Proposition 13 is widely regarded as the third rail in state politics: Touch it and you're politically dead. It has earned that sacrosanct status because it solved some urgent problems for California homeowners. But that was a generation ago, a different time with different problems. As we face the challenge of reviving the state's housing market and finding a reliable revenue source for freeways, schools and other public services, we should consider how Proposition 13 should serve us in the future.
We need new policies, but new policies require new understandings about who we are as a state and where we want to go. Now, at this fundamental turning point in California's history, we need to take stock. The deep effects of the Great Recession, our housing crash and some major swings in demographics have thrown our old narratives in sharp relief. We need a more contemporary narrative of California's future, one that incorporates new interpretations of Proposition 13, house prices and changing demographics.
The vast majority of Californians agree we are not moving in the right direction, but few agree about what is the right direction. Governance reform alone may not be adequate for solving California's problems. We also need a kind of "conceptual reform" that leads citizens to renewed agreement on the shared problems worthy of a common purpose.
But first we need to revisit why we loved Proposition 13 in the first place. There were good reasons.
Newcomers to California probably don't know how urgent the problems were in 1978 when voters overwhelmingly passed the legendary tax-limitation measure. Property taxes were directly wired to house prices and they were exploding. Not only were home prices rising at the highest rate on record 25 percent alone in 1977 but assessors were also required to tax homes at full-market value. As a result, property taxes often were spiking 60 percent some even 200 percent with each reassessment cycle. People, especially those on fixed incomes, feared that they would be driven out of their homes.
All this was occurring during a decade of tremendous overall price inflation. From 1973 to 1982, the consumer price index rose, on average, more than 8 percent a year, compared with 3 percent annually during the preceding 10 years. Housing prices more than doubled from 1974 to 1979. What were senior citizens supposed to do when their Social Security cost-of-living adjustment was rising just 6.5 percent annually? Meanwhile, the state treasury was flaunting a fat surplus, the opposite of the deficits that have plagued recent years.
Proposition 13 was designed to limit, once and for all, unfair and abusive tax increases. In the eyes of its supporters, existing residents had already paid their fair share for public services. Property taxes were sufficient to maintain them, so citizens should not have to pay much more. To that end, Proposition 13 declared that property taxes could rise no more than 2 percent a year. What's more, legislators would have to achieve a two-thirds majority to pass any tax increase.
The genius of Proposition 13 was that it allowed residents to outvote the people who weren't here yet. It was migrants coming to California and buying homes who were bidding up house prices and driving up the cost of living, so they should pay more in taxes. Call it the price of admission.
Soaking the newcomers was a strategy that worked well as long as droves of people kept coming to California and buying homes. Each new wave of homebuyers would be assessed taxes at a higher sales price, generating higher property-tax receipts, but thereafter they, too, would get Proposition 13's tax benefit.
That was yesterday's narrative. Today's emerging story undercuts every premise of the old beliefs.
In the decade ahead, we no longer must guard against explosive, runaway house prices. Instead, we would be grateful if foreclosures ended and house prices stopped falling. The consensus among housing experts is that we may have finally reached bottom, but price recovery will be slow, perhaps averaging just 1 percent to 3 percent per year. That means property taxes would naturally rise at an annual rate close to that enshrined in Proposition 13.
Unlike the past, new buyers won't be supplying the public bonus of extra property taxes required of ever-higher purchase prices. If anyone is hoping for a magic rebound in public revenue, stop holding your breath. Underfunded public services will not be rescued by new buyers like before.
What of the unfair burdens on the older generation at the heart of Proposition 13's creation story? Longtime homeowners continue to enjoy lower taxes than everyone else. In real dollars their taxes have steadily declined, because the 2 percent maximum increases under Proposition 13 are less than half the average rate of inflation since 1978. At the same time, the old-timers have reaped tremendous gains in housing wealth, which has not been capped at 2 percent. The new buyers are young people who struggle to afford the older generation's homes even after the housing bust, and yet they are the ones saddled with much higher taxes.
Where will the young buyers come from to rejuvenate our housing markets? The old narrative of Proposition 13 assumed a steady surplus of migrants lining up to buy a house in California. They can't be counted on any longer. Population growth has slowed drastically, even since the early 1990s recession. The same goes for immigrants. Growth today comes from children born in California. For the first time since before the Gold Rush, we have a homegrown majority among young adults in the state.
Proposition 13 puts the tax burden on new buyers who now will mostly be native sons and daughters. Proposition 13, as a revenue generator, depends on ever rising house prices. Our grown children will only be able to offer a higher purchase price if they have higher earnings. That crucially depends on their level of education. The typical offering price of a college-educated homebuyer is 50 percent to 65 percent higher than that of a buyer with a high school degree only. The property tax revenue is correspondingly higher too.
What should be the tax strategy of Proposition 13? We need buyers who can afford the state's high prices to save the housing market and pump up property-tax revenue. But we have to grow our own. All agree education is key, and recent polls by the Public Policy Institute of California show that a majority of voters believe education funding is a priority.
Studies show why it should be a priority. One from the Rand Corp. reports that early-childhood programs can return $2 and up in benefits to society for every $1 invested. And a new UC Berkeley study for the Campaign for College Opportunity finds that every $1 invested in producing college graduates returns $4.50 in added tax revenue and savings in social service spending. The public's investment is totally paid back by the time the graduate reaches age 38, according to the study.
So where do we get the money? The recession has taught us that the personal income tax is too volatile to maintain a high-quality education system. How could Proposition 13 be redesigned to help us produce more future homebuyers and taxpayers?
This should no longer be a question that produces a political death sentence. That was before and this is now. Let's get talking.
Our inherited old narrative operates in counterproductive ways, misdirecting us from solutions to our most serious problems, and it is ill-suited to fostering hopeful opportunities. In fact, clinging to outdated stories actively discourages new hope that is so desperately sought in California today.
A new narrative does not specify the exact policy prescriptions for solving our problems. Rather, it helps to direct attention and inform priorities. It helps us interpret our current and future situations, showing how the needs today are different from those before. Comparing old and new narratives side by side, it's striking how dramatically the key premises have reversed. Public discussion, in part, should focus on which narrative overall is the more useful as a guide to the future.
In the Proposition 13 narrative, is the most compelling reversal that booming house prices are no longer to be feared and guarded against? Or might it be the reversal of fortunes for the older generation, who were once overburdened? Or could the most compelling be that the future of California today depends on the state's own children?
California's urgent problems are how to fortify its housing market and increase its tax revenue. Proposition 13 needs to be repositioned for this challenge. Our homegrown generation is a tremendous asset, but we have to develop its full potential. The simple fact is, you have to invest taxes to earn taxes. Proposition 13 needs to help us do that.
Californians need to choose their preferred narrative story for guiding a future that begins in 2012, not the future that began in 1978.
TWO NARRATIVES FOR THE FUTURE OF PROP. 13
Trauma of 1978
Runaway housing prices
Abusive, shocking rates of property tax increases
Unfair burdens on the older generation
Population growth by migrants from outside California
Enjoying the fruits of high levels of investment in freeways, schools and public services
The decade ahead
Recovering and slowing rising housing prices
Slow, steady tax increases that negate benefits of Prop. 13
Higher profits for the older generation; burdens on the younger generation
Population growth due to children born and schooled in California
Accumulated deficit of years of underfunded public services