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Tilting at Windmills

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December 26, 2008
By: Hilzoy

Idiocy Comes Home To Roost

Bloomberg (h/t Paul Krugman):

"Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms.

"I've been on the bench for 23 years, and I've never seen anything like this," said David G. Sills, the presiding justice for the Fourth District Court of Appeals, Division Three, in a telephone interview.

California's worst budget crisis has held up $3.8 billion in spending on public works, possibly including the courthouse adjacent to Santa Ana City Hall. Sills and his seven fellow jurists had planned to move in before the lease on their temporary offices expires June 30.

"Everyone will have to work from home," said Sills, 70, "and we'll have to rent a place for when we hear arguments.""

As Krugman says, this is exactly the opposite of what's needed right now. But the problem isn't just the economy, and California's need to balance its budget. It's Proposition 13. Proposition 13 was cleverly designed to make it virtually impossible for California to raise taxes. Any tax increase requires a supermajority. Property taxes are fixed at 1% of assessed value, and assessments themselves are fixed at the time of purchase, and can rise only very slowly thereafter.

This leads to all sorts of idiotic consequences. Back when I lived in California, one of the few ways of raising taxes available to cities and towns was to increase the sales tax by some fraction of a percent. Result? Cities and towns did this, and then tried desperately to induce people to set up car dealerships and other places where people sell big, expensive things. Did it make sense to have so many car dealerships? Who cares! It's revenue!

Likewise, people in California don't always sell their houses when it would normally make sense to do so, because as long as they stay in their existing house, the assessment will not rise much and their taxes will stay low, whereas if they buy a new house, it will be assessed at its purchase price, and their taxes will go up.

"Free markets", indeed.

My favorite Prop 13 anecdote: while she was alive, my grandmother lived in a wonderful house that she had (I believe) designed herself in the 50s or thereabouts, and built on what was then an undeveloped hillside. As time passed, however, that property became much, much more valuable, which makes sense since it was on the border between LA and Beverly Hills, on a delightful secluded street that ran up the hillside and dead-ended at the top. Phil Spector lived next door, and Eartha Kitt lived up the street.

Meanwhile, I had a good friend who lived in a house in a terrible neighborhood (as in: there were shootings nearby on a fairly regular basis.) The only famous person who lived near her was Rodney King. Her house itself was great, but it was also in a state of considerable decay when she bought it, and needed a whole lot of work.

Guess who paid the least in property taxes, by a considerable margin? My grandmother, of course. Having a cap on property assessments in place for decades will do that.

The result, of course, is that California has been deferring maintenance for a very long time. Now their judges will be working from home, their schools will fall further into decay, and their bridges will continue to crumble. With any luck, Obama's stimulus plan will help out with the worst of it; my only regret about that is that it will postpone the day when Californians have to confront the idiotic tax policies they put in place.

Hilzoy 11:35 AM Permalink | Trackbacks | Comments (43)

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Comments

The 'idiotic' tax policies are all liberal policies, enacted by a democratic-majority state. So pat yourselves on the back for that.

Posted by: sarah on December 26, 2008 at 11:48 AM | PERMALINK

those were passed in the 70s. Not sure you could call it dem majority when so many republicans are governor. I think Reagan was governor when that was passed.

Now, the only thing I will say for prop 13, is that it did have some protection for seniors, who are on fixed incomes. If the value of your house goes up so much, and you get taxed out of it, I don't think that's a great idea, just because you picked a place people want to live 40 years later.

It is ridiculous and needs fixing, but please put forward an idea that takes the above into account.

Posted by: kt on December 26, 2008 at 11:55 AM | PERMALINK

On the other hand, an appeals court can work just fine in humble surroundings, most of the judges' work being done behind the scenes in their chambers (or houses).

Posted by: Peter on December 26, 2008 at 11:55 AM | PERMALINK

California'll at least have novelty value -- all the rich people will live up in the hills around a city, and the favelas will all be downtown, on the flat. Like Bogota, or Sao Paulo, in reverse.

Posted by: Davis X. Machina on December 26, 2008 at 11:57 AM | PERMALINK

I have voted For on every local tax issue (property, bond, sales tax) but one in my 30 years of voting and 25 years of property owning, so I count myself as aware of the value of local government and reasonable tax policy.

Still, there is a side to this question that you leave out: the people - particularly the elderly - who were forced out of their homes in the 1970s as inflation raised the appraised values of their houses and their income available to pay property taxes remained fixed. And I saw this again in the 1990s in suburban Chicago where retired couples were pushed out of their homes in family-oriented neighborhoods as property values soared. I have a hard time with the fairness of this process.

Also, in the last 20 years I have to think that just about every piece of property in California has changed hands at least once, resetting the appraised value, and millions of new and very high-valued homes have been built that go on the rolls at their initial high appraisal. This wasn't enough property tax income for the communities? Why not?

Finally, while my current flyover country community never saw the huge value run-up of the coasts it did see substantial appreciation from 1998-2008, and taxing districts were very aggressive about re-appraising upwards. Now that values are dropping - not as much as on the coasts, but dropping - we suddenly learn that there are all sorts of mechanisms that operate to prevent the absolute value of collected tax from falling as houses are sold for lower prices and appraisals drop (for one, the taxing district "doesn't count" foreclosure sales in calculating appraisals). There were of course no such mechanisms to prevent the tax increases. Funny dat.

Cranky

Posted by: Cranky Observer on December 26, 2008 at 11:58 AM | PERMALINK

Sarah could you possibly be more ignorant. On what planet have those type of tax policies been instituted by democrats?

Posted by: Gandalf on December 26, 2008 at 11:59 AM | PERMALINK

Interesting article here, but one glaring omission...Property taxes are a function of county government...we do not pay property taxes to the state of California...

Posted by: SD Progressive on December 26, 2008 at 12:03 PM | PERMALINK

Actually, I don't think it's fair to pay a tax based on market worth of something - if my income stays the same, why should I pay more for having a "thing" that people want unless and until I sell it for that and actually get the money directly? The answer is not to change or raise real estate taxes. That whole enterprise is inherently corrupt since there is no clear-cut honest way to compare "value" of things post-purchase. The answer is to use income and/or sales taxes, but especially income taxes since that doesn't require any given level of consumer spending.

Posted by: Neil B ☺ on December 26, 2008 at 12:05 PM | PERMALINK

Sarah,

You complain of "liberal" tax policies? The caps are a fear of taxation, and more coservative in their thought than any liberal label you could put on it...

How has the last 30 years of "conservative" tax policy treated the country? Things are pretty rosy right now, aren't they?

Posted by: SD Progressive on December 26, 2008 at 12:06 PM | PERMALINK

The 'idiotic' tax policies are all liberal policies, enacted by a democratic-majority state. So pat yourselves on the back for that.
Posted by: sarah on December 26, 2008 at 11:48 AM | PERMALINK

Well, except that Prop 13 was introduced by Republicans Paul Jarvis and Howard Gann as part of a nationwide anti-tax initiative of the kind Republicans are usually pushing, was supported by Reagan, and was a ballot initiative voted on and passed by the VOTERS OF CALIFORNIA.

You. Utter. Moron.

Posted by: trex on December 26, 2008 at 12:06 PM | PERMALINK

[sarah, sockpuppeting is not permitted]

Posted by: CA is dreaming on December 26, 2008 at 12:08 PM | PERMALINK

Californians were the ones who set up a state constitution that allows for all these ballot propositions. Many are not well thought out, are passed by particularly active minrities, or appeal to common misconceptions. (We can pass initiatives that cut our taxes and still demand that the state do stuff for us. It will all work out. We'll cut waste.) This is what happens when the citizens of a democracy insist they have the right to make all the decisions, then neglect their responsibility to study the situation so they can make good decisions. The closest analogy is Athens during the Pelopennisian War. No one can, or has the right to, do anything about it until the people of California decide to either govern themselves better or choose good people to do the detail work for them.
A democracy that really represents the people depends on those same people to make it work. If it doesn't work, the people have only themselves to blame.

Posted by: Tim H on December 26, 2008 at 12:13 PM | PERMALINK

FDRs New Deal cost some 32 billion dollars, Even when adjusted for inflation its still less than the bailout of Wall Street which, so far, has put nothing back into the economy.

Posted by: Jet on December 26, 2008 at 12:14 PM | PERMALINK

If any Californian wants to know who to blame for the continuing Proposition 13 crisis, that person is Jerry Brown. Back when this moron was Governor, there was a legislative majority that could have been created with a bit of gubernatorial leadership (I know this because I was working for the California Legislature at the time), that would have provided property tax relief for homeowners while maintaining a market rate for corporate property, which would have solved the problem responsibly and defused the Jarvis movement. Instead, Governor Moonbeam sat on his mattress on the bed chanting "Ommmmmmm" and did nothing, with the result that Proposition 13 passed. And since then, the result has been backwards: every time a property gets sold it gets a revaluattion, with the result that the taxes go up. Unfortunately, the property least likely to have been sold in the past 32 years is all that corporate property, which is still being taxed at its lowered valuation made in 1977, while homeowners pay more, but not enough to avoid the current crisis.

And this halfwitted piece of dog excrement wants to run for governor again...

Posted by: TCinLA on December 26, 2008 at 12:17 PM | PERMALINK

Prop 13 does more for business than homeowners. That being said, yes, I pay more than twice as much in taxes as my parents, which is not fair at all.

Gotta get rid of Prop 13. In fact, the way we're being taxed who are not protected, WE are gonna need a prop 13 to not be taxed out of our homes! The stupid populace passed most of the ballot propositions and who pays for most of it-- homeowners!

It really is bad.

Posted by: clem on December 26, 2008 at 12:20 PM | PERMALINK

Vox populi, vox dei.

We are ruled by an amalgamation that tends toward simple-minded solutions. The only way to change this situation, is education.

Cheers,

Alan Tomlinson

Posted by: Alan Tomlinson on December 26, 2008 at 12:21 PM | PERMALINK

Of course one obvious solution to California's budget that will NEVER be taken up is to legalize and tax marijuana sales. Even if they failed to collect half the revenues there would be so much relief on the expense side we could re-fund basic services.

Posted by: Alan on December 26, 2008 at 12:21 PM | PERMALINK

Florida enacted its own cap on home property taxes some years ago, with results similar to California. Competent local-government employees have been fleeing to other states.

Posted by: Dave Martin on December 26, 2008 at 12:25 PM | PERMALINK

Ah, California, where you can pass a constitutional amendment with a 50%+1 majority, but you need a 2/3rds majority to increase taxes by 1%.

The 'idiotic' tax policies are all liberal policies, enacted by a democratic-majority state.

Given that California was a Republican-majority state when Prop 13 was passed, and has now become a Democratic-majority state, I think it can fairly be argued that the Democrats came into power because Republicans insisted on stupid and ruinous tax policies. In other words, Republicans shot themselves in the foot and now you're complaining that Democrats didn't take the gun away first.

One of the worst things about Prop 13 is that it is not reserved to residential properties -- commercial property owners are given the exact same tax advantage as a retired grandmother. Explain how that makes any sense at all.

Posted by: Mnemosyne on December 26, 2008 at 12:25 PM | PERMALINK

You know, morons like Sarah have something to teach liberals -- right wing conservatives basically won the marketing contest when it comes to taxes. I would say the Reagan administration was when the victory occurred. Prop 13 presaged the "tax revolt" and many argue this propelled Reagan to the presidency in 1980.

Liberals need to re-claim the thoughtful, targeted, progressive tax mantle that the failure of conservative tax policy under Bush and Cheney has effectively handed to us. Other countries look at taxes as an investment that they feel gives them good return. That's where we need to get to.

Ironically one of the problems with the Russian economy is that they have big problems collecting taxes. US economic advisors have been to Russia frequently since 1990 advising Moscow how to collect what's owed to the Russian government. The GOP's tax hatchet, with it's "no tax can be good" mindset, makes Republicans look like the Russian mafia or Russian oligarchs.

Now that I think of it, with our country's incompetent response to Katrina, collapsing bridges in Minnesota, massive fraud on Wall Street, an unpopular war motivated essentially by paranoia and the general militarization of our foreign policy the US has looked a lot like Russia in recent years. While I find Russia and Russian history fascinating I think the US can and should do better.

Posted by: pj in jesusland on December 26, 2008 at 12:26 PM | PERMALINK

We are ruled by an amalgamation that tends toward simple-minded solutions. The only way to change this situation, is education.

Given the state of public education in California, which pre-Prop 13 had the best system in the country, I wouldn't count on that happening anytime soon. Prop 13 has pretty much ruined public education, which was probably one of the goals to begin with.

Posted by: Mnemosyne on December 26, 2008 at 12:28 PM | PERMALINK

If California has a third rail of politics, it's prop 13. Despite the continual string of budget problems we've had since it passed, it's unlikely to be overturned.

It's also one of the reasons everything seems to be funded by ballot initiatives.

But at least we have the Lotto! {/snark}

Posted by: Trollhattan on December 26, 2008 at 12:33 PM | PERMALINK

It's the difference between direct v representative government. I like the good people of California, but don't expect them to understand much about tax policies and government work. So usually, the direct democracy of propositions make things worse.* Elected officials should be smarter representatives who can have knowledgable staff that can handle these issues.

It doesn't work out that way, especially since there are 6 year term limits in California. Which is why it needs a new constitution. Or at the least, a major overhaul of the proposition system and term limits (16 or 20 year limit lets you have smart and clever representatives; and make house reps serve 4 years between elections so they can spend less time fundraising/campaining)

*Some propositions have been great, like re: marijuana. So there does need to be an avenue for direct democracy when the system fails the people.

Posted by: agorabum on December 26, 2008 at 12:34 PM | PERMALINK

Rent a small office for the court and use on-line adjudication.

That is the message, building the thing will result in fewer jobs totally

Posted by: Mattyoung on December 26, 2008 at 12:34 PM | PERMALINK

Keeping taxes low helps banks to raise checking fees and credit card debt and interest charges. "No new taxes" has made the banks rich for a while.

The financial industry should bail out California and all those places that need help now. Oh well that they pissed away all that money and can't help either. So nationalize the banks.

Posted by: slanted tom on December 26, 2008 at 1:10 PM | PERMALINK

The mentality that passed-- and maintains-- Prop 13 is the reason my wife and I moved back to the Midwest after living in Silicon Valley for two year back in the 80's. California is a great place to play, we loved our weekends there, but owning a home or raising kids there? Forget it.
Admittedly, there are idiots everywhere who believe they are entitled to quality government services at far less than cost, but it seems like there are a lot more of them in the Golden State than the Dairy State.

Posted by: wihntr on December 26, 2008 at 1:12 PM | PERMALINK

If you want to finish off California, repeal Prop 13. It would immediately trigger another 20% drop in home value as that increase in taxes would be factored into the home value. That is why home prices have risen faster here than in other high tax states. In 1978 before the proposition was passed, a friend of mine paid 7000 dollars a year in property taxes on a home valued at 250,000. That home was worth over a million before the current slump. Do the math. Someone above related the story of how Jerry Brown could have avoided the whole thing and that is absolutely true.

The real issue has been state spending and that is what Sarah was trying to say, I suspect. The state budget has gone up 40% in the past several years. Taxpayers are leaving the state.

Posted by: Mike K on December 26, 2008 at 1:34 PM | PERMALINK

The progressives want more taxes to build brick buildings and take away Obama's Blackberry.

Again, I suggest to the progressives and to Krugman that firing Blackberry workers and forcing them to make brick buildings does not make it.

We are better off giving the appellate judge a blackberrys and skipping the brick buildings. Teachers have the same problem, they want to students and teachers building b rick buildings and quitting their jobs in high tech.

Whjy?

Posted by: Mattyoung on December 26, 2008 at 1:50 PM | PERMALINK

Mike K,

If state services are supported by property taxes and the state's costs go up as a result of general economic conditions, why shouldn't the state's revenue also go up? You appear to be using trends in the market to force state cutbacks to your liking.

What sense does it make to cut school spending because Enron and OPEC manipulate the price of oil and natural gas??? Why punish students because it costs more to heat government buildings and fuel the state's automobile fleet? Why the arbitrary bias against education? After all, smarter students develop better & cheaper energy alternatives.

Taxes are all about incenting behavior but the only behavior your proposal incents is the private accumulation of wealth.

Do you know what else incents the accumulation of wealth? Health insurance. Studies have shown that catastrophic illness is one of the leading causes of families falling into poverty.

Posted by: pj in jesusland on December 26, 2008 at 2:17 PM | PERMALINK

The budget problems are largely due to the whole initiative process. Arnold can't fix the budget any better than Gray Davis could because the taxpayers just keep voting for more spending while refusing to raise taxes or cut programs. The amount of budgetary discretion left up to the governor and the legislature is constantly shrinking.

Posted by: matt in eugene on December 26, 2008 at 2:20 PM | PERMALINK

I don't recall, but did Gray Davis go begging to Washington at the height of the California energy price bubble? Arnie sure didn't hesitate --

Posted by: pj in jesusland on December 26, 2008 at 2:42 PM | PERMALINK

Blaming Jerry Brown for Prop 13 is like blaming Neville Chamberlain for World War II. Sure, Chamberlain could have tried to stand up to Hitler in Munich, but it was Hitler who was the problem.

And perhaps Brown could have put one piece or another of legislation through the assembly, but does anyone really think that would have quieted the Republican anti-government tax cutting machine? Sorry man, I lived out there and voted against Prop 13. It was all emotion and no logic. The anti-government crowd got what they wanted. You guys are using Brown as a scapegoat.

Posted by: tomeck on December 26, 2008 at 2:51 PM | PERMALINK

Now that values are dropping - not as much as on the coasts, but dropping - we suddenly learn that there are all sorts of mechanisms that operate to prevent the absolute value of collected tax from falling as houses are sold for lower prices and appraisals drop

Crap. I know people whose property tax bills have been lowered by 33% without doing anything - they just came along and said "we're readjusting" and that was that.

Prop 13 is rent control for homeowners. That's all it is. And tales of people being taxed out of their homes are the kind of urban legend used to sell the measure, like the mythical farmers having to sell up to pay inheritance taxes.

If you really live in a huge home that rates huge taxes, and you can't afford them, maybe you should live in a smaller house. Isn't that what Mr Market is all about - efficiency? Conservatives love Mr Market until he tells them their house is too big, eh?

Posted by: grumpy on December 26, 2008 at 2:53 PM | PERMALINK

We are living in smaller houses, doubling up, and the housing market is way down. So is the county income way down because of the taxes and the more crowded houses.

Posted by: Mattyoung on December 26, 2008 at 3:39 PM | PERMALINK

> Crap. I know people whose property tax bills have
> been lowered by 33% without doing anything - they
> just came along and said "we're readjusting" and
> that was that.

I believe the exact quote from the Small City/County Director of Revenue was "People are often surprised when their property taxes do not go down in a falling housing market, but that is the way our system works". You are welcome to call his office and explain to him that he is speaking "crap" if you wish. Perhaps you are thinking about your own county and not others'.

Cranky

Posted by: Cranky Observer on December 26, 2008 at 3:42 PM | PERMALINK

Excuse me for the Republican tilt here, but why is it that a state like California whose made these irresponsible decisions is going to go get federal dollars paid by folks in my state who has been relatively responsible and paid our own way. Where is the incentive for our responsible behavior?

Posted by: Henk on December 26, 2008 at 3:57 PM | PERMALINK

Much of this may be pandering to seniors who are on fixed incomes and want to stay in their homes right near job centers.

Homes that working people need. Instead they buy houses they can afford. House that are more plentiful and therefore cheaper. In the exurbs.

Property tax subsidies feed global warming and drain time from the lives of young families, straining marriages.

Just a theory I'm working on. I could be wrong.

Posted by: toowearyforoutrage on December 26, 2008 at 4:00 PM | PERMALINK

Henk,
California pays way more to the federal government than it gets back in federal bennies. California is #9 per capita in sending $$ to DC, and #38 getting it back. Perhaps we could go back to the Reagan years when we got back more than we paid.
KT

http://www.taxfoundation.org/taxdata/show/22685.html

Posted by: kt on December 26, 2008 at 6:56 PM | PERMALINK

The progressives want more taxes to build brick buildings and take away Obama's Blackberry.

Aren't BlackBerries made by a Canadian company? I'm not sure how a Canadian company that builds its product in Asia directly benefits the American worker the same way a contract to build a new courthouse would.

Posted by: Mnemosyne on December 26, 2008 at 11:18 PM | PERMALINK

Before you start criticizing California's statutory inability to raise property taxes, think about all the great value that all the other states in the union are getting from their more-easily raised property tax rates! Unless you know something I don't, they're pretty much all in the same boat. But California has the advantage of not bankrupting its citizens or forcing them from their homes to pay skyrocketing property taxes that reflect The Golden State's skyrocketing property values.

Posted by: Robert Moskowitz on December 26, 2008 at 11:50 PM | PERMALINK

California's skyrocketing property values? Oh, really??

The whole point about why CA has no cash to pay state employees past February is on account of declining property values and the state's inability since Prop 13 to adjust taxes to economic conditions. In other words, Prop 13's conservative anti-tax supporters are forcing Arnie to go begging hat in hand to Washington. Short of shutting down California government that's all Arnie has left.

That's a great state of affairs -- pensioners in Cleveland will be subsidizing the Newport Beach fire department by March. But by golly at least those Californians are holding the line on taxes!

Posted by: pj in jesusland on December 27, 2008 at 1:44 AM | PERMALINK

Suggestion for the incoming Obama administration: When Arnie comes begging to make payroll in February make a ballot initiative repealing Prop 13 a condition of federal support.

Californians complain that high property values would make their taxes too high, but maybe it's the artificially low taxes that are driving up property values??

FYI, a neighbor of my brother's in Irvine just used his artificially high property value to leverage his house and walk away with the cash. Smart business or immorality? You be the judge. But who pays in the end?

In California they have a great term, "jingle mail," named for the sound the keys make in the envelope that fleeing homeowners send to their mortgage lenders.

Posted by: pj in jesusland on December 27, 2008 at 2:02 AM | PERMALINK

People should understand that a BIG part of why we have the national economic crisis is due to excessively high home valuations in CA, which in turn are due to Prop 13.

The next big wave will happen when our state-wide economy crashes against the rocks when we run out of cash in February. I'll be curious to see what national economic implications that has, but suspect they won't be pretty.

Posted by: California Houser on December 29, 2008 at 11:56 AM | PERMALINK




 

 

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