Property Tax: Biases and Reforms
Our fall of income pc (per capita) is greater than appears from a purely monetary measure. Real pay (in contrast $) has fallen more because of the drastic rise in shelter prices. In San Francisco, shelter takes 50 percent of the median income, with many other cities, especially coastal ones, not far behind. It is unusual to find livable quarters for less than $600 per month. The median home price rose 163 percent during the 1980s to $258,000 (that is just the median - the mean is higher). These prices are part of the C.O.L. of all renters and new buyers, a part not fully incorporated in standard CPI measures.
Some cities are in desperate straits. In 1976 San Bernardino was chosen an "AllAmerican City, A City on the Go." Go it did: today 40 percent of its people are on welfare!
California is earthquake country. But it has always renewed itself. It was different after the Northridge quake in the San Fernando Valley, January 1994. This is the uppermiddle neighborhood of Los Angeles, but now large pockets of ruined buildings remain, unreconstructed, inhabited by vagrants and criminals: an instant Bronx West. These ominous blighted sections portend the spread of more blight.
It should give one pause. It is the expectable consequence of what the voters did. They rejected the concept of taxing inert wealth in favor of the alternative: taxing liquidity, cash flow, work, production and commerce. The predictable result has been to inhibit economic activity, and encourage holding wealth inert and stagnant. They turned property from a functional concept into a sacred one; from a commission to be enterprising, hire people, produce goods, and pay taxes into a welfare entitlement.
California had a construction boom in the late 1980s, but it was not healthy. It was marked by extreme scatter and instability. Downtown L.A. was to become a great new financial capital. But it now has nearly the highest office vacancy rate in the U.S., with of course a high rate of builder bankruptcies. Speculative builders were led on to over-build, in part by anticipated higher land rents and prices. This Lorelei effect was magnified by national income-tax provisions luring on speculative builders. But we have to ask why California fell harder than other states, even with the object-lessons of the oil states in clear view.
David Shulaman tersely summarized the distributive effects of Prop. 13 as he left us to become Chief Equity Strategist for Salamon Brothers in Manhattan: "it breached the social compact." Alienation is the result, and the results of alienation are the Rodney King riots, arson and looting. (The consistent leader in death rate from violet causes is New Mexico, with the lowest property tax in the nation.) The Watts riots, you may object, preceded Prop. 13, and you are right. However, the Watts riots were part of a national epidemic. By 1967 there were riots with arson and looting in 70 or more American cities. The Rodney King riots were endemic to California, and they spread over a much wider area of Los Angeles than the Watts riots did. The looters and arsonists were not all black, and the targets were not all white, but mainly Korean-Americans who just happened to be there minding their stores.
Conventional wisdom now blames our California bust on the end of the Cold War. Surely that is a factor, but as a casual explanation, it is too pat, too easy and too convenient. It shifts the load onto impersonal historical forces - the Marxist world view. Let us see if it can survive analysis.
Compare today with 1945. Los Angeles' economy depended much more on The Hot War, 1940-1945, than it every did on The Cold War. Los Angeles' wartime boom had swelled its population as no other great city, 1940-45. After 1945 the U.S. pulled the plug on defense spending, more than today. Jane Jacobs, in The Economy of Cities, tells us what happened to military spending in Los Angeles after 1945. It lost 3/4 of its aircraft workers, and 80 percent of its shipbuilders. It lost its military and naval overseas supply and replacement businesses. Troops stopped funneling through. It got worse: petroleum and cinema and citrus, its traditional exports, all declined.
Pundits then forecast a regional collapse, but Los Angeles boomed instead. The wartime immigrants stayed. They formed creative, innovative small businesses in large numbers, giving L.A. its deserved reputation for having the most dynamic, flexible, adaptable industrial base in the nation. Besides exporting goods, L.A. also became more self-contained, providing itself with more of the goods it previously imported. How could this be? Angelenos had access to land, the basis of all supply and demand in any economy.
Between 1945-50, one-eighth of all new businesses started in the U.S. were established in L.A. They were small, creative, flexible, miscellaneous, and too varied and dynamic to classify. No Linnaeus could sort them in static conventional boxes; they were the despair traditional economic geographers and base theorists who were at a loss to explain the region's thriving economy. The new Angelenos stayed and started producing everything for themselves, some things previously imported, and others never seen before.
Eastern firms established branch plants. Top eastern students came to California's great university system and stayed behind to take jobs and make careers here, then sent their children through California's excellent public schools. California became famous for supporting outstanding higher education, highways, water supplies, public health, public safety, and other public services, all without repelling business by taxation. There was a regional "El Dorado Effect" as demand and supply grew together. Growing local demand allowed for economies of scale serving local markets. Food and shelter were cheap and abundant. Land for business was accessible, providing a basis for the California selfcontained phenomenon. A "continental tilt" developed in both interest rates and wage rates, drawing in eastern capital and labor. Why is that not continuing today?
The invisible, pervasive change is due to Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3 percent every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1 percent. Using Gwartney's Rule of Thumb (see below under #2, A, "Reassessing Land Frequently") it is about 1/8 of 1 percent: a rate of 1 percent applied to 1/8 of the true value.
Landowners are only taxed now if they use their land to hire people and produce something useful. Then they are confronted by the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight.
What was different then? We had high property tax rates, but they were more focused on land than now, less on new buildings. Another obvious difference was the lower burdens of sales tax, business tax, and income tax. California was more hospitable to Georgist thinking than perhaps any other state, shown by its long run of Georgist political action in the prior thirty years. Most people today are totally ignnorant of this subject. It has been deleted from our history books. Here is a brief review.
Several states had "single-tax" movements and initiatives, 1910-14, but most of them petered out. In California they continued through 1924, and then popped up again in 1934-38. In 1934 the "EPIC" campaign of Upton Sinclair included a strong Georgist element - he proposed the establishment of new factories and farms on idle land. At the same time, Jackson Ralston was pursuing a pure land tax initiative, 1934-38.
Sinclair and Ralston lost. But the very existence of such political action in California, when the movement was torpid elsewhere, tells us a lot. It reveals a large matrix of supportive voters and workers, with effective leaders, to whom politicians (including elected County Assessors) would naturally respond by focusing on land assessments. Politicians survive by accommodating and absorbing dissident movements. Even while "losing," such campaigns raise consciousness of the issue. Thus, in California, 1917, land value constituted 72 percent of the assessment roll for property taxation.
This remained the California norm for years. California was different. Even into the 1960s, Sacramento County elected an avowed single-tax Assessor, Irene Hickman; San Diego County harbored an active movement for raising land assessments. The Henry George Schools of San Francisco, San Diego, Los Angeles and Sacramento were the most active such schools in the country: four in one state, when most had none. State Senator Al Rodd, Chair of the Senate Finance Committee, held hearings and tried to push land tax legislation through his Committee in the 1960s and early 1970s. He assigned a staffer, Jack Massen, to spend a year working out the detailed effects on intergovernmentai relations. Assemblyman Dr. William Filante, from a base of Georgist support in Marin County, picked up the torch too.
California displayed amazing prosperity and growth up to 1978. It had the resilience to shrug off the loss of war industries after 1945 and still grow "explosively" (as Jane Jacobs put it). After 1978 we suffered a string of reverses. The timing, along with a priori causative analysis, plus direct observations too numerous to review support an hypothesis that the reverses were aggravated by Prop. 13. Michigan, be warned: "This Could Happen to You.
End of Part Two. Part Twhree will appear on Thursday, March 19.
This paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.