Another proposition 13?

I was amused to hear from my daughter that King county in Seattle is experiencing large increases in property taxes – in much the same way that California was experiencing rapidly rising property taxes during the 1970, which led to proposition 13 being passed. According to the legislative analyst, property tax rates in California prior to Proposition 13 were 2.67%, and Proposition 13 rolled those back to 1% of the cash value at the time of purchase. Perhaps more importantly, it limited the yearly increases to at most 2% per year, which over the long term, causes a large imbalance between the taxes paid by new owners and the taxes paid by long-term owners.

Property tax is unlike income tax, because it is more of a tax on wealth rather than income. On the other hand, when property values are increasing rapidly but property taxes are not, it results in a lower tax on capital gains from property (presumably some of those taxes are collected later from capital gains taxes when property is sold). Some people will rail against Proposition 13 for a variety of reasons – including the imbalance that it imposes, but also the impact it had on schools after the 1970s. My memory of the subject was that it was imposed as a way to reign in local authorities who could raise tax rates arbitrarily and give special breaks to insiders by rigging assessments. Now that property taxes are rising rapidly in King County, we might expect a similar backlash – perhaps another Proposition 13 style of revolt. Washington state is a peculiar case because it’s one of those states that has no income tax. This puts incredible pressure on the state to collect taxes from other sources (e.g., property tax and sales tax). The same is true in Texas, which has high property taxes but no income tax. By contrast, California has the highest state income tax rates.

The discussion about proposition 13 in California has been wrapped up in the perceived shortage of housing in the bay area, and the rising cost of housing. One reason is because proposition 13 provides an incentive not to move, because once you have lived in a house long enough, your taxes are going to be lower than what you would pay in a newly acquired property. There is evidence for this, though it’s not clear how much this effects the perceived housing shortage. People who retire and move into smaller housing might put increased pressure on entry-level housing, while freeing up larger family homes.

Another effect can be traced to another reason why Proposition 13 was passed – as cities like San Jose expanded rapidly in the 1970s, property taxes were also being raised to fund growth of the city. Since proposition 13, impact fees have replaced missing property tax revenue, which cause the cost of new housing to rise as the cost of growth for the city is born more heavily by new residents.

Proposition 13 has resulted in local government being restricted in how much tax they can collect from residential housing. As a result local government have an incentive to focus on commercial development rather than more housing development. I suspect this is a bigger impact than the lack of mobility in the housing market. It is showing up in the dual measures B and C that are on the ballot in San Jose, all over the development of this piece of land:

San Jose is already on the road to producing much more housing than it has in the past, but there is doubt that it will be enough to meet demand. One thing seems clear – California will be a much less desirable place for me to live in the future. Our infrastructure is already incredibly strained, and things like High Speed Rail will do almost nothing to solve our transportation problems as the population grows. The state is only nibbling at solutions to the problem, and I suspect that it will take much tighter restrictions on single occupancy vehicles in order to solve the problem.

There are two amendments to proposition 13 that are moving forward on the California initiative process. One of those would remove Proposition 13 protection for commercial property, and one is designed to increase mobility among seniors. Evidently only one of them is polling well enough to move forward. Total repeal of proposition 13 is still essentially unthinkable in California politics. I wouldn’t be surprised to see a similar thing happen in Washington.

I’ve always found tax policy a fascinating but very complicated subject. I started to become more aware of it when my marginal income tax rate topped 50% for the last decade or so. Ultimately taxes are collected to provide collective social welfare through the funding of a government. Some conservatives argue that government should not be involved in redistribution of resources, but there are some programs (e.g., national defense) that can only be funded through collective taxes. In the extreme, some conservative elements in the US appear to think that the poor should just die when they get sick. Most of the time I don’t resent the taxes that I pay, but there are limits to that tolerance. Most of the California budget is spent on education and health care, which seem like good investments in the health of a society. I’m less confident about how the federal government spends their revenue.

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