The Democratic Party supermajority in the state legislature is calling for reform of Proposition 13. The legislature should leave Proposition 13 alone. Instead it should repeal or override regional growth management and smart growth laws. Here’s why: it is growth management laws that cause the excessive housing booms and busts that throw state and school budgets out of balance as well as causing upside-down home values.
Bogeymen are not Cause of Problem
It is sales and income tax revenue flows that are most prone to sudden declines in California. Nonetheless, Proposition 13 is typically blamed for California’s budget deficits. But Proposition 13 has a built-in circuit breaker that prevents large increases or decreases in property taxes in any one year for properties that have not resold. For properties that have sold in boom years their assessed base value can be set higher. Conversely, for those that sold in bust years their assessed base value can be set lower.
Democratic politicians also claim commercial properties are under taxed due to Proposition 13 tax loopholes. But it has recently come to public awareness that reforming Proposition 13 is not needed to plug the alleged loophole in majority ownership transfers of commercial properties. Large commercial property owners are just used as bogeyman for eventually getting rid of Proposition 13 altogether on both commercial and residential properties. Ending Proposition 13 for commercial properties will mainly affect struggling small businesses that comprise 97 percent of all businesses in the state.
Proposition 13 is a policy that lessens the shock of higher property taxes to property owners during economic housing booms and lower taxes to state and local government and school districts during housing busts. This prevents the proverbial widow from being thrown on the street for inability to pay greatly increased property taxes during booms. And it prevents huge declines in property tax revenues for public schools in any one year.
Conversely, there is a manufactured erroneous media perception that tax revenue shortages during economic recessions are the result of Proposition 13 constraints against large property tax hikes during housing booms. Proposition 13 critics ignore capital gains tax revenue from Dot.Com, Telco, and Facebook bubbles. But capital gain tax revenue is highly unpredictable for budgeting.
There is also the problem of upside-down home values as a result of crashes following housing price booms. Politicians may be averse to raising property taxes on homes where mortgages exceed home values by as much as 20 to 50 percent.
Slow-Growth Plans, Not Prop. 13, are Main Cause
It is the toxic combination of slow-growth and smart-growth plans with affordable housing incentives –- low interest rates, low down payments, mortgage interest deduction — that help bring about abnormal booms and busts in California’s real estate market.
State government and local school districts only want budget surpluses from housing booms and not deficits from the busts. The problem is that government doesn’t want to see that it is complicit in creating the deficit problem. Instead they always want to blame Republicans. But there are no more Republicans to blame. And Republicans aren’t to blame in the first place.
Democratic Party central planners want to reserve central cities and Lake Tahoe for the wealthy or politically connected lower class by “performance zoning” and design commissions. In California, it is called “Petaluma style” growth management. Growth management drives the politically unconnected out to the urban fringe, “edge cities,” and transitional farmland for new housing subdivisions. Thus, growth management results in stable property values in San Francisco but boom and bust cycles in Fresno, Stockton, and the Inland Empire of Southern California. San Francisco experienced no decline in property values since the bursting of the Mortgage Bubble in 2007. Stockton and San Bernardino experienced about 45 and 48 percent declines in homes values respectively.
Housing bubbles created by growth management plans create a vicious cycle where homeowners need continual booms to offset their over-mortgaged housing that incomes cannot support. California homeowners become addicted to voting for policies that promote housing booms to be able to sell their homes for an appreciated value. And booms push property tax revenues under Proposition 13 up faster than money inflation. Proposition 13 reformers never protest the windfalls from the hyperinflation of housing prices.
As the table below clearly shows, the Bay area lost low and moderate-income households since 1989, but Houston gained in all income categories.
Unaffordable housing has pushed middle-income people out to the Central Valley cities with long work commutes. What causes unaffordable housing is growth controls coupled with affordable housing incentives. Houston is known for its neighborhood zoning and California for regional growth management plans.
Change in Number of Households by Income Class from 1989 to 2009
| Quintile (5ths) in 1989 |
Quintile (5ths)in 2009 | Houston(neighborhood zoning) | San Francisco(growth controls) |
| >$60,000 | >$100,000 | 219,970 | 156,477 |
| $32,500 to $60,000 | $60,000 to $100,000 | 45,986 | (245,948) |
| $22,500 to $32,500 | $40,000 to $60,000 | 122,329 | (12,425) |
| $12,500 to $22,500 | $20,000 to $40,000 | 184,840 | 30,474 |
| <,$12,500 | <$22,500 | 90,680 | (7,828) |
| Included low & moderate income households | Pushed out low & middle income households to Central Valley | ||
| 1 in 1,000 homes foreclosed in 2009 | 1 in 173 homes foreclosed in 2009 | ||
| Randal O’Toole, American Nightmare: How Government Undermines the Dream of Homeownership, p. 170. | |||
Housing bubbles are manufactured in California not on Wall Street. One in every 173 homes in California was in foreclosure in 2009; only 1 in 1,000 in Texas.
A sociological law is that beliefs tend to hang together. It is likely the same Democratic politicians and voters that embrace growth management, environmental clearances, and affordable housing policies also support reforming Proposition 13. But there is no awareness that such policies create the “roller coaster” housing economy that ends up making tax revenues so changeable and result in government budget deficits. Reforming Proposition 13, gerrymandering, and a supermajority in the legislature dedicated to raising taxes will only treat the symptoms and not the cause of government budget deficits.
Reform Over-Stimulated Housing, Not Proposition 13
If Democrats in full power in California were serious about reforming Proposition 13 they would leave it alone. Instead they should begin by repealing or overriding regional growth management and smart growth laws.
The enemies of Proposition 13 are also the enemies of stable tax revenues for state and local governments and school districts. They are also the enemies of full disclosure about the risks to home buyers of low down-payment loans turning upside down. It is time for Democrats to give up their fake moral superiority about affordable housing and lack of tax revenues for public schools and state and local governments during recessions. Democrats are fully in power and government budget deficits are of their own making. The enemies of the enemies of Proposition 13 are your friends.