Los Angeles Mayor Antonio Villaraigosa believes he may have an answer – at least partly so – for California’s extreme financial problems. But it’s a very tough sell.
Villaraigosa is challenging Governor Jerry Brown and other state lawmakers to completely reform Proposition 13, a 1978 initiative that has helped keep many homeowner’s property taxes down but has cost the state a huge amount of revenue in the process.
The San Jose Mercury News has a good story about it here, and Bloomberg is one of the many other outlets who have covered the story.
The initiative rolled back tax rates to 1973 levels, restricts assessments to 1 percent of the purchase price and caps annual increases at no more than 2 percent. It also said that homes would only be reassessed when they changed ownership. It passed with 65 percent of the vote and led to similar laws throughout the country.
While that has kept property taxes down for homeowners who have stayed in their homes, it’s created inequality in neighborhoods where similar homes might have significantly different values. It’s also cost the state, and in particular the state education system which receives a majority of its funding from property taxes, a huge amount of money. Also, it’s taken away the ability of local municipalities from increasing or decreasing its tax rate to support its needs.
In the first year that Prop 13 was in place, tax collections in California dropped 52 percent, from $10.3 billion to $4.9 billion. Since then, the state’s public schools have fallen from seventh to 47th in per-student spending and it has the highest number of students-per-teacher ratio in the country. California also has the lowest credit rating of any of the 50 states.
The proposition can only be changed by a two-thirds vote in the Legislature or through a voter-approved initiative process. A similar attempt in 2009 failed.
Brown was the governor when Prop 13 was proposed. He was originally against it, but when it passed he enthusiastically put it into motion. Now that he’s back, he’s said he’d like to see reform overall but has stopped short at saying Prop 13 is the cause of California’s woes.
Any change to Proposition 13 will face an uphill climb as it is very popular, especially with senior homeowners who credit it with allowing them to stay in their homes amidst the recession. Villaraigosa acknowledged that it will be tough to make changes but he said it can be done if enough people agree that government and the services it provides needs to be funded, and those funds have to come from somewhere.
Lawmakers were hoping spending cuts and a small increase in tax revenue would help spur the state’s economy, but spending once against has slowed and tax revenue has got in reserve, which could lead to even more cuts in education as well as other services. Villaraigosa, whose term ends in 2013, said the cuts are harming some of the state’s most important services and that a better system needs to be found.
Few would argue with him about that. Many would argue with him about how to do that.
Villaraigosa’s idea is a split tax roll, where the property tax cap would remain for residential properties but would be removed for businesses. The Mayor’s estimate is that such a move could raise between $2.10 billion and $8 billion a year, money that could go toward education as well as lowering property taxes for homeowners. Villaraigosa knows that business owners aren’t going to be real supportive of the move, and he said the change could be lessened by gradually phasing it in.
Good luck with that argument. Anti-tax supporters as well as business groups have moved quickly to attack Villaraigosa’s idea, saying it will have a hugely damaging effect on small businesses in particular. The Howard Jarvis Taxpayers Association, named after the original designer of Prop 13, said any change that would affect businesses would contribute to California’s high unemployment rate and could drive businesses either out of business or to relocate to a different state. That would create an even larger financial burden on the state.
Brown has not spoken with Villaraigosa about his proposal but a spokesman said the Governor is looking forward to hearing the ideas. Brown has said that he’d like local governments to regain some power and that’s certainly something that Prop 13 has limited, but the Governor hasn’t said how exactly he plans to do that. It’s possible he could give more financial control to localities without messing around with Prop 13.
Proponents of Villaraigosa’s proposal say businesses have taken advantage of Prop 13 because even when ownership changes on a property, savvy financial managers have been able to create complex trusts to avoid reassessments.
Still, by keeping the initiative’s guts in place for homeowners, Villaraigosa at least has a chance to be taken seriously by a portion of the voting populous. Proposition 13 is unlikely to ever be eliminated by Villaraigosa believes big changes have to be made to correct California’s issues, not a bunch of little adjustments.
So, what do you think? Would you be in favor of Villaraigosa’s proposal? If not, do you have one of your own? Does Proposition 13 need to be amended? Done away with? Left alone? One thing’s for sure: I wouldn’t want to be the one having to decide.