Property Tax Reform in the Big Picture
[An excerpt from a paper delivered at the Conference
on Land, Wealth,
and Poverty; The Jerome Levy Institute, 3 November
What happens when a state radically slashes its propertytax?
Michiganders are saying they must wait and see, but there is no
need for that: California can show you 17 years of experience. To
read your future, just study our past. Here is what has happened
since California passed Proposition 13 in 1978.
The obvious direct results have been to cut public services,raise
other taxes, and lose credit rating. Our school support fell from
#5, nationally, to #40 in 1985 when last seen, still falling. County
road maintenance is down to where my county (Riverside) is repaving
its roads at an annual rate of once every 130 years. Once in 20
years is recommended here, and up north you generally need higher
frequency. You can't just build infrastructure and then stop paying
for it, it's a perpetual commitment. Thanks to urban sprawl, a high
fraction of our population now depends on these county roads.
In 1978 we had a surplus in Sacramento. Since then we have raised
business taxes, income taxes, sales taxes and gas taxes, but go
broke every June. Now our State bond rating is last among the
states. One of our richest counties (Orange) has gone bankrupt; Los
Angeles is on the brink of it, saving itself by closing emergency
rooms and hospitals that serve as a last resort for the uninsured
The private sector is doing badly, too. Raising income taxes,
business taxes, and sales taxes is no way to stimulate an economy;
they are all a drag on work and enterprise. Our income pc was down
from #7 to #12 among the states by 1992, then fell some more. From
1992-94, California was one of three states where median household
income fell. Our unemployment rate is 9%, 50% higher than the
national mean of 6%. Our poverty rate is 18%, compared to 14.5%
nationally. Not surprisingly, therefore, the only government
function that grows now is building and operating prisons. One of
our few rebounding industries is cinema, the art of escaping from
reality: we excel at that. Another thriving activity is that of
auctioning off used machinery for export to the east.
In 1993 there was net outmigration (including international
migration) from this state that has symbolized American growth since
time immemorial. It is unheard of. 426,000 people were lost, nearly
2% of the population. This is a watershed change: imagine of all
states California, America's trend-setter, our El Dorado, The Golden
State, our Horn of Plenty, the safety-valve for job-seekers and
retirees and entrepreneurs from everywhere, the end of the rainbow,
losing population! It's almost enough to make a person click off the
tube and think.
The fall of our income pc is greater than appears from thepurely
monetary measure. Real pay has fallen more, because of the drastic
rise of shelter prices. In San Francisco, shelter takes 50% of the
median income, with many other cities, especially coastal ones, not
far behind. It is unusual to find livable quarters for less than
$600/mo. The median home price rose 163% during the 1980s, to
$258,000 (remember that is just the median - the mean is higher).
These rises are part of the C.O.L. of all renters and new buyers, a
part not fully incorporated in standard CPI measures (for various
unworthy reasons too technical to open up now).
Some cities are in desperate straits. San Bernardino in 1976 was
chosen an "All-America City, a City on the Go." It went,
all right: today, 40% of its people are on welfare.
California has always been earthquake country, but hasalways
renewed itself, routinely. It was different after the Northridge
quake in the San Fernando Valley, January, 1994. This is the
upper-middle neighborhood of Los Angeles, but now large pockets of
ruined buildings remain, unreconstructed, inhabited only by vagrants
and criminals: an instant Bronx West. These blighted sections,
ominous portents, spread more blight around them.
It should give one pause. It is, however, if you think about it,
the expectable result of what the voters did. They turned property
from a functional concept into a sacred one; from a commission to be
enterprising, hire people, produce goods, and pay taxes into a
welfare entitlement. They rejected the concept of a tax on inert
wealth in favor of the rival concept of taxing liquidity and cash
flow. The predictable result is to inhibit economic activity, and
encourage holding wealth inert and stagnant.
We had a construction boom in the 1980s, but it was not wealthy.
It was marked by extreme sprawl, and extreme instability. Downtown
L.A. was to become a great new financial capital, but now has nearly
the highest office vacancy rate in the U.S., with of course a high
rate of builder bankruptcies. Speculative builders were led on to
overbuild, in part, by anticipated higher land rents and prices.
This Lorelei effect was magnified by national income-tax provisions
luring on speculative builders, but we have to ask why California
fell harder than other states, even with the object-lessons of the
oil states in clear view.
David Shulman tersely summarized the distributive effects of Prop.
13 as he left us for Salamon Brothers in Manhattan: "it
breached the social compact." Alienation is the result, and the
Rodney King riots, arson and looting are the results of alienation.
True, the Watts riots preceded Prop. 13, but they were part of a
national epidemic. By 1967 there were riots with arson and looting
in 70 or more American cities. The Rodney King riots were endemic to
California, and spread over a much wider area of Los Angeles than
the Watts riots did. The looters and arsonists were not all black,
and the targets were not all white, but mainly Korean-Americans who
just happened to be there minding their stores.
Conventional wisdom blames our bust on the end of the Cold War.
Surely that is a factor, but as a causal explanation it is too pat,
too easy, and a-historical. Compare today with 1945. Los Angeles'
economy depended much more on The Hot War, 1940- 1945, than it ever
did on The Cold War. Los Angeles' wartime boom had swelled its
population as no other great city, 1940-45. After 1945 the U.S.
pulled the plug on defense spending, more than today. Jane Jacobs,
in The Economy of Cities, tells us what happened to military
spending in Los Angeles after 1945. It lost3/4 of its aircraft
workers, and 80% of its shipbuilders. It lost its military and naval
overseas supply and replacement businesses. Troops stopped funneling
through. It got worse: petroleum and cinema and citrus, its
traditional exports, all declined.
Pundits then forecast a regional collapse. Yet, regardless, Los
Angeles never collapsed, nor missed a beat. The wartime immigrants
stayed put here. They formed creative, innovative small businesses
in large numbers, giving L.A. its deserved reputation for having the
most dynamic, flexible, adaptable industrial base in the nation.
Besides exporting goods, L.A.also became more self-contained,
providing itself with more of the goods it previously imported. How
could this be?
1/8 of all new businesses started in the U.S. were in
L.A.,1945-50. These were small, creative, flexible, and too varied
to classify. No Linnaeus could sort them in conventional categories:
the new Angelenos simply stayed here and started producing
everything for themselves, some things previously imported, and
others never seen before. Eastern firms established branch plants
here. Top eastern students came to California's great university
system, and stayed behind to make careers and jobs here. There was a
kind of regional "El Dorado Effect," as demand and supply
grew together, and growing local demand allowed for economies of
scale serving local markets. Food and shelter were cheap and
abundant. Land for business was accessible, providing a basis for
the whole self-contained phenomenon. A "continental tilt"
developed in both interest rates and wage rates, drawing in eastern
capital and labor.
Why is that not happening today, 1995? An invisible, pervasive
change is Proposition 13, which makes it possible to hold land at
negligible tax cost. In 1945 land was taxed at 3% every year,
building a fire under holdouts to turn their land to use. Today that
same tax cost is well below 1%. Using Gwartney's Rule of Thumb (see
below under B,1), it is about 1/8 of 1%: a rate of 1% applied to 1/8
of the true value.
Landowners are only taxed now if they use their land to hire
people and produce something useful. Then they meet the drag of our
high business and employment and sales taxes, necessitated by the
fall of property taxes. A handful of oligopolistic landowners
control most of the market; small businesses are squeezed out. This
helps us segue from being at the cutting edge of industrial progress
to a third-world economy - from the NH model to the AL model - with
little relief in sight.
What was different then? One obvious difference was the high
property tax dependence in 1945, and the lower burdens of sales tax,
business tax, and income tax. We not only had high property tax
rates, they were more focused on land then than now. California was
more hospitable to Georgist thinking than perhaps any other state
then, shown by its long run of Georgist political action in the
prior thirty years. Several states had "single-tax"
movements and initiatives, 1910-14, but most of them petered out. In
California they continued through 1924, and then popped up again in
1934-38. Even while "losing," such campaigns raised
consciousness of the issue to such a degree that assessors were
focusing more attention on land. Thus, in California, 1917, tax
valuers focused on land value so much that it constituted 72% of the
assessment roll for property taxation - a much higher fraction than
today. This became the California tradition.
In 1934 the "EPIC" campaign of Upton Sinclair included a
strong Georgist element - he proposed to set up new factories on
idle land. Meantime, Jackson Ralston was pushing a purer land tax
initiative, 1934-38. Ralston lost, but the mere existence of such
political action in California, when the movement was torpid
elsewhere, tells us a lot. It reveals a large matrix of supportive
voters and workers to whom politicians (including tax assessors)
would naturally respond by focusing on land assessments.
California displayed amazing growth up to 1978, and the resilience
to shrug off the loss of war industries after 1945 and still grow "explosively"
(as Jane Jacobs put it). After 1978 we have a string of reverses.
The timing, along with a priori causative analysis, plus various
direct observations too numerous for this time-slot, support an
hypothesis that the reverses were aggravated by Prop. 13. Michigan,
be warned of our lot, and learn about taxes from us: "This
Could Happen to You."