David Crane’s budget ideas spark debate

Commentary

May 22, 2013

By Wayne Lusvardi

David Crane has come up with a tax reform proposal, “Jerry Brown’s Last Chance to Save California.” A Democrat, he was an economic adviser to former Gov. Arnold Schwarzenegger, especially on pensions. Crane wants to change Proposition 13, the landmark 1978 tax limitation initiative.

There are some merits to Crane’s proposal to end the effects of the boom and bust system of taxation on government, the university system and public schools.  But as he concedes, tampering with Prop. 13 would bring a firestorm of opposition from anti-tax groups and voters.

‘Uncertain revenues’

Crane sees the major problem of California’s tax system as one of “uncertain revenues” dependent on the swings of the stock market to produce capital gains taxes.  Crane believes the Commission on the 21st Century and the Think Long Committee for California have come up with reforms that are defective because Prop. 13 is left untouched.

Instead, Crane’s solution proposes to end Prop. 13 and impose an oil and gas severance tax.  Crane sees California’s problem as reliance on sales and income taxes that are mobile.  Thus, people and corporations are able to escape taxation by moving across state and legal corporate lines.  He wants to shift the bulk of the tax base to immovable assets such as real estate, oil and gas.

The mistake is that Crane views taxes mechanistically instead of historically. His proposal would return us to the 1970s. The ups and downs of taxes would be shifted back onto homeowners and small businesses. It would be back to 1975, when widows’ homes were sold to pay skyrocketing taxes from inflating home prices.

California sometimes has real estate busts, as was painfully clear from 2007-09. But generally, prices keep going up, especially in coastal areas. If real estate taxes are allowed to rise apace, then it really would be a rerun of “That ’70s Show.”

Growth controls 

Yes, Prop. 13 affects housing prices by encouraging home ownership. But more important are California’s basin geography, which limits the supply of land; and unique growth controls, such as the California Coastal Commission, which was enacted by another 1970s initiative.

Nothing can be done, of course, to make our beautiful California coastline as flat and seemingly endless as the land in and around Houston, Tex., which has some of the cheapest real estate in America. And there’s no chance the CCC will be repealed. So we’re stuck with these limits.

And it’s these limits — geography and the CCC — that would produce a boom and bust cycle in real estate even if Prop. 13 didn’t exist. If Prop. 13 were eliminated, property tax receipts would jump up and down with the booms and busts in property. So the tendency of the state government to spend too much when revenues surge would continue, in turn producing the inevitable deficits during slumps.

Indeed, getting rid of Prop. 13 might not even help with the state budget. Real estate markets would adjust property values downward due to the larger and more unpredictable tax load.  

Ironically, any large shift of taxes back onto homeowners well could lead to a revitalization of the moribund Republican Party. Homeowners’ tax rates now are fixed by Prop. 13, so there’s little incentive to worry too much about real-estate politics. But if Prop. 13 were repealed, Republicans low-tax stances would make them more attractive to homeowners resisting tax increases.

Pensions

Crane is one of the most astute analysts of California’s budget problems, especially the pension crisis. As he wrote in his article, “Governments would first need to reduce pension and health-care liabilities because, if not, most of the new revenue raised from lifting Proposition 13 would go to retired employees, instead of to current services.”

So although his proposal to get rid of Prop. 13 should be a non-starter, he’s right that any budget reform must be preceded by pension and health-care liability reform.

There are other ideas for reforming the yo-yo budget problem. One would be to bring back the Gann Limit, which lasted from 1979 to 1990. It successfully limited state spending increases to the increases in population plus inflation. Excess revenue actually was returned to taxpayers with rebate checks in 1987.

Another idea came from former Rep. Tom Campbell during his run for governor in 2010: Limit one year’s spending to the receipts from the previous year.

And Arthur Laffer has proposed a simple, flat income tax that would include repealing all other state taxes.

David Crane has advanced the discussion with his proposal. But the discussion needs to retain Prop. 13.