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Opting for a Spending Ceiling Rather Than a Revenue Cap

posted in: Weekly Commentary 0
By Lowell L. Kalapa

A couple of readers reacted to comments made on the efficiency of a limit on general fund spending as opposed to a cap on how much in taxes elected officials could raise as represented by the infamous Proposition 13 adopted in California.

Those comments reflect the belief that if elected officials were prevented from raising excessive taxes, the excessive spending would cease and the size of government could be contained. While many would like to believe that this was the outcome of Proposition 13 in California, many observers in that state will argue that just the opposite occurred.

Instead elected officials found novel ways to get around the limiting effect of the Proposition which requires that annual increases in property tax bills be limited to one percent. Soon after Proposition 13 was approved, public officials discovered one of the most crippling effects of limiting the amount of revenues local officials could raise from the property tax. Not having the unlimited ability to raise revenues made bond holders nervous. This made it more difficult for local governments in California, who rely upon the property tax, to issue debt for capital facilities such as schools and roads.

Another downside of the limit on real property taxes did not surface for quite some time. Under the provisions of the Proposition, the limit applied to the value of the homeowner’s property at the time the Proposition was adopted or when it was acquired. As a result, people who continued to live in the home they owned at the time Proposition 13 was adopted in 1978 saw their property taxes grow by only one percent per year.

For example, a couple who owned a house valued at $100,000 in 1978 watched the assessed value of their home grow over the next ten years to a value of roughly $111,000 in 1988. However, a newly married couple buys the house next door which is an exact duplicate of the house owned by the first couple. They pay the market price of $295,000. The newlyweds’ home will be valued at the market price of $295,000 even though the property is as old and has the same characteristics as the older couple’s house right next door.

The inequity between the two property tax bills is obvious. Just because the older couple has lived in the same house for the past ten years, their property tax bill will be about one-third of the newlywed’s bill. However, both properties will receive the exact same services. So why do the owners of the newly purchased property have to pay three times as much as their neighbors for the same services?

While subsequent amendments to the Proposition attempted to address this inequitable situation, similar problems continue to plague homeowners in California. For example, because local governments were not able to issue debt at reasonable costs, infrastructure could not be built to accommodate growth in the community. Thus, developers of new housing tracts could not depend on government to put in the necessary streets, sewers, and water lines to service a growing community.

The response came from state officials who came up with a debt financing plan that supposedly did not depend on the property tax, the funds for the repayment of the debt came in the form of a charge per parcel of property. Although proponents of the scheme argued that this was an additional property tax which was limited by Proposition 13, the fact that it was allowed as a deductible tax meant it had to be either an income tax or a property tax.

More importantly, when local government officials found that their hands were tied, they found other ways to raise the funds they needed to run local governments in California. Like Hawaii in recent years, California officials resorted to charging fees for every little thing. Library fines went up and licenses and permits were required for all sorts of activities.

As a result, Californians have lost sight of the true cost of local government because local government officials are nickel and diming their residents to death. Is this any better than the situation in Hawaii?

Thus, while some may argue that Proposition 13, which limits the taxing ability of elected officials, is better than Hawaii’s constitutional limit on spending, one should consider all the ramifications before jumping to a conclusion.

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