PoliBlog vs TAM on Prop. 13

Don't worry, hostilities haven't broken out between Steven and me. It's not some lame attempt to generate some "news" during the August doldrums. It just a discussion on California's Proposition 13 and a better way to finance local government.

Steven links to how Prop. 13 works:

Section 2 of Article XIIIA of the California Constitution (enacted by Proposition 13) establishes an acquisition-value assessment system. It provides that property is to be assessed at its value when acquired through a change of ownership or by new construction. Thereafter, the taxable value of property may increase annually by no more than the rate of inflation or two percent, whichever is less.

Steven sees this tax limitation as unfair:

I understand the root cause of the taxpayer revolt in the 1970s that led to Prop 13, but clearly this distorts the fairness of the system. It seems to me that if my house and your house in the same neighborhood are valued the same, we should pay the same amount in property taxes.

It may be unfair for the latter buyer, but the market-assessed method for property taxes is unfair to the person who has lived in a home for a significant amout of time. Suppose person A bought a house for $100,000 in 1990. In 2000, person B bought an identical house next door for $200,000 (a result of the dot-com boom). Assuming the same tax rate is applied to both properties, B is paying twice as much as A. It's seems unfair to B because they're both using a similar amount of government services. But it would be unfair to raise A's taxes just because B spent more on his house.

In another post, Steven and I go back a forth on the property tax versus a user tax. I commented:

In my perfect world, property taxes would be based on use of city services or land size instead of the property's value.

Steven responds:

Well, that would be a usage tax, not a property tax. Plus, how does one exactly calculate that? For example, even if one drives less than one's neighbor, one may still get other benefits from the roads (such as their use in shipping in items you buy that you neighbor doesn't--it is difficult to quantify).

Property taxes, by definition, are an assessment against the value of the home. Prop 13 distorts the way that value is assessed, and creates inequity in how citizens are taxed.

No tax is economically neutral. Adding another cost onto anything creates incentives to minimize it. An example of this are the narrow houses in Amsterdam. When taxes were determined based on the width of the home, smart Dutchmen built narrow houses. When it comes to the roads, the gas tax seems like it works fairly well at focusing on the bigger users. When I mentioned a tax based on property size, I was thinking in particular the amount of road going past one's property that needed snow plowing (Wisconsinite's brain at work) and sewers.

How you would calculate the tax is to take the total levy (government spending) then divide it by the taxable land in the governmental area. It would end up being a certain dollar amount per square feet of land. Larger land owners would pay more since it would seem they used more government services. There would still be distortions--those unintended consequences--but it seems more just than basing taxes on property values that are beyond the control of property owners.

In the California situation, I see little need for tax increases or "reform" that amounts to tax increases when government spending balloon these past few years. Revenue hasn't been California's problem since the paper on Prop. 13 Steven linked to states that "The property tax has proven to be a stable revenue source for local governments, growing almost 10 percent per year between 1980 and 1992; even in 1992, a recession year, the annual increase was 7.9 percent." Any fiscal problems with local government is the result of out-of-control spending not fluctuating tax revenue. Much of the spending increases is beyond the control of the legislature due to propositions (example: Arnold's after-school initiative). I'm from the Friedman school of taxes: to shrink government you must shrink the revenue that flows into it. Prop. 13 prevents the beast from being fed more.

August 18, 2003