Massaging Proposition 13

On the date of its passage, June 6, 1978, annual property reassessments were common, as tax increases by county officials literally forced long-term residents from their homes due to amounts they couldn’t afford to pay.

Since the day Prop 13 became law, tax advocates blamed it for every imaginable malady to befall California – except perhaps the San Francisco earthquake of 1906. Not a month goes by where a state project or program gone awry, whether because of faulty planning in its origination or incompetence in its undertaking, is not attributed to a lack of funds resulting solely from the evil perpetrated by the proponents of the initiative.

The fact its passage was approved by 64.79 percent of the state’s voters and millions of property owners are now spared the confiscatory taxes, which became common prior to its enactment, seems to be of no concern to those desiring to deep-six Jarvis-Gann.

For those of you unaware of the details, the following is a brief summary of the law’s provisions. Prop 13 recognized the assessed valuation of all California real estate on its 1978 passage date. If title remains unchanged, its assessed valuation is permitted to rise by only two percent annually. Reassessments thereafter may only occur upon the transfer of the property to an unrelated party. The tax rate assigned to all property is one percent of its current assessed valuation.

[As an aside, you might note there’s another factor, unrelated to Prop 13, which invariably increases your total tax. It’s those expenses added to your home’s cost by the builder or bond issues approved by your fellow voters along the way. This is a factor we’ll ignore – although you’ll be pleased to know your annual property tax on these amounts is also bound by the one percent limitation.]

To illustrate the working of these rules, consider this example: Fifteen years ago you purchased, for $200,000, the home you still live in, with an original assessment of $200,000. The second year its assessment is raised by $4,000 (2% X 200,000 = 4,000). The third year its assessment is raised by $4,080 (2% X 204,000 = 4,080).

As you see, an analogy to compound interest comes into play. In any event, its assessed value today, 15 years later, calculates out to be $274,559. What this means to you is, with the tax collector’s one percent tax rate limitation, this year’s property tax will be $2,746.

We’ll now delve back into history to give you a view of the sort of tax you’d likely be paying on your home if Howard Jarvis and Paul Gann never graced the face of this earth.

Prior to 1978, typical tax rates ran from 2.5 percent in affluent locales to 4 percent in depressed areas. And over the years, appreciation of homes averaged 4.5 percent annually. We’ll presume your home is in middle-class Huntington Beach, so the tax rate is 3¼ percent. It’s time, once again, to do the math. Appreciation of your $200,000 house, again compounded over its 15-year holding period, raises its market value – and thus the value the tax assessor assigned to it – to $440,061. And with its tax rate at 3¼ percent, its property tax this year would be 14,302. As you see, Prop 13 saves you $11,556 (14,302 – 2,746 = 11,556).

Although you obviously find this to your satisfaction – and the mathematics is uncontestable – there’s another way of viewing the result. If you’re among those persons who believe taxing authorities are entitled to tax without limit, then you did not save $11,556. Rather, the government lost $11,556. As you see, it’s all a matter of perspective.

With the preliminaries now behind us, we must take a look at what may be in our future. Jarvis-Gann is under attack more aggressively than ever before. In February of 2018, a coalition of civil rights and community organizations began collecting signatures for a measure to tax commercial real estate at market value while leaving in place the Proposition 13 protections for residential properties, a concept known as “split roll.”

The reason for exempting residential is obvious, as the changes must be approved through an initiative. The organizers realize a majority of homeowners and tenants will oppose any modification possibly raising their personal property taxes and/or rents. They hope, however, most voters are less concerned with what happens to commercial interests.

If they’re correct, the split roll generates an additional $11.4 billion annually for state and local governments. With the coalition’s recent announcement they’ve acquired the more than 800,000 signatures needed, it appears the measure will be scheduled for the 2020 ballot.

Who are those supporting this massive tax increase on businesses? They include good-government groups like the League of Women Voters, social justice advocates like the Alliance of Californians for Community Empowerment, various state and local teachers unions – thought not the California Teachers Association – and philanthropic organizations such as the San Francisco Foundation and the Chan-Zuckerberg Initiative.

They are, as you see, entities with no stake in whether California’s business interests prosper or fail…and, for that matter, no stake in whether California prospers or fails.

Rather than discuss the skirmishes in store for the parties promoting and opposing the Prop 13 modifications, I’d like to concentrate on a somewhat related subject: what the probable effects will be for the residents of California if the split-roll taxation measure is successful.

In particular, what will a substantial increase in property taxes do to the assessed value of commercial property? Of greater importance, in what way will these tax increases be passed on to the tenants of the properties? And of even greater significance, what may be the likelihood many of these tenants will abandon their rental agreements or their businesses and dismiss their employees?

I doubt there can be any definitive answers to these questions. The best we can do is speculate as to how extensive will be the disruption to the business community.

I confess to an uncomfortable feeling. I believe the diminution of business income caused by the tax increases will enhance what is commonly referred to as wage stagnation. For the past two decades we’ve experienced a decline in the share of income going to working and middle-class Americans. Labor’s share of capital investment is no longer predictable.

A 2013 economics report for the San Francisco Federal Reserve Bank, revealed as much as 85% of the declining labor share may be attributable to increased import competition, as U.S. producers respond by shifting production to countries with cheaper labor. Thanks to technology and globalization, the world’s lowest salaries are now available to employers everywhere. This may leave countries better off in general, but it’s of little comfort to those employees who jobs are lost as a result of employers forced out of business due to the imposition of governmental fees or taxes of any sort.

There’s no doubt the tax increases to be imposed by the split-roll on business properties will lead to a massive loss of California jobs … this as a direct result of the exportation or termination of many businesses and a corresponding reduction in the valuations of countless parcels of commercial property.

A final thought: In the not too distant past California functioned in a business friendly manner. Its property taxes remained competitive with those of other states, as were its income taxes. Furthermore, neither state legislators nor constitutional officers found themselves bound by term limits, so those who won the favor of their constituents by working for the best interests of all productive citizens remained in their jobs.

I personally recall those years; I considered it a joy to be a Californian. For some reason things changed and government became a hostile force. Those officials who make and enforce the rules by which we live seem to exist in an environment removed from the citizenry who must obey their commandments. I’m sure there’s a logical reason, but I truly don’t understand it. Will someone please explain why?
 

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com.

al@beachcomber.news