Jul92018

Tax Revolt 1978 a Winner

Lou Binninger

Golden State people don’t get too excited about being overtaxed these days. Maybe they remain here due to a career, grandchildren or they are too old to start over elsewhere.

The highest income, sales and gas taxes in the nation combined with extortion-like DMV fees and hundreds of other charges make you wonder if residents don’t have Stockholm syndrome. However, there was another era where taxes erupted like a plague. It occurred under Governor Ronald Reagan.

Reagan inherited budget deficits from Governor Edmund “Pat” Brown (father of the current Governor Jerry Brown). Reagan later calculated the state was overspending by $1 million a day. This calculation actually underestimated the problem. Reagan’s solution was to balance the books with a tax increase.

David Doer, a tax specialist who worked on the plan said, “Basically, the legislature taxed everything that moved.” Sales taxes were increased; liquor taxes went up, as did inheritance taxes. But the key to the largest tax increase in California history was the income tax. Rates were increased, brackets were narrowed, and exemptions were replaced by tax credits. The income tax was made extremely progressive. Doer concluded with regret, “It became a money making machine.”

Reagan thought by increasing income taxes they could come-up with property tax relief. However, once the tax and spend spigot was on, Reagan could not stop it. For the five years between the defeat of a Reagan tax-cut initiative to Proposition 13’s tax revolt in 1978, state spending increased 12.5% a year while state revenues went up 18.4% a year. Money was coming in so fast the government couldn’t spend it all.

Jerry Brown (his first term) inherited the state’s massive surplus from Reagan while property taxes were spiking and infuriating the public. Then, the Proposition 13 property tax revolt erupted led by Howard Jarvis and Paul Gann. Property tax horror stories abound.

Howard Jarvis told of watching an elderly lady suffer a heart attack while at the Los Angeles assessor’s office when she couldn’t convince the authorities to change her tax bill.

The Newhall Signal newspaper described a retired couple living near a new apartment house. The assessor refigured their property at the land’s highest and best use, as if their land would host a motel. Their small home was taxed at $1800 a year. The total income of the couple was $1900 a year. This incident occurred in 1968, 10-years before Proposition 13 passed. Thousands were losing or facing selling their homes.

Another tax victim told of an empty house at the end of their street, which was routinely flipped by speculators. No one ever moved in, but every time it sold, all the houses in the neighborhood were reassessed upward.

The story that best describes the nonsensical nature of the property tax debacle is set in San Francisco prior to the passage of Prop 13. The San Francisco assessor was taking bribes to keep business property taxes down. He eventually went to jail.

The new assessor used computers to insure valuations were correct and fair. When a property sold, all adjacent parcels received tax bills reflecting a new market value, resulting in huge and frequent increases in taxes for everyone. Property taxes went up so quickly in San Francisco that bumper stickers soon appeared pleading: “Bring back the crooked assessor!”

Politicians and bureaucrats believed homeowners were making wild profits from the housing price boom with some properties being assessed with 50%-100% increases in value. However, for those not selling their homes, these “paper profits” could not be used to pay real inflated tax bills. Retirees who had lived in their homes for decades now could not pay their property taxes.

On June 6th, 1978, nearly two-thirds of California’s voters passed Prop 13, reducing property tax rates on homes, businesses, and farms by about 57%. The amended constitution said property tax assessments could not exceed 1 percent of the property’s market value and future valuations couldn’t grow by more than 2% per year unless the property sold.

In addition, Prop 13 required that all state tax rate increases be approved by a two-thirds vote of the legislature and that local tax rates also have to be approved by a vote of the people. The people’s right to vote on taxes is a key protection in Prop 13.

Today, politicians knee-jerk blame Prop 13 for all of society’s ills and are doing their best to undermine it. However, government revenues and salaries are at record levels judging by real constant dollars compared to 1978. Watch for a proposition on the November 2018 ballot that at least will try to remove commercial property from Prop 13 protections.

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