Dare We Touch Prop 13?

Like death and taxes, well, especially taxes, the only thing I've felt sure about is that Proposition 13 would never be touched.

The 1978 ballot initiative championed by the late Howard Jarvis caps property taxes at 1 percent of a home's purchase price, and taxes can only growing 2 percent a year (until you sell the house, then the process starts over at the new purchase price for the new buyer). For example, if you buy a home for $200,000, your property tax will start at about $2,000. Ten years later, while the house may be worth $400,000, your property tax bill will only be about $2,400.

Joel Kotkin, Presidential Fellow at Chapman University and a well-known public policy expert, thinks it's time to tinker with Prop 13. Kotkin says our property taxes are too low, and our income taxes are too high, helping and hurting the wrong people. "Who is hurt by the high income taxes?" he asks. "The entrepreneurs, the young couples who are raising children. Who benefits from Prop 13? The elderly, the retired and the property owners. So you end up with a kind of rent-tier society which is really everything that California should not be." Kotkin says California should be "an entrepreneurial society that encourages people to go out and make money and do it in a responsible way." But he fears the legislature would prefer to just gut Prop 13 and raise property taxes (political suicide) without lowering income taxes at the same time.

California has one of the highest state income taxes in the country, ten percent. What's more, capital gains are treated as regular income, also taxed at ten percent. This leads to an unusual dependence on the state's top wage earners who may have good years or bad years in the market, creating an unreliable revenue stream. "We go through these periods of 'sugar highs'," says Kotkin, "and we have an asset bubble, and we go through depressions after that." A state commission is currently working on ways to bring more sanity to California's tax structure. Its report is due out later this summer.

But for all the solutions being bandied about in Sacramento to close the $24 billion projected budget gap, like slashing programs for the needy and closing state parks, Joel Kotkin says the 800-pound money-sucking gorilla in the room isn't even being discussed. "The item that is most killing the state budget is the huge pensions for public employees." He doesn't think there will be any meaningful fix to California's problems until the pension issue is dealt with. "We have to figure out what we're spending, how we're spending, and to begin to make the public employees live by something close to the rules that the rest of society does." He warns that California's pension situation is the most dire, but it is hardly alone. "I can tell you for a fact that New York, New Jersey and Illinois are right behind in a very similar situation."

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