The Myth of California Proposition 13 – Is it Toast?

Posted Posted in California, Proposition 26

Howard Jarvis, chief sponsor of California Proposition 13, signals victory as he casts his own vote at the Fairfax-Melrose
precinct, June 1978. Courtesy of the Los Angeles Times

California Proposition 13 will be toast only if you desire a colossal collapse of the California real estate market and state government.

The analysis of California demographics and history is so flawed that I hesitate to mention that the Professor pronouncing them is from my alma mater, USC.

The facts is that California Democrats have dominated the California Legislature for decades and would have spent California blind and bankrupt without Proposition 13, which limited taxes on real property. This is what was happening in California during the 1970’s prior to its passage.

The California Legislature, County and City governments just could not say no to government spending. It was far easier to raise property taxes a few more per cent every year or to instruct County Assessors to inflate the assessed value of homes and/or apartment buildings, than to disappoint a voting constituency. Property taxes rose California County by County until some folks were priced out of their homes i.e. had to sell them since they no longer had the cash to pay the growing property tax debt (liens are placed on California homes when property taxes are delinquent).

So, what would happen if Proposition 13 was disgarded or modified (not an easy task since it is engrained in the California Constitution.)?

The tenuous and foreclosure ridden California real estate market would collapse. As property taxes increased, in some cases precipitously, sales would commence or residents would walk away from their homes. With a burdening tax environment, even more businesses would relocate out of California since they would be unable to attract employees who could afford to live in California.

And, for what?

California’s tax scheme is already one of the highest in the country.

California’s State and Local Tax Burden Above National Average

California’s 2009 state and local tax burden of 11.8% of income is above the national average of 9.8%. California’s tax burden has decreased overall from 11.8% (5th nationally) in 1977 to 10.6% (6th nationally) in 2009. Californians pay $4,910 per capita in state and local taxes.

California’s 2011 Business Tax Climate Ranks 49th

California ranks 49th in the Tax Foundation’s State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property. The ranks of neighboring states are as follows: Washington (11th), Oregon (14th), Arizona (34th), Nevada (4th) and Hawaii (22nd).

California’s Top Individual Income Tax Rate Is Third-Highest in the Nation

With seven brackets and a top rate of 10.3 percent for those earning over $1,000,000. California’s individual income tax has the third-highest rate and one of the most highly progressive structures in the nation. In 2009, California’s state-level individual income tax collections were $1,206 per person, which ranked 6th highest nationally. Since most small businesses are S Corporations, partnerships, or sole proprietorships, they pay their business taxes at the rates for individuals. That makes California’s taxes on small businesses some of the most burdensome in the nation.

California’s Corporate Income Tax Rate is the Highest in the West

Corporations looking to relocate, or even establish, a business in the West may shy away from California, as the state’s 8.84% flat rate is the highest corporate tax rate in the West. Nationally, only 8 states have a higher top corporate tax rate than California. In 2009, state-level corporate tax collections (excluding local taxes) in California were $259 per capita, which ranked 5th highest nationally.

California’s Sales Tax Rate Is Highest in the Nation

California levies an 8.25% general sales or use tax on consumers, which is the highest in the nation and above than the national median of 5.85%. Local governments are also permitted to levy another 1.5%. In 2007 combined state and local general and selective sales tax collections were $1,502 per person, which ranks 15th highest nationally. California’s statewide gasoline tax stands at 46.6 cents per gallon and is the 2nd highest in the nation, while its cigarette tax stands at $0.87 per pack of twenty (31rst highest nationally). Additionally, California’s general sales tax and various municipal sales taxes are levied on the sale of gasoline. The sales tax was adopted in 1933, the gasoline tax in 1923 and the cigarette tax in 1959.

Property Tax Collections Slightly Below Average

Despite Proposition 13, California ranks in the middle of the pack when the states are ranked on combined state/local property tax collections. Proposition 13 favors people who have owned the same property many years by only permitting re-evaluations at resale. As in most states, local governments in California collect far more in property taxes than the state does. California’s localities collected $968.01 per capita in property taxes in fiscal year 2006, the latest year for which the Census Bureau has published state-by-state data. At the state level, California collected $62.59 per capita during FY 2006. That brought its combined state/local property taxes to $1,030.60 per capita, ranked 28th highest nationally.

The problem with funding Big Government in California is not with tax  receipts or Proposition 13. It is with the Democrats in the California Legislature who have not met a program they won’t fund, an entitlement they won’t increase or a tax they won’t raise.

Proposition 13 is going nowhere.

Amazon Internet Sales Tax WILL Require Super Majority in California Legislature

Posted Posted in Amazon Tax, California, Internet Sales Taxes, Proposition 26
Robert Ingenito, Chief of Revenue Estimates, California State Board of Equalization

While the Amazon Online Sales Tax legislation is in “suspense,” Americans for Tax Reform make this point – the legislation will require a 2/3’rds super majority in the California Legislature.

As it would happen, proponents of AB 153 are operating under the faulty assumption that approval can be had with a simple majority vote of the legislature. Not so fast. As a result of Proposition 26, which California voters approved with over 52% of the vote just last November, lawmakers can no longer get around the two-thirds majority vote requirement to raise taxes simply by denying that what they are imposing is, in fact, a tax increase. Yet that is precisely what Skinner and company are doing in attempting to pass AB 153 with a simple majority vote. Skinner herself claims that AB 153 will yield an additional $250-500 million in taxpayer dollars for state coffers in year one. Objective analysis can only conclude that Rep. Skinner would ultimately find her simple majority assumption to be as valid her assertion that her bill wouldn’t cost jobs.

Proposition 26 amended the California constitution so that – according to the language of the law – “Any change in state statute which results in a taxpayer paying a higher tax,” which is the goal and purpose of AB 153, is subject to a two-thirds vote requirement. Online sales tax proponents might have had a shot at getting a simple majority, not so with a two-thirds threshold.

Yes, this is my reading of the law. A two-thirds vote will be required for passage in the Assembly and State Senate. This means there will have to be some Republican votes – a highly unlikely occurrence.

And, the passage of Proposition 26 was a little heralded silver-lining in the GOP wipe out in last November’s California election. This little proposition will have long-lasting impacts on the growth of California government.