California on the Edge

“Proposition 13 set up an unfair and dysfunctional two- tiered system of property taxes. It choked off a source of revenue, and the lack of that revenue has brought California to the edge.” –Kevin Starr, historian and California State Librarian Emeritus

Many Californians would agree with Kevin Starr that our state is teetering on the edge of disaster. Unemployment remains the second highest in the nation, 32 percent of all mortgaged homeowners are underwater, public schools have been cut to the bone and public universities are unaffordable for the middle class.

Big business and their Republican allies have repeated the laundry list of why California’s economy is struggling so many times that it is practically written in stone—Taxes, Regulations, Public Employees. These are the unholy trinity that supposedly crashed California’s economy and threatens to smother any business growth in the future.

The facts, however, contradict the well-worn talking points of big business. The Council on State Taxation, a business-friendly group led by CEOs of major corporations, found that California has a moderate tax burden, taking less in taxes from business than many other states, including the sweethearts of the right, Texas and Florida. 

Many experts look at regulations as job creators, in addition to the benefits to public health and worker safety. Roger Noll, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research breaks down the GOP’s obsession with regulations:

The effect of regulation on jobs has nothing to do with the mess we’re in. The current rhetoric about regulation killing jobs is nothing more than not letting a good crisis go to waste.

He goes on to state that regulations may affect job distribution, but not the total number of jobs, eliminating the possibility that California’s landmark environmental laws crashed the global economy causing the current recession. 

As for public employees, it requires leaps of logic to understand how laying off thousands of teachers, nurses, home health aides, crossing guards, librarians and public works crews makes the state a better place to do business. California already has the 4th fewest state employees per capita as any other state—even Texas has more state workers per capita than we do! And more than a third (37 percent) of those public employees are at UC or CSU—I doubt laying off professors, economists and business school personnel will please the business community too much. 

That begs the question, then, why is California on the edge? Putting aside the deregulation of Wall Street and their subsequent destruction of the global economy through risky and irresponsible gambling, why is California in such a dismal economic state?

A reporter recently put that question to state historian Kevin Starr.  He traced the beginning of California’s decline to 1978, the year Proposition 13 passed. Prop 13 capped property taxes, limited local governments’ ability to raise revenue and imposed a two-thirds majority to raise revenue.

Prop 13 has had profound negative consequences for California on all levels. Local government is starved of revenue and dependent on the state to keep schools open and local employees on the job. In turn, the budget crunch forces deep cuts to UC, CSU and every public program that impacts the lives of Californians. At the same time, elected officials can’t vote to raise revenue without a supermajority, giving the minority of anti-tax Republicans disproportionate veto power. 

While Prop 13 was seen as a populist measure, corporations have been the true winners. Across the state, the burden of property taxes has shifted radically from corporations to homeowners. A recent report by the California Tax Reform Association (CTRA) cites numbers for all counties showing how homeowners have taken on a significant burden of funding public services, while corporations have shirked paying their fair share. 

The report goes on to outline how corporate property owners can exploit a loophole in the law to avoid paying what they really owe in property taxes. The law requires a 50 percent “change of ownership” to trigger reassessment, which corporations conveniently avoid in many transactions. The Bloomberg article describes a number of billion dollar commercial property owners that have avoided paying millions in taxes, including the owners of the luxury hotel the Fairmount Miramar. 

The CTRA summarizes the extent of the problem in their report “System Failure:”

We have found major changes of ownership in major properties which have gone without reassessment. The ones we examined are predominantly those of private equity buyouts, corporate purchases of companies, and bank mergers which have avoided reassessment….We believe that there are many properties, particularly the banks and other commercial properties, which should have been reassessed but have not been….

Not only has Prop 13 starved state and local budgets, caused mass layoffs and created a huge loophole for corporations to shirk paying taxes, but it has also put many new business that WANT to locate in California at a disadvantage. Because of the cap on property at the time it was purchased, property owners, including businesses, pay incredibly different tax rates. So a new business that wants to move into California may locate and have to compete with another business that pays millions of dollars LESS in property taxes than the new business. Some reward for job creation, right? Move to California, create jobs and WHAM pay more than your competitor just because they bought property before Prop 13? That sounds like something free-market business types would oppose!

So what will it take to pull California back from the edge? What can we do to stop our state from falling into an abyss of unemployment, foreclosure, budget cuts and misery? A good first step is to reform the commercial property side of Prop 13. By closing loopholes on “change of ownership” definitions and allowing more reassessment and a higher cap, the state could raise significant amounts of revenue. That would be a good first step to stop the budget hemorrhaging and put California on the road to recovery.