Howard Rich's Blog

July 8, 2009

Tax Fiction Sells In Hollywood

From Investor’s Business Daily

Rewriting History: Did Proposition 13 ruin California? Yes, says a now-popular myth, which explains the state’s budget crisis as punishment for keeping taxes too low. But statistics are stubborn things.

There are only two ways to get into a fiscal mess on the scale seen in California right now: You either spend too much or tax too little.

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Legislative Republicans, now joined by Gov. Arnold Schwarzenegger, have decided that chronic overspending is the problem. They insist that the budget gap be closed with no new taxes.

The state’s Democrats want a tax increase, and they’re being egged on by cheerleaders such as Time magazine, which recently opined that California is paying the price for tax-cutting fever.

At the “root of California’s misery,” says Time, “lies Proposition 13, the anti-tax measure that ignited the Reagan Revolution and the conservative era. In Washington, the Reagan-Bush era is over. But in California, the conservative legacy lives on.”

This sort of argument is emerging now, we’d guess, to help soften voter resistance to higher taxes not just in California but, sooner or later, at the federal level to pay for the spending frenzy of Congress and the Obama administration. Prop. 13, passed in 1978, is being trotted out as Exhibit A in the case against limited-government conservatism.

There’s just one problem: The case against Prop. 13 is factually unsound. The proposition did cut property taxes sharply and did set a high bar — a two-thirds vote in the Legislature — to approve new tax increases. But it did not turn California into a low-tax state, and it did not put state and local governments on a 30-year starvation diet.

Los Angeles County, the state’s and nation’s largest by population, took a big hit in its property-tax take after Prop. 13 (see chart), but that revenue source recovered. It has racked up a 3.7% average annual gain since the mid-1960s, and 7.0% since Prop. 13. Local governments were able to raise other taxes and fees, such as business license taxes, without much opposition. State government rode the tide of prosperity (yes, California boomed through most of the post-Prop. 13 era) and just kept getting bigger.

The net effect of the evolving revenue mix on California’s taxpayers was to leave them very close to where they were before Prop. 13 — near the top in rankings of taxes paid.

The Tax Foundation, which has tracked these statistics since 1977, put California’s total state and local tax burden at 10.5% of per capita income, sixth highest among the 50 states and D.C.

In 1978, the year before Prop. 13 hit, California ranked third, with a burden of 11.7%. Prop. 13 briefly knocked it down to 22nd in 1979, but the next year it was back in ninth place and has been in the top 10 every year since 1995.

Even property taxes in California are above national averages when measured against income — that is, by ability to pay them. Census figures analyzed by the Tax Foundation show that California property taxes on owner-occupied housing in 2007 were 3.4% of the median homeowner income, compared to the national average of 2.9%.

So let’s go back to asking what, in Time’s words, “has brought California to such a perilous state?” One answer, consistent with the facts, is that Prop. 13 didn’t go far enough. It raised barriers to tax increases but did nothing on the spending side.

And other attempts to limit spending (California technically has a cap now) were gutted by ballot initiatives to guarantee spending growth where it was popular, especially on schools.

Another cause was the state’s failure to stand up to public-employee unions. The key year here was 1999, when Gray Davis and the Democrats had just won back the governor’s office from the more fiscally conservative Republicans.

As Schwarzenegger noted last week in a Los Angeles Times op-ed, Davis and the Legislature quickly hiked state employee pensions “to a point where some employees could retire after 30 years, at as young as 50 or 55, and continue to earn 90% of their highest salary plus cost-of-living increases for the rest of their lives.”

Just to give some idea of the magnitude of the obligation the state took on with this one move, Schwarzenegger says rolling back pensions to pre-1999 levels just for new hires would save the state nearly $95 billion by 2040.

All this suggests one answer to the tax counter-revolt: Government in California gets plenty of money. What it lacks is real leadership.

Instead of tax increases, it needs lawmakers and governors who can look their special-interest benefactors in the eye and say, “No, this time we’re putting the taxpayer first.”


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