The late economist Milton Friedman was fond of saying: “The property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land.”
He said almost those exact same words to me four years ago during an interview about his relationship with Gov. Schwarzenegger – and about his history with California ballot initiatives.
When the subject turned to Prop 13, which he had strongly supported in 1978, Friedman said he thought the measure had proven to be “a mixed bag.” He did not regret his vote for Prop 13 because it had sent a tax-cutting message that was important for that time.
“You’re probably too young to realize it,” he told me (he was right — I was 5 in June 1978), “but in those days, government was the answer to every problem. Very few people think that now.”
But as a matter of current policy, he said, Prop 13 was problematic. “It’s a bad tax measure because the property tax is the least bad tax there is,” he said. “Think of the original and indestructible properties of the soil. The least dangerous and harmful tax is a tax on something of which there is an inelastic supply.” He argued that protecting Prop 13 was far less important than cutting other taxes, particularly on the income and sales we need more of.
I was reminded of Friedman’s comments back in June at a Los Angeles meeting of the Commission on the 21st Century Economy, otherwise known as the tax commission. Late in the meeting, one of the commissioners took note of the body’s movement to cut income taxes, and said he understood the logic. But this commissioner thought that, to make up the revenue and make the commission’s proposal more palatable to legislative Democrats, the commission ought to propose raising taxes on property taxes as the same time it cut income taxes.
It was a compromise in line with Friedman’s thinking. A cut in income taxes would lead to more income, the economist might have argued, while a property tax hike would not reduce the amount of land. (Property taxes, in fact, provide an incentive for the most productive use of land). Swapping a cut in a very bad tax for a hike in the least bad tax would be a net positive for the state.
Now, about that commissioner. It wasn’t one of the panel’s conservatives or Republicans who made the Friedmanesque suggestion. It was a liberal Democrat, UC Berkeley Law School Dean Christopher Edley Jr. Republican appointees on the panel have since objected, almost reflexively. But their objections are – to put it bluntly – purely political. Yes, it’s conventional wisdom that raising property taxes is politically impossible in California. But why is that true?
It’s true because California’s conservatives and Republicans have become a party of no. If a proposal increases taxes in any way, they’re against it. In doing so, they ignore the teachings of an economist that they claim to revere.
For more than a generation, conservatives have protected the “least bad tax” to the exclusion of all else. So even as income and sales and all kinds of taxes – with their negative effects on the economy – grow (they’re up again this year), the Prop 13 tax limits remain sacred.
That’s the opposite of how things should be. It’s time for those who say they agree with Friedman to practice his economic logic. The tax commission offers a rare opportunity for just such a trade. Marry the commission’s Republican-backed proposals for a lower, flatter income tax with Edley’s suggestion of an increase in the property tax.
Such a compromise would change the game in California’s economics and politics. Democrats in the legislature are so fixated on tearing down Prop 13 that they would almost certainly go along with a package that included income tax cuts. And Republicans, by backing a compromise, would demonstrate that they take their economics seriously.