Tired of Taxes?

It was in November of 1789 that Benjamin Franklin, perhaps the most prolific spokesmen of all time, penned what was one of his most prophetic observations. In a letter to French scientist Jean-Bapitiste LeRoy, Franklin gave a quick update about a major event in the United States – the ratification of the Constitution and the start of a new government. Included in his comments was the following sentence:

“Our new Constitution is now established, everything seems to promise it will be durable; but in this world, nothing is certain except death and taxes.”

My state of California, where I’ve been a devoted inhabitant for more than three-quarters of a century, certainly does its best to make Franklin’s prophesy a reality. A recent poll conducted by the Berkeley Institute of Governmental Studies (IGS) reveals that, by a margin of 78% to 16%, voters contend “taxes in California are already so high that they are driving many people and businesses out of the state.”

The poll also conveys bad news for elected officials and interest groups hoping to pass new tax increases in the coming legislative session. According to Mark DiCamillo, Director of IGS: “An historically large proportion of voters (81%) now feels the level of state and local taxes paid by the average Californian is high, while just 19% consider taxes in the state to be low or about right.”

And Mr. DiCamillo’s observations are accurate. The Golden State now has the highest gasoline taxes in the nation. In addition, its marginal state income tax rate of 13.3% is the top to be found, as is its sales tax rate of 7.25%. And perhaps most grievous of all, there seems no inclination by our political representatives to modify the way they’re functioning. Apparently our leaders are perfectly content to preside over a governmental entity in which their residents express profound dissatisfaction. These realities do not portend well for the future.

This brings us to the crux of this article. On Friday, Nov. 27, the Orange County Register’s editorial reviewed one of the most controversial provisions appearing on the recent California ballot. The editorial, titled “Californians are tired of being taxed,” related to Proposition 15, a measure designed to partially repeal Proposition 13 – the still popular 1978 Jarvis property tax limitation – by permitting commercial and industrial real estate taxes to henceforth be increased per current assessor’s valuations.

Although Prop. 15 failed by a margin of 52% to 48%, its proponents have already announced the measure will be seen again on the ballot in 2022. They further claim it’s just the beginning of intensive action to repeal the 1978 restrictions “which penalize the residents of California by unfairly limiting property tax increases.” Despite their fervor, it’s questionable as to the general support these tax-increase advocates enjoy.

Just who are these tax-increase advocates and what are their plans? The identities of some of them are well-known. Among the top sponsors are Facebook founder Mark Zuckerberg and his wife Priscilla Chan, The California Teachers Association, AIDS Healthcare Foundation President Michael Weinstein and Mary Kay Henry, president of the Service Employees International Union.

As for supporters, they include virtually every prominent Democratic political organization and office holder in California … in short, those individuals and entities which expect to have a say in the allocation of the tax money to be generated.

The method by which a still very popular Prop. 13 is to be phased out is not a matter openly discussed. However, some of the planning details have leaked out and what I’ve learned is distressing. I’ll now disclose what I understand to be in the works. I can’t verify whether what I’ve been told is actually scheduled be done, but as described, in a perverse way it almost seems logical. In addition, unhappily, it appears to be planned out sufficiently well to be successful. You may make your own determination as to whether it can be pulled off as they intend.

For the first phase of the program, we must go back a couple of years. It’s now only vaguely recalled, but the sponsors originally hoped to be able to secure a split-roll modification in the off year elections of 2018, where commercial and industrial property would no longer be protected by Prop. 13. Over a million signatures were collected by Michael Weinstein’s AIDS Healthcare Foundation and they were about to place the proposition on the ballot.

However, they included multifamily residential units as being declared to be commercial and were advised – wisely, it appears – masses of tenants would vote against approval after being warned by their landlords that rental increases would be the result. Weinstein therefore didn’t qualify the proposition. He dumped the signatures and modified his plan.

What he did instead involved a concentrated effort over the next year to induce the California legislature to enact a form of statewide rent control. This didn’t involve modifying Prop. 13 in any way, so an assembly bill was sufficient. The result was the statewide Rent Cap; it then became possible to raise property taxes on apartment units while assuring tenants their rents could not be raised to cover massive tax increases.

With the year 2020 elections now a thing of the past, had Prop. 15 been approved this time around, a similar action was intended to be submitted to the voters in 2022 to remove residential rental property from Prop. 13 protection. However with this year’s failure, it’s uncertain exactly what provisions will be included in the next attempt. I’m certain the tax-increase proponents are vigorously debating the advisability of their various options. It’s my guess increased apartment taxation will not be on their plate.

Before we move on from the subject of Prop. 13 decimation, you should be aware of the device now proposed to be employed, whereby single family owner- occupied residences will lose their tax protection. Quite simply, it’s to be done incrementally, using the principle of general resentment against the wealthy as the driving force. An initial proposition will be advanced wherein the protection will be removed from only those residences with a sufficiently high appraised value – possibly several million dollars.

Once the foot is under the door, and the principal established, successive propositions merely reduce the designated appraised value. And as the approved values are reduced and property values increase due to inflation, fewer homes will be so covered. The result: Prop. 13 will become a matter of no major economic concern.

It’s obvious the tax proponents don’t particularly care whether Prop. 13 is formally voted away. Their aim is not based on humanistic principals, but rather on the money to be collected from a taxation system on which there are no limits. At that point the legacy of Howard Jarvis and Paul Gann will fade into obscurity. California’s carefully regulated property taxation rules, though perhaps still officially on the books, will become extinct … as did the dodo bird of Mauritius Island, last seen in the year 1662.

A final thought – not mine, but of C. Northcote Parkinson, an astute English naval historian and author: “Populations which are largely literate are exposed to modern methods of tax collection based upon their inability to escape. Where an individual’s expenses rise to meet a known income level, governmental expenditures rise toward a ceiling that is not there. It is the spectacle of public waste and extravagance which seems to justify, if it does not cause, the nation-wide fashion of excessive taxation. Economy must begin with fixing the government’s revenue as a proportion of the national income and then restricting its ability to exceed that amount.”

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at al@abjacobs.com