Sunday, January 20, 2008

Prop 13: Protecting Taxpayers and Politicians

Greetings friends and neighbors,

This article was written a few years back by a California legislator. Funny thing about Proposition 13 which was an experiment begun some thirty (30) years ago now. What with all the people who have moved here from California and settled in Ogden Valley to Saint George I have yet to meet one who did not love it. Whether a public servant, businessman, or homeowner...they all have nothing but good things to say about it while they lived in California.

The only ones in these parts that seem to want to kill it are Realtor Association members for the most part. And a few who are concerned unnecessarily about how it might effect public services. The author (and I apologize for not providing his name but I lost it) puts those concerns to rest fairly well. Also those who actually live among us now and who worked in public services areas of California have nothing but good things to report about how it affected their lives.

Detractors locally like to "preach" about the "Three legged stool; income, sales and property taxes". And of the three, how property taxes are the most "stable" and "dependable" since they must be paid no matter one's "ability to pay".

My argument is just how "stable" is an onerous property tax which increases beyond a homeowner's ability to pay? What happens when the word gets out that Utah has oppressive property taxation? How "stable" are Realtor driven market valuations hence property taxes which cause people to leave Utah, or not move to Utah as retirees on fixed incomes? Young people study cost of living indexes before accepting a job in any State as part of their salary packages to determine whether or not to live in Utah. When they see Utah is always ranked in the top ten (10) highest taxed States in the seniors they turn away. How does that help the Realtor Association?

Seems like very bad tax policy and business to me. If you agree (or disagree) let me know please.


Minor Machman

Proposition 13 is frequently held up by many as the root of all evil in California. It is the consistent target of vilification by government agencies that wish they could get their hands on more of your tax dollars. Proposition 13 was passed to protect property owners from abrupt and excessive run-up in property tax bills and has likely saved countless retiree homeowners on fixed incomes from financial ruin. Yet, the understated, but not unintended, golden nugget in Proposition 13 is that it has also saved politicians and government officials from themselves by limiting their ability to spend wildly.

In my nine years of working with governmental budgets I have come to recognize that those of us in the public sector charged with making budgets could make our budget struggles much less unpleasant if we were to practice a smoothing of spending over time. I admonished my colleagues at the local level that we should forecast revenues over an extended period of time, establish an average revenue level, and then limit annual spending to that average. Revenues in any year above the average should be held back as a reserve. Then, when revenues inevitably fall, we would have enough resources to avoid painful levels of cuts. Cutting programs can be one of the most difficult and trying things for an elected official to do. It makes good sense to use this method of budgeting. Unfortunately, I discovered that good sense doesn't prevail over the pressure to spend on any level of government. I have learned that an unstated principle of public budgeting seems to be that spending will expand to the level of tax revenues that we see before us in the current year only.

In one of his recent Sacramento Bee columns, Dan Weintraub pointed out that Proposition 13 has actually acted as a revenue stabilizer and in essence forced the very smoothing of spending over time that I longed for as a local elected official. Mr. Weintraub called it a ''surprise'' benefit of Proposition 13 that shouldn't be overlooked, and I couldn't agree more.

With Proposition 13 and the caps on property taxes that it provides, revenues to government agencies are naturally leveled out and smoothed over time. This mechanism provides a much more consistent revenue stream for local government in contrast to what the State sees with wild year to year fluctuations in income tax revenues. By capping property taxes at levels that reflect the home's original value, local governments can better anticipate their property tax revenues and moderate their spending.

Of course, it is that statement about a home's original value that always leads to further attacks on Proposition 13. As Mr. Weintraub points out in the same article, there is ''…an element of Proposition 13 that has come under attack, because two homes next to each other and worth the same amount can be taxed at wildly different levels . . .'' Proposition 13 detractors have long said that these different levels of taxation are unfair.

As Mr. Weintraub correctly noted in his article, ''A home that sells for $300,000 one year and is worth $320,000 the next will be assessed at only $306,000, reflecting the 2 percent cap in annual increases. After a few years of big growth of the kind California saw in the early years of this decade, such a home might be worth $500,000, but its assessed value would still be close to the original purchase price. The owner is sitting on a mountain of untaxed equity.''

True, but the good sense of Proposition 13 is that this ''mountain of untaxed equity'' has absolutely nothing to do with the homeowner's ability to pay a tax bill. Those who attack this impact of Prop 13 as unfair are forgetting the tragic unfairness of pre-Prop 13 circumstances where senior citizens were taxed right out of their constantly increasing value homes while their incomes remained stagnant.

At least two other states (this article is dated having been written several years ago as most other States have also gone to acquisition value or purchase price based reassessment taxation which are "Prop 13 based".), Florida and Texas are currently looking at implementing Proposition 13-like reforms as abusive local governments have taken advantage of unusually escalating property values. Beleaguered taxpayers have taken their grievances about these abuses to their state government and their legislatures are wisely looking into the issue.

So as Proposition 13 continues to be a target for attack by those in government who believe that it handcuffs them from raising new revenues to pay for new programs, politicians and government should instead be thankful. Proposition 13 has provided consistent, predictable revenue streams that have protected politicians from themselves and their wild spending ways, while living up to its intended purpose of protecting taxpayers from abusive tax increases.

If you have gotten this far I have a "test" question for you. What is "tax capitalization" a how does it relate to acquistion value taxation? MM

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