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Hurting the People Who We Intend to Help

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By Lowell L. Kalapa

People ask why politicians do some of the things they do when in the end they find out that what appeared to be a good idea ends up hurting the very people they intended to help.
Such is the case of California where more than two decades ago politicians had hoped to stem the tide of a taxpayers’ revolt by slapping a ceiling or governor, if you wish, on the growth in property taxes by limiting the amount a property owner’s bill would increase annually to 1%. This action came in the midst of one of many spurts in California’s economy as millions of people moved to California to seek their fortune.
Just as Hawaii experienced in the late 1980’s, California real estate started to appreciate hand over foot as the demand for housing, and in some cases commercial property, skyrocketed, driving prices along with that demand. As a result, housing values soared and along with that property taxes. Local officials enjoyed the ride as ever increasing values meant ever increasing real property tax collections. And like Hawaii, elected officials blamed the rising property values and not the fact that they did little to lower property tax rates to compensate for the rising values.
Well, it went too far and people got disgusted with the fact that nothing was being done to alleviate the rising tax bills. So they took up a petition and got a proposition on the ballot to slap a limit or ceiling on just how much property taxes could rise from year to year on residential property. And while they were successful in getting Proposition 13 passed, it was only the beginning of the horror story that followed over the next two decades.
First came the funding problems. Because no one specific real property bill could increase more than 1%, elected officials could raise only 1% more in revenue than in the previous year, at least in the first few years as the effects of Proposition 13 took effect. This meant that local governments’ hands were strapped. How were they going to pay for schools, parks and libraries which are funded through the real property tax? During that period inflation took on double digit proportions and costs began to outpace the revenues that could be realized from the property tax. While many doubted that this initiative would succeed, people seemed to be thrilled that they did not have to face rising property taxes. What they didn’t anticipate was that sooner or later elected officials found ways to fund the public services that used to be paid for by the property tax. Libraries started charging fees and exactions on developers started to appear. Local governments looked to state government to bail them out of rising education expenses.
Now some 20 years later, we can see the downside of Proposition 13. Besides not being able to raise the money necessary to fund public services, shifting the burden instead to user fees and charges and seeking subsidies from the state, local governments in California also discovered that the bond market didn’t want to buy their debt. Because the ability to raise taxes to meet debt service requirements was no longer available, the prospect of local governments being able to repay debt disappeared.
As a result, local governments resorted to gimmicks to disguise what would otherwise be a property tax to fund infrastructure improvements critical to new developments that in turn would increase the property tax base. The Mello Roose concept argued that it was not a property tax but a charge imposed on each parcel within a proposed development. But the telling aspect of the proposal was that it would be deductible against federal and state income taxes. Since it wasn’t an income tax, the only thing it could be was a property tax.
The other disappointing result of Proposition 13 is a growing apathy toward local government by those who have enjoyed the freeze in their property tax bills. Those favored taxpayers no longer care about how elected officials spend their property taxes because they are paying so little by comparison to those who don’t enjoy the benefits of Proposition 13.
And who are the people who don’t benefit from Proposition 13? They are the first-time home buyers who face the full brunt of the market value of their home being subject to the property tax rates. And although the high tech boom of the 1990’s helped to boost market sales, Proposition 13 also discourages even more movement in the market because buying a new home in another jurisdiction subjects the new home to the full burden of the property tax rates. So much for helping the beleaguered property taxpayer.

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