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Jan. 15, 2021 - Epoch Times
25:22
California’s Proposed Property Tax Increase, Explained | Jon Coupal
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We have a measure on the ballot, Prop 15.
Can you tell us what this measure is?
This would be the largest property tax increase in California history.
And now, where is this money going to go?
So it's going to go to local governments, and how is it supposed to get distributed?
The reality is this.
Most new taxes, if not all new taxes in California, We'll have to go for one thing, and that is shoring up the unfunded liabilities of California's pension systems.
Let's say Prop 15 passes, the money is collected.
Who would make sure that what was passed, what was told, the money is used for that cost?
There's no accountability whatsoever.
There is zero accountability.
If this measure passes, how is it going to affect the commercial real estate and how is it going to affect, in general, how is it going to affect us?
How is it going to affect those businesses and then how is it going to affect the rest of California?
It will have a significant impact on the cost of living in California.
California has the second highest cost of living in the United States right now, and is one of the reasons we have so many people moving out of the state of California.
California already has the highest income tax rate in America at 13.3%.
We have the highest state sales tax rate in America at 7.25%, and that's even before the local add-ons.
We have the highest gas tax in America.
And even with Prop 13, The property tax revenues are not low.
We rank in the top half of all states in per capita property tax collections.
So California is awash in tax revenue.
It's just that our elected leaders and bureaucrats don't spend it very wisely.
Prop 15 is on the 2020 election ballot.
It's a commercial property tax increase that allocates funds to public education and local government services.
My guest today is John Coppell, president of the Howard Jarvis Taxpayer Association.
He will explain the details of Prop 15 and what it means for the future of California.
Welcome to California Insider.
Good to be here.
Thank you so much.
John, your organization has done a lot over the years for taxes in California, and you were the ones that actually helped pass Prop 13, right?
Yes, we were.
Proposition 13 passed in 1978.
It was the culmination of a lot of frustration and anger in California with runaway property taxes.
So Howard Jarvis, who was the namesake for our organization, had tried several times to get property tax relief during the 70s, and he failed many times.
And then finally in 1978, when things got so bad, He finally put Prop 13 on the ballot in June of 1978.
And it was widely opposed by most, what I'll call the political elites in California, including some major corporations.
But when the voters had a chance to vote on it, by a 65% margin, they overwhelmingly enacted Proposition 13.
And fortunately, Proposition 13 remains remarkably popular to this day.
And there was somebody that passed away that motivated Howard Jarvis to do this?
Is there a backstory to it?
Well, Howard Jarvis was originally a journalist from Utah, but then he became the executive director of the Apartment Association of Greater Los Angeles.
He's the father, not only of Proposition 13, but really of the modern tax revolt movement.
He was actually good friends with Ronald Reagan, and after Prop 13 passed in 1978, other states began to adopt tax reform and tax reduction measures.
And quite frankly, Ronald Reagan said that Howard Jarvis gave him the idea for how to limit government and reduce the tax vote.
Now, we have a measure under ballot, Prop 15.
Can you tell us what this measure is?
Yes, this would be the largest measure.
Property tax increase in California history.
And it would take away one of the key protections of Proposition 13.
And to understand why Proposition 15 is so dangerous, it's very important to understand how Proposition 13 actually works.
And how Prop 13 works is actually quite simple and very elegant in its operation.
Prior to 1978, the average property tax rate in California was 2.6%.
This was the rate of tax that the county assessor would apply to your property every year.
So if you had a $100,000 property, 2.6% would be $2,600.
That's a pretty high tax rate.
Proposition 13 put in the California Constitution that the highest rate of tax could only be 1%.
So under Prop 13, everybody pays a maximum property tax rate of 1%.
But Prop 13 also did something just as important, if not more important, and that was it limited the annual increases in the taxable value.
Prior to Proposition 13, The county assessor would reassess property to current market value.
So your property could double in value even though you didn't sell it.
Your property could double in value or triple in value in a single year.
And so we needed to restrain the value that assessors would use to apply that tax rate against.
So what Prop 13 did is it said that the taxable value Could only go up no more than 2% a year.
So let's say, again, a $100,000 property.
If it doubled in value, you wouldn't be taxed on $200,000 of value.
You would only be taxed on $100,000.
$102,000.
So it would only go up 2% a year.
And then property is reassessed to full market value when it changes hands.
So it's a very elegant system.
It works very well.
It has produced a lot of tax revenue for local governments.
In fact, for local governments, property tax revenues have increased at levels that exceed population and inflation almost every year.
So Prop 13 works very well to provide homeowners...
How has it done that?
Is it because the values of homes have gone up?
Is that the reason?
Yes.
And in fact, that was one of the things that really spurred Proposition 13 was the fact that people were being punished not only by the tax rate, but because their properties were increasing so rapidly in value, And keep in mind, the market value of your home is something over which you have no control at all.
So suppose you had a retired couple whose house was worth $100,000, and all of a sudden, because the demand in their neighborhood goes sky high, and the assessor comes in and says, your house is now worth $300,000, and they're going to say, we can't afford a tax based on $300,000 for value.
So what Proposition 13 did is it helped To preserve neighborhoods by allowing particularly senior citizens on fixed incomes to stay in their homes.
So it's worked very well.
And the stability that it provided for homeowners, it's also provided to businesses.
And that's where Prop 15 comes in.
What the proponents of Prop 15 want to do is they want to strip away That one protection of Proposition 13, that limitation on the annual increases in taxable value to 2% a year, they want to take that away from business properties so that business properties would be taxed at market value every year or every two years.
And again, the result of that would be about a $12 billion a year tax increase in California, the largest property tax increase in the history of California.
That's about 8% of the tax revenue, right?
I think the California state has like $140 billion, $130 billion, or $160 billion that they're bringing in.
And so there's going to be 12 more, which is an 8% increase, right?
Yes, if you look at the general fund, but keep in mind that property tax is collected at the local level and then it's apportioned according to statute.
Most property taxes stay local and so it is viewed as a local government source.
However, it's subject to the whims of this legislature because the legislature is charged with providing statutes on how property tax is allocated among local governments.
And now, where is this money going to go?
So it's going to go to local governments, and how is it supposed to get distributed?
Well, here's the dirty little secret.
They say it's primarily for schools.
First of all, on its face, that's not true.
Even the language of the initiative says that 60% is to go to local governments, only 40% of schools, and some additional revenue out of that will be used to provide the administrative costs to the county assessors because there's going to be a lot of administrative costs associated with this tax increase.
But at the end of the day, you know, they're going to talk about how this is going to help schools, how it's going to help police and education.
The reality is this.
Most new taxes, if not all new taxes in California, will have to go for one thing and that is shoring up the unfunded liabilities of California's pension systems.
Our public employee pension systems are very much underfunded.
It's called the unfunded liability, and that is the obligation, the debt, that government owes to retirees and future retirees in the public sector to pay down their retirement costs.
So Wall Street understands this.
Local governments understand this.
Let me give you an example.
The amount, take a city for example like San Diego, the amount of the general fund budget every year for San Diego that has to be dedicated to debt service, and most of that debt service is the pension obligations, has been increasing very dramatically in recent years.
It used to be that maybe five or seven or eight percent of a local government's budget went To pension obligations.
Now it's up to 10, 20, even 30%.
This is what we call pension creep.
As the obligations to pay down pensions absorb the ability of local governments to pay them, it's crowding out essential services.
That is the number one problem, fiscal problem in California, is unfunded liability.
And most of the new taxes that they're talking about, whether it's this tax or other taxes, have to be dedicated.
There's no way around it.
They have to be dedicated.
Now, when a measure like this passes and the voters are promised that this fund is going to go to a certain cost, how does it...
Where is the accountability making sure that this money is going to get spent on that cost?
Is there any accountability in the government levels where the funding comes in?
Let's say Prop 15 passes, the money is collected.
Who does make sure that what was passed, what was told, the money is used for that cost?
There's no accountability whatsoever.
There is zero accountability.
Let me give you an example.
Many years ago, the people of the state of California passed a proposition to build a high-speed rail project.
And in that bond measure, it made all these promises about there would not be a public subsidy, that it would run from San Francisco to Los Angeles.
It would run in less than two hours.
The fare box revenue would cover the operating costs.
All of those were lies.
All of those were lies.
We sued on those promises and we've lost.
Basically, the courts say whatever government wants to do, it can do.
So, for voters out there who have promised that You know, school tax is actually going to help schools.
And I hate to be cynical, but the reality is government is never held to the level of accountability that they should.
Now, sometimes they try to put window dressing in it.
They say, comes with strong accountability, there will be some sort of oversight committee.
But those oversight committees don't have any team.
Those oversight committees do not have the ability to say, you can't spend the money.
So all the accountability that we see that's promised to us is unrealistic.
And that's one of the reasons, in fact, why voters are now rejecting many of these measures.
Recall just the last election cycle, there was a statewide school bond on the ballot, and it failed.
It was the first time a statewide school bond had failed since the 1990s.
Did it fail because Californians don't like education?
No, of course not.
We all love education, but I think voters are coming around to the realization that They're not spending the money we give them wisely.
And until they prove that they can use the money that we do give them more wisely, I think there's going to be a lot of cynicism and suspicion about additional taxes.
Now, if this measure passes, how's it going to affect the commercial real estate?
And how's it going to affect, in general, how's it going to affect us?
How's it going to affect those businesses?
And then how's it going to affect the rest of California?
Well, first of all, you know, as I explained at the beginning, our members are mostly homeowners.
And so people say, well, this is just commercial and industrial property, so it won't impact you.
But that's simply not true.
It's not true for two reasons.
Number one, it will have a significant impact on the cost of living in California.
California has the second highest cost of living in the United States right now.
It is one of the reasons we have so many people moving out of the state of California.
People are leaving in very significant numbers because there are much cheaper places to live.
And the cost of living is driven in large part by the tax burden and the regulatory burdens imposed on California citizens by government.
So it's going to have a huge increase in the cost of living because The cost of goods that we buy at stores, at commercial properties, is going to have to go up.
Obviously, that's just simple economics.
But the other reason it will hurt homeowners is that the proponents have made it clear that Destroying Prop 13 for commercial and industrial properties is only the first step in the complete dismantling of Prop 13.
And they've come out and openly said that they want to incrementally destroy Proposition 13.
So my homeowners understand that.
They understand that if we lose Proposition 13 for commercial and industrial property, That homeowners will be the next target.
So that's why our members don't like it.
And obviously, for commercial and industrial property who are struggling in this environment, anti-business climate, this would probably drive even more of them out of business.
You know, one big impact in industry, of course, is restaurants.
Many restaurants have already closed permanently because of the pandemic.
Those that haven't closed are trying to hang on by having some level of service outdoors.
They're trying to do social distancing.
It's almost impossible.
They're not generating the revenue they need to stay in business, but they're just trying to hang on.
Many of those restaurants do not own the property that their business is located on.
They rent their property.
In fact, that's true with most restaurants, that they don't own the property.
And for commercial property, the tenants pay what's called triple net leases, which means that if a property owner gets a higher tax, which they will under Prop 15, then that tax liability flows immediately to the tenants.
So the tenants understand this.
And the landlords understand this, that as the costs go up because of Proposition 15, everybody's going to have to pay more.
So it's a disaster for California businesses.
And there are other industries.
The ag industry, the proponents say that they've exempted agricultural land.
Well, they've exempted the land, but not the infrastructure.
So for a dairy, There's so much infrastructure, the piping, the barns, the facilities for transportation.
All of those are going to be subject to higher costs, increasing the cost of food in California.
So, look, a lot of industries, a lot of individuals will be hurt by this.
We do not need the money.
We do not need the money.
So this is what I want to talk to you about.
What if it doesn't pass?
And how is it going to impact us?
Because that's a lot of money that will not be coming to the local and state governments, right?
How is it going to impact us?
In terms of government services, because government wastes so much money, what they would have to do is instead of shoring up and expanding government programs, they're going to have to start economizing like homes do, like families do, and like businesses do.
There is enough money out there, and the reason there's enough money is this.
California already has the highest income tax rate in America, At 13.3%.
We have the highest state sales tax rate in America at 7.25%, and that's even before the local add-ons.
We have the highest gas tax in America.
And even with Prop 13, the property tax revenues are not low.
We rank in the top half Of all states in per capita property tax collections.
So California is awash in tax revenue.
It's just that our elected leaders and bureaucrats don't spend it very wisely.
So you mentioned the unfunded pension liabilities, and you thought that this money is going to go to death.
Yes.
And if this money doesn't come in, what will happen to those pension liabilities?
Well, I think if it doesn't come in, that will provide a little bit of incentive For local governments and the state government to start doing pension reform.
We've been pushing for pension reform for decades.
And there's been no appetite at the state level or local levels to adopt pension reform.
And that's what really needs to happen in order to start controlling the runaway growth in the pension obligations.
And there are reforms out there that are fair to the employees and are fair to taxpayers.
But as long as government Thinks they can take the easy road by passing more taxes.
There's no incentive to adopt efficiencies in pension reform or any kind of reform, in education reform, in transportation reform.
There's no appetite to economize government.
Why is it that other states do so much more For their citizens with so less money.
It is just staggering to us that we're paying so much for a low quality of public services in California.
Now, you mentioned about how if it does pass, the cost of living will go up.
And is there any other things that could happen?
Is it just a gradual, so the cost of living goes up, but is there going to be bigger ramification down the line where businesses might move out or funding investment may not come into commercial property in California?
Yeah, that's exactly what's going to happen in business.
The number of people who have moved out, I believe the latest figure is that in terms of net domestic out-migration out of California, 1.2%.
A million people more have moved out than have moved in in the last eight years, and that trend would accelerate.
As you may know, the primary purpose of the U.S. Census, which occurs every 10 years, is to allocate The representation in Congress.
We're limited at 435 members of Congress under the Constitution and every 10 years it gets reallocated depending on where people are moving.
And California is on track to lose one representative in Congress because of the number of people who have moved out.
Texas is on track to pick up three Because people are fleeing, are leaving high-tax and high-regulation states like California and Illinois and New York, where people are leaving because they just can't stand it anymore.
They just can't stand it anymore.
And so businesses are leaving.
Capital flight is moving.
That's been well documented.
And I think people just need to understand that if we want to say to this state, we need to adopt some level of reasonableness when it comes to our tax and regulatory climate.
And what do you recommend to our viewers when it comes to looking at these type of propositions?
What should they do?
Well, I think they need to, first of all, read very carefully the ballot arguments and the ballot material, although even there, our Attorney General, who was supposed to prepare impartial ballot material, like the ballot label and the title and summary, has been roundly criticized For being partisan in the way he describes some of the ballot measures.
And in fact, he's even been criticized by some progressive newspapers like the Los Angeles Times and the San Francisco Chronicle.
Unfortunately, we do not have an impartial attorney general when it comes to the preparation of the Thailand Summary.
So people are going to have to read the initiatives for themselves.
Read the arguments and then rely on groups you trust.
I think one of the things, whether people agree with us, the Howard Jarvis Tax Credit Association or not, I think we are viewed as being a fairly objective judge of fiscal matters, of tax matters, even if people don't agree with us.
So if people think we are trustworthy, they can rely on our recommendations, recommendations of other organizations that they trust.
And to consider both sides of both arguments.
Right now, I think people need to question whether or not California even needs additional tax revenue and whether or not people are willing to absorb a higher cost of living at a time when government is not doing the things to economize its own spending.
Do you have any other remarks?
Well, I think that pretty much covers it.
That applies to all the ballot measures.
I do know that the fiscal issues that are confronting California with Prop 15 is not the answer.
Prop 19, which amends another provision of tax relief, isn't the answer.
And to be very cautious about debt, that doesn't mean that all bonds are bad.
But I would caution your viewers to question whether or not taking on more government debt is good for the financial health of not only the state, but of the nation and their local government.
So again, I appreciate the opportunity to talk to you today.
Thank you so much, John.
Thank you.
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