislative mismanagement several magnitudes greater than anything Proposition 13 could conjure. Still, the measure's untoward consequences -- from the disempowerment of local government to the decimation of a once-proud educational system, unequal taxes on equal properties and yawning tax loopholes for business -- demand a rigorous reexamination of Proposition 13 and its legacy. In tax lingo, a reassessment.
For a California governor to legitimately claim vision and leadership he must take Proposition 13 off the shelf and put it back on the table. A state with compounding problems and cascading fiscal shortfalls projected at as much as $10 billion a year can hardly afford to declare anything out of bounds. Not that you haven't proposed solutions. You want to eliminate state contributions to teacher retirement accounts and take more than $1 billion from funds earmarked for our sadly neglected transportation infrastructure. You even want to take billions more from a public school system already last or near last in the nation in per-student ratios of teachers, counselors, librarians, principals and administrative staff. The one thing you appear unwilling to mess with -- or to even talk about messing with -- is the most sacred cow in our pasture, good old Proposition 13.
Ah, I can hear your scream from here, governor. Better to die young and have "Girlie Man" inscribed on your tombstone than to reconsider Proposition 13. But surely it can't hurt to talk about a piece of the state Constitution that can't be altered even slightly without either a vote of the people or a junta. We need someone big and powerful, preferably someone with major film credits and an Austrian accent, to stand up and say, "Hey, either we talk about this or everyone does 10 laps around Lake Tahoe." You at least sideswiped the issue, or seemed to, one evening last October during a public conversation with former Clinton White House Chief of Staff Leon Panetta. Answering a Panetta question about California's byzantine public finance system, which quite frankly appears to be the work of saboteurs, you acknowledged that "eventually" changes must be made in "sales tax and property tax and all that."
Changes? Property tax? That's Proposition 13 turf. Exactly what changes did you have in mind? The duct tape variety, or something more meaningful? I tried to reach you for answers to these questions, but you were busy handling important gubernatorial responsibilities such as asking diners at Applebee's to sign your fistful of new ballot-initiative petitions, and hanging out at a bodybuilding exhibition in Ohio. A governor's work is never done. By the way, next time you're at Applebee's, you gotta try the barbecued riblets.
Beginning in the late 1970s, while you concentrated on building your movie career, Proposition 13 became part of California's cultural wallpaper, a feature of our environment as natural as earthquakes and homeless men with cardboard signs. A generation has never known life without it. By now Proposition 13 looks like an aging fashion model, still attractive at a glance or from a distance, but the closer you get, the more flaws you see. Distressed over the diminished quality of California schools and unwilling to accept the wide disparities in property tax levies among neighbors with houses of similar value, George Akerlof would like to see Proposition 13 phased out and replaced with something more equitable and civic-minded. Do you know Akerlof, the UC Berkeley professor? In 2001 he won a Nobel Prize in economics for what the Nobel folks deemed "the single most important study in the literature on economics of information . . . a truly seminal contribution."
"If the governor is willing to do something about Prop. 13, I'll be very happy to do 500 sit-ups," Akerlof told me recently. He will turn 65 this year.
"Are you in shape?" I asked.
"No, I'm not in shape," he replied, but "I'll do 500 sit-ups."
Akerlof bought his Berkeley home in 1979. Thanks to one of the salient provisions of Proposition 13, he pays half as much or less in property taxes than do some of the area's newest homeowners. The system needs fixing, he says. Neighbors living in similar houses should pay similar property taxes, even if that means he has to pay more. People with no children in school should be willing to help pay for schools. "I feel that we're sort of in this together and this is our civic duty. We owe civic duties to each other."
That outlook seems almost quaint today, but it puts Akerlof in the company of former U.S. Supreme Court Justice Oliver Wendell Holmes, who claimed that he liked paying taxes. "It is purchasing civilization," Holmes said.
It's precisely here -- at the suggestion that anyone might be assessed a dollar more -- that any conversation about Proposition 13 reform falters, and for understandable reasons. As you know, governor, few Americans, including Akerlof, share Justice Holmes' view of taxes as one of life's pleasures, and few of us think of taxes as "purchasing civilization," either. We think of them as a burden and oftentimes a waste. Now that you're calling the shots in Sacramento, you know better than ever how proficiently governments waste money. Humorist Will Rogers, looking on the bright side, noted that it's "a good thing we do not get as much government as we pay for." And, of course, governments such as the one you head aren't shy about demanding that we pay. As I like to say, the only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. OK, Mark Twain may have said that first, but the point is, due to a series of unfortunate events that even Lemony Snicket would find disturbing, your constituents have developed an attitude.
In the mid-1970s, as property values soared, local government let property tax rates ride or lowered them only slightly and reaped the windfall, never mind that some people, especially the elderly, were losing their homes because they couldn't come up with the cabbage. You were busy sculpting your body at the time, but this was a huge deal, so you probably heard about it. A bunch of property owners led by rabble-rousing anti-tax crusader Howard Jarvis finally got fed up. After gathering steam for years, their angry rebellion found its moment. Proposition 13 won easy approval, and suddenly the state's property owners collectively owed 57% less in property taxes. Local government revenues fell by roughly $7 billion the first year alone. The landmark revolt inspired tax reforms across the country, yet despite California's high cost of living, our property taxes remain among some of the lowest in the nation.
You'd get a kick out of Frederick C. Stocker, the tax economist. He once noted that property taxes resemble "a structure designed by a mad architect, erected on a shaky foundation by an incompetent builder, and made worse by the well-intentioned repair work of hordes of amateur tinkerers." That may sound like the state Legislature to you, governor, but change "mad" to "mad as hell" and you've got a pretty good description of Jarvis and Proposition 13.
But anger sometimes overrides common sense. You've probably heard that amusing bit that Ronald Reagan liked to reprise: An economist is someone who finds something that works in practice and wonders whether it would work in theory. With Proposition 13 it's the opposite. In its long, turbulent wake economists can see something that looked good in theory and wonder why anyone thought it would work in practice. Sure, it lowered our property tax bills, but at what cost?
You have owned property in California for a long time, so you probably learned the particulars of Proposition 13 well before you became governor. They seem straightforward enough. The property tax rate stands firm at no more than 1% of a property's full market value, and no one's tax bill can increase by more than 2% a year come hell or high prices. The oddest part decrees 1975-76 property values as the taxable base for all properties, and nothing can alter that except a change in ownership. If you and Maria keep your Brentwood mansion for 20 years, your property taxes in 2022 will still be based on what you paid when you bought the place in 2002. Only new buyers are taxed on a house's true current value -- the selling price -- which means that as long as property values rise, the most recent buyers always pay more than anyone else to keep the streets paved and the sewers functioning. We require them to subsidize the rest of us.
You've got to admire the crisp simplicity of the thing -- unless you have the benefit of more than a quarter century of hindsight. We now know that Proposition 13 has greased California's slide from a model state to a state so mired in educational, fiscal and political dysfunction that you have to wonder how we can ever make things right again.
Alan Auerbach dismisses Proposition 13 as "terrible policy." That opinion might not matter if Auerbach were a physician or an arc welder, but he directs UC Berkeley's Burch Center on Tax Policy and Public Finance and exudes expertise in those realms. "You would have to rule out a large number of better alternatives to get to Prop. 13," he says, adding that "you could think of any number of better ways of protecting people from rapid increases in tax payments and accomplishing other objectives that Prop. 13 might have had. Prop. 13 was very poorly designed, and we're living with the unfortunate consequences."
There's an old joke about a geologist, a physicist and an economist marooned on a desert island with nothing to eat. A can of soup washes ashore, but they have no way to open it. The geologist says, "Let's smash it open with a rock."
"No," the physicist says, "let's heat it up and blow it open."
"No, no, no, we'll lose most of the soup," cries the economist. "Let's just assume a can opener."
Economists are forever making assumptions. If we assume that the current housing market is unsustainable, what will happen when the bubble bursts? If we assume a 6% rise in U.S. soybean prices, how will that affect left-handed dressmakers in Italy?
So, OK, if we assume that Proposition 13 had never existed, how would California be different today? It's safe to assume that some other version of tax reform would have been enacted. A less radical tax-relief measure offered by the Legislature actually appeared on the same ballot with Proposition 13 -- but was rejected. Voters figured the only thing better than a tax cut was a bigger tax cut.
"There are certainly some taxpayers in California who might well have had lower taxes under an alternative system," Auerbach says. "If California looked more like other states in terms of the way it taxes property, it's likely that overall property tax revenues would be higher, but that the revenues collected from people who have bought relatively recently would be lower."
Steven M. Sheffrin, a UC Davis economics professor who knows this stuff cold, disagrees. "I think even the people paying the most property tax" -- those who bought most recently -- "are still paying less than other places."
That's the charming thing about economists, isn't it? They possess that splendid ability to analyze the same information and arrive at different conclusions, like husbands and wives but with more bar graphs. As a Republican married to a liberal Democrat, governor, you must be familiar with that phenomenon. Maria doesn't use bar graphs, does she? Anyway, that experts such as Auerbach and Sheffrin disagree just underscores the problem.
As Sheffrin points out, "All other property tax systems in the U.S. have inequities as well. The difference with Prop. 13 is that they're more systematic." In other words, Proposition 13 built unfairness right into our state Constitution.
As properties have turned over, disparities in tax bills for similar houses have lessened, but nothing prevents that trend from leveling or reversing. If the market cools and people stay put longer, the gap between their taxes and what newcomers pay will widen. "That's a feature of Prop. 13," Sheffrin says.
No doubt you know all of this, governor, but given the complexity of tax strategies, a review can't hurt. In his 1979 autobiography, "I'm Mad as Hell" (see what I mean?), Jarvis said that in 15 years of activism he and his taxpayer organization learned only 10% of what there was to know about taxation. He figured that was way more than the politicians or anyone else knew. Still, he was flying almost blind into what amounted to not just a tax revolt but a social experiment. He died in 1986 at age 83, less than a decade into that experiment, leaving us with a puzzling array of interlocking and often unforseen consequences.
A self-described conservative with close ties to high-level republicans, Jarvis distrusted government and was philosophically opposed to tax increases. Politically, he was Sen. Tom McClintock with a touch of Ayn Rand. There's no way to achieve absolute equality, he admitted in his autobiography, "But we wanted to do our best. We felt that if two people had houses just alike, like tract houses, and the owner on the right side of the street paid $3,000 a year in taxes and the owner on the left side of the street paid $1,000 a year in taxes, they weren't being treated equally."
How those guiding principles could result in a lopsided thicket like Proposition 13 is beyond reckoning. Take the differing impacts on homes and businesses. Apart from disparities on the residential side deemed "staggering" by the U.S. Supreme Court (which nevertheless held in 1992 that Proposition 13 does not violate the Constitution's equal-protection clause), Proposition 13 enabled businesses to exploit the system. When someone buys a house, the transaction triggers a reassessment at current market value. But business properties often undergo ownership changes by perfectly legal means that don't register as ownership changes, enabling companies to maintain outdated assessments. All of a corporation's stockholders could turn over, for instance, without triggering an updated valuation of the property. Houses turn over more frequently than businesses do, too, which explains why homeowners have gradually assumed a larger share of the property tax burden. That can't be what Jarvis had in mind, can it?
Perhaps state Sen. Martha Escutia of Montebello has spoken to you about the bill she introduced in December to plug loopholes estimated to cost the commonwealth a sum approaching $1 billion a year. Unfortunately, the Legislature has shown no more enthusiasm for similar proposals in the past than it has for some of yours. Yet some reformers want the Legislature to go even further and adopt a system that would tax commercial and industrial properties at full market value, the most common method used in other states. That could add another $2 billion or so each year to government revenues.
"That one I would change in a minute," says Peter Schrag, who edited the Sacramento Bee's editorial page for years and wrote a book in the 1990s about Proposition 13 and California's self-inflicted decline. "As an economic principle I think it's much worse to have commercial property essentially not reflect the real value" of the business activity it supports. "It stifles competition. If I want to build a store across the street from yours, my property taxes are going to be much higher than yours, which means it's going to be harder for me to compete with you."
Another unintended consequence of Jarvis' success has been the consolidation of power in the state Capitol. Auerbach says "one of the ideas behind Prop. 13 was it would give control back to people and wrest control from governments. It's wrested control from local governments, but it's given more power to the state government." These days no one familiar with California's Legislature would recommend shifting more responsibility in its direction, would he? But that's how it worked out.
Property tax revenues traditionally exist for local governments, which set the amounts, collect the levies, establish priorities and distribute the funds to all the local entities that provide services. California follows that model -- or did until Proposition 13 washed the whole thing away. The cleansing wasn't all bad, given bureaucracies' innate tilt toward inefficiency and self-enlargement. But despite finding ways to replace funds lost to Proposition 13 cuts -- by implementing fees and special assessments, for instance, or devoting land to new retail instead of needed housing because retail yields sales-tax revenues -- local public services have taken a major hit, and in many cases haven't fully recovered.
The plight of counties, cities, schools and other local agencies caught in Proposition 13's undertow has, over the years, been well-documented -- thousands of layoffs, shuttered libraries, recreation programs gutted, schools overcrowded and understaffed, deteriorating roads, strained healthcare services, police and fire staffs stretched thin, and on and on. Empowering Sacramento at the expense of local authority and responsibility stands as one of Proposition 13's most glaring miscalculations. As you may have noticed, the state has failed miserably as a trustee, repeatedly raiding property tax revenues for its own needs and withholding repayments to local governments and schools. To your credit, governor, you acknowledged as much at the Panetta Institute last October, when you said, "For the last 12 years we have stolen from local government $40 billion."
A successful ballot measure that you supported last November, Proposition 1A, forbids the Legislature from continuing to pillage, but to what extent will it eliminate the problem of state dominance?
"Very little, frankly." That's what I hear from Michael Coleman, an expert on California local government finance and principal fiscal policy advisor to the League of California Cities. State legislators still determine how local money is split among local entities, he says. "It's difficult to be accountable in Sacramento for things that happen in Kern County. People in Kern County should be responsible for what goes on in Kern County."
In a system of its own making, the state uses formulas based on years-old local budgets to determine how to split the pot. "And that's bizarre," Sheffrin says. "Nobody understands that. Even the people who wrote it don't understand it." Ultimately, he says, "instead of being a way to empower taxpayers, [Prop. 13] sort of disempowers them, because the decisions made in Sacramento about education and so forth are much more distant from them than they were before."
Former Californian Clarence Y.H. Lo, now a sociology professor at the University of Missouri-Columbia, has stepped back from the Proposition 13 experience and taken a more thoughtful look at it than most. His book "Small Property Versus Big Government: Social Origins of the Property Tax Revolt" centers on Proposition 13. The initiative achieved a correction, he says, but "the wrong kind of correction. Because you really wanted government to operate differently, to be more representative and responsive. That didn't happen. Yes, people have more money in their pocket if they've owned their house for a long time. . . . But there are all these larger issues. Social issues, larger philosophical ones that weren't corrected for, and they're even worse at this point."
Having lost so much autonomy and responsibility to Sacramento, local communities no longer bear as much accountability. What has suffered in that bargain, Lo says, is the commonweal. "That spirit of real participation, citizens going in personally and talking among themselves and to people in their community and to their elected leaders and trying to figure out solutions -- much of that has been wiped out by Prop. 13. I think Prop. 13 helped to change people's sense of what politics is. As [President] Kennedy said, 'Ask not what your country can do for you, ask what you can do for your country.' . . . Prop. 13 was a watershed because through Prop. 13 [the mind-set] became, 'What can the government give back to me? What's my refund check going to be like?' "
Having known California in better times, Lo laments that today we so commonly see "the individual calculus overshadowing thinking about the group."
Governor, you recently spoke about how your goal is "to do the kind of things that no one wanted to do because it's too dangerous in politics to do." How often over the past two years have we heard you talk about doing what's right for California? About restoring greatness to California, about returning California to the promise and prosperity that lured you here in the first place? To give ourselves a real chance of achieving those things, don't we have to finally admit that Proposition 13 is part of the problem? Fixing it will by no means make us whole again, but ignoring its flaws perpetuates unprincipled policy and misses an opportunity to set things right. Proposition 13 entangles California like a vine -- verdant, alluring, toxic. Your predecessors wouldn't touch it. What about you? Will it be political expediency or political courage?
Don't be a girlie man.
A Concerned Citizen
P.S. In 2003, when Warren Buffett wanted to talk about Proposition 13 and you wanted him to zip it, the Nebraska billionaire tried to illustrate Proposition 13's inequities by comparing that year's property tax bills on two houses he owns in Laguna Beach. The tax on his $4 million house, purchased in the early 1970s, was $2,264, while the tax on his $2-million house, adjacent to the first and bought in the mid-1990s, totaled $12,002. In a published letter to the Wall Street Journal, Buffett pointed out that "the tax rate on the second house -- same neighborhood, same owner, same ability to pay -- is roughly 10 times the rate on the first house." He also noted that a hypothetical "non-billionaire" family buying a $300,000 house in Chico "faces real estate taxes materially higher than those borne by this nonresident billionaire on his $4 million house in Laguna. This family, because of Prop. 13, has been selected to subsidize me." Forgive me, governor, but shouldn't you be trying to change such an illogical system instead of vowing to perpetuate it? Just wondering.