California Landed Gentry

January 26, 2020

by Steve Stofka

What is a fair share of taxes? As I noted last week, different households pay a varying share of sales tax to the city but consume the same amount of public services. Income taxes and property taxes vary as well. In California’s booming real estate market, younger homeowners are furious that they must shoulder an inequitable share of a community’s property tax.

In the 1970s, the population of California swelled and created a large increase in demand for housing. The higher demand and runaway inflation during the period led to rapidly escalating home prices. Proposition 13, an amendment to the California constitution, was sold as a remedy for older homeowners on fixed incomes who could no longer afford the property taxes on the homes they had owned for years. Commercial properties were included in the amendment as a way to protect small businesses and the stability they brought to communities.

In 1978, California voters passed Prop 13, as it was called. Annual increases in residential and commercial property taxes were limited to 2% for existing property owners. These were years of high inflation. In 1979, the inflation rate was 14%, far higher than the current 2% rate (BLS, n.d.). In the two years following passage of the amendment, property tax collections collapsed by 50%. The resulting loss of revenue and high inflation caused a financial crisis in cities and counties throughout the state (BOE, 2018). Because taxes are based on acquisition cost, not current appraised value, the law has created large disparities in tax liability between neighbors in similar housing. In addition, the law has created inequalities between homeowners of different ages. The purchase of a home would normally step up the appraised value of the property to a current value but new homeowners over 55 were exempted. Older homeowners could also transfer their house to their children without triggering a step up in appraised value. Many homes are never sold. The homeowners and their heirs rent out the homes at current rental prices and pocket the profits. The law has created a class of landed gentry in the state (Dillon, Poston, 2018).

In 1992, the Supreme Court ruled that the law did not violate the 14th Amendment (Nordlinger v. Hahn, n.d.). In the past forty years, the law has severely reduced funding for California schools and helped to create notorious budget shortfalls. In the 1970s, California ranked in the top ten states in the quality of public education. This past year, Wallet Hub ranked the state #38 (McCann, 2019).

The fixing of one problem often creates a much larger inequity in the end and that requires an endless stream of fixes to the solutions to the problem. It’s good business for lawmakers. Adam Smith, the father of economics, documented the process in his book Wealth of Nations (Smith, 1776). Labor guilds and business interests often proposed regulations which gave them an advantage in a market. The public good was often compromised by laws that favored these interest groups. Smith proposed a free market approach as the only way to protect the public from the corruption and favoritism that inevitably marks a political state. California is a living example of the same problems that Smith described in 18th century England. Human nature has changed little in the past 200 years.

In 2020, California voters may have a chance to undo that part of the law that applies equally to commercial property, but homeowners will continue to enjoy incremental changes to their property taxes (Levin, 2018). The dream of homeownership will elude many families in the state. Taxes are inherently unfair but Californians have created their own brand of unfair taxes.

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Notes:

Bureau of Labor Statistics. (n.d.). Inflation Calculator. [Web page]. Retrieved from https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=197901&year2=198001.

California State Board of Equalization (BOE). (2018, December). California Property Tax: An Overview. [PDF]. Retrieved from https://www.boe.ca.gov/proptaxes/pdf/pub29.pdf#page=5

Dillon, L., Poston, B. (2018, August 17). Must Reads: California homeowners get to pass low property taxes to their kids. It’s proved highly profitable to an elite group. Los Angeles Times. [Web page]. Retrieved from https://www.latimes.com/politics/la-pol-ca-california-property-taxes-elites-201808-htmlstory.html

Levin, M. (2018, August 4). Prop. 13 could be partly undone in 2020—here’s what you should know. [Web page]. Retrieved from https://calmatters.org/economy/2018/08/prop-13-could-be-party-undone-in-2020-heres-what-you-should-know/

McCann, A. (2019, July 29). States with the Best & Worst School Systems. Wallet Hub. [Web page]. Retrieved from https://wallethub.com/edu/e/states-with-the-best-schools/5335/

Nordlinger v. Hahn. (n.d.). Oyez. [Web page]. Retrieved from https://www.oyez.org/cases/1991/90-1912

Photo by The Joy of Film on Unsplash

Smith, Adam. (1776). The Wealth of Nations (Kindle Edition). Digireads.com Publishing (2019). Available at https://www.amazon.com/Wealth-Nations-Adam-Smith-ebook-dp-B000FC1CVE/dp/B000FC1CVE/ref=mt_kindle?_encoding=UTF8&me=&qid=

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