California's 40-year-old ban on property tax raises has made the rich a lot richer

In 1978, California ballot initiative Proposition 13 capped property taxes at 1% of assessed value and increases at 2% per year, creating a massive hole in the ability of cities to fund their operations, which has only been partially plugged by hiking sales taxes and utility rates, regressive moves that disproportionately shift the burden of civic services to low-income households.

A new report from the California Legislative Analyst's Office documents the gross distortions of municipal policy that Prop 13 has wrought over nearly four decades: first by draining the state's multibillion-dollar operating surplus; creating bizarre, nonsensical differences in valuation among neighboring properties; and locking municipalities into providing substantially identical services to those offered in 1978, regardless of shifts in population and demographics.

The overreliance on sales taxes to plug the gap in city budgets gives cities perverse incentives to approve retail zoning at the expense of housing, exacerbating the state's housing crisis.

The paper's authors believe present evidence that I read as suggesting that commercial property owners have been systematically disguising ownership transfers to prevent reassessments: owners of these properties structure their corporations to spread ownership among family members such that no one owns more than 50% of the business, thereby avoiding reassessment.

Prop 13 was passed in 1978, the year in which Thomas Piketty's data-sets show that the wealth controlled by the richest 10% of Americans tipped over the point where they could exert policy influence to protect their interests at the expense of the national prosperity and the common good.

The authors document how the limitation on reassessments leads to huge variations in the tax bills even among similar, neighboring properties and similar homeowners. Among Bay Area homeowners aged 45 to 55, with incomes of $80,000 to $90,000 and homes worth $575,000 to $625,000, tax payments in 2014 ranged from $1,350 to $7,500.

The governing factor, of course, is the length of time between changes of ownership; the longer the period, the greater the mismatch between the property's market value and its tax bill. This effect was memorably identified by financier Warren Buffett during the 2003 California recall election, when he observed that he paid $14,400 in taxes on his $500,000 Omaha home, but less than $2,300 on his $4-million Laguna Beach manse — and that the bill that year had risen by $1,920 on the former and $23 on the latter. "In effect," he said, "it makes no sense."

Common Claims About Proposition 13
[Legislative Analyst's Office/State of California]

Four decades later, California experts find that Proposition 13 is a boon to the rich [Michael Hiltzik/LA Times]

(via Naked Capitalism)

Sleeping beauty castle, Tom Arthur, CC-BY-SA)