Proposition 13 continues to spark tax debate as California remains mired in deep recession

In the modern political climate, two fiscal policies are widely considered to be nearly as untouchable and immortal as the United States Constitution. At the national level, the very notion of touching Social Security has been pervasively derided as the “third rail” of American politics, while in California, the notion of touching the still-controversial but persistently popular Proposition 13 has taken on a similar appearance.

As such, one particularly eyebrow-raising move by California’s legislature may factor strongly into the electoral calculus come this fall, given its daring attempt to do what has long been thought impossible – that is, moderate the effects of Proposition 13. The San Francisco Chronicle reports:

     With California mired in a budget crisis, some lawmakers are eyeing revisions to Proposition 13, the state’s landmark law limiting property-tax increases, considered the untouchable third rail of California politics. Assemblyman Tom Ammiano, D-San Francisco, is sponsoring legislation that he said would stop commercial property owners from evading higher taxes when businesses change hands, a practice that he said deprives cash-strapped cities and counties of hundreds of millions of dollars.

This deceptively simple proposal has long been a darling of Proposition 13’s foes, even though it simultaneously aspires to resolve a genuine ambiguity in the law. Under Proposition 13, property tax values are reassessed when a property is sold – a fairly easy thing to determine when it comes to residential property, but much more dicey where commercial property is concerned, due to the arcane rules of corporate ownership.

As a result, Proposition 13 has in effect created a tax loophole whereby corporate/commercial property owners can avoid paying certain potentially binding taxes, a situation which traditionally Democratic interest groups and public sector unions decry for its adverse effects on the state budget. Ammiano’s bill would clear up the ambiguity, while simultaneously reining in what the bill’s supporters claim would be hundreds of millions of dollars in revenue.

To an outside eye, it may be difficult to see why such a simple exercise in clarification could garner the sort of political opposition that has universally sunk previous efforts at clarifying the same language. In order to formulate an answer, one has to look holistically at the entire California budget process/economy, as well as the political interests involved.

On the side of the budget, it is worth noting that California’s tax system has become an infamous case study in excess – so much so that the Pacific Research Institute recently bestowed the rueful name of “Taxifornia” upon the State. To be sure, every business and taxpayer has an incentive to avoid taxes, but in the case of California, that incentive has been magnified extraordinarily by the stagnant tax code, which has already driven over 100 companies out of California, according to Investors’ Business Daily.

As such, the battle over Ammiano’s “clarification” is about more than Proposition 13 – it implicates one area in which California businesses can avoid the otherwise business-averse tax code, and thus implicates powerful political interests in opposition.

Moreover, these interests arguably have reason to be paranoid. Proposition 13, and the general antitax philosophy behind it, is a subject in the crosshairs of not only California-based interest groups, but also of many members of the national media. According to City Journal columnist William Voegeli:

     According to liberals in politics, journalism, and academia, Proposition 13 is the reason for California’s worsening fiscal nightmare and the declining quality of the state’s public services, and the motives behind it were deplorable. And because Prop. 13 ignited a national tax revolt that remains potent, the Left also blames the measure for much of what it thinks has gone wrong in American political life generally over the past three decades. Yet no matter how often their moral and intellectual ‘superiors’ denounce them, California taxpayers continue to insist that the problem isn’t their purported stinginess but their government, which makes lousy use of the considerable funds that it continues to receive. On this point, the voters aren’t being stubborn, greedy, or stupid. The voters are right.

It is thus fair to say that, even if one presumes that the businesses which oppose Ammiano’s measure are paranoid, so too are the knee-jerk opponents of Proposition 13, who ignore the real fact that, as Voegeli points out, “total state and local tax revenues in California were higher ten years after Proposition 13’s enactment than they were just before—and that they were half again as high in 2000 as in 1978.”

Thus, even if the “third rail” has much ambiguity, it has equal advantages to recommend it – a fact which might make the process of “clarification” much simpler if only it were acknowledged by the bill’s foes.

 

* Editor’s note:  for a closer look at how the Alternative Minimum Tax (AMT) and unfunded federal mandates also significantly contribute to California’s fiscal woes, click here.