Proposal to reform Property Taxation in California
California’s existing paradigm on property taxation has many unique factors including split roll. Besides touching upon many hot button economic and social issues, this paradigm shows that despite being a one party state, California is made up of many different political and demographic tribes, each with their own interests. For instance the ultra-wealthy, the geriatric house rich but cash poor, middle class millennial heirs, new wealth immigrants, working class renters, and the lumpen proletariat. A more specific example would be a baby boomer state employee who benefits from prop 13 but whose pension is dependent upon property taxation.
These many demographic groups and special interests are often at odds with each other while sometimes overlapping in interests. This is why it is hard to come up with one statewide solution that is both palatable and fair to all. In a mass democracy there will always be economic winners and losers, especially in a place as diverse and with significant wealth inequities as California, but any compromise must reconcile these different interests into coalitions.
The existing coalitions are made up of many special interests ranging from the real estate industry, well off homeowners, state bureaucracies who demand greater funding, identity politics including senior interests and racial equity based policies, with the Democratic Party finding the right balance between appealing to equity concerns while not alienating their wealthy donor base. There are also conservative groups such as the Howard Jarvis Tax Payer Association, who despite being an electoral minority, have some influence as far as opposing ballot measures that raise taxes.
The existing taxation framework is flawed from both a leftwing and rightwing standpoint but both sides also have reasons to avoid completely scraping prop 13 altogether. There are parallel narratives on prop 13 such as it contributing to income inequality but also protecting constituencies of the democratic party (ex. seniors and anti-gentrification concerns) while also limiting the economic growth of new wealth and limiting the housing supply for and placing higher taxes on new families, which is dysgenic from a rightwing standpoint. A new framework is needed that reconciles both leftwing and right wing concerns in order to come up with a viable new system.
For starters taxation should protect and foster an Ownership society, a position aligned with the economic theory of distributism which calls for ownership of private property that is distributed fairly amongst the people in order to prevent consolidation from either the state or private landholders. It is also important to point out the role that capitalism played in hampering generational wealth, starting in the 20th Century and that the mortgage industry needs reform possibly with public banking for the viability of a true ownership society.
Another principle is the efficient allocation of resources to prevent waste which relates to the economic theory of Georgism. I wouldn’t call for a Land Value Tax as the Georgist advocate, due to concerns that it could hamper an ownership society taking zoning into account, but we should adopt the aspect of Georgism that calls for taxing waste rather than production which would contribute to more efficient allocation of resources.
Split role needs to be reformed but scraping prop 13 all together is a bad idea and likely won’t happen in the near future. I would advocate for piecemeal reforms and that is what has happened with ballot measures, even if some are a mixed bag (ex. prop 15) while others make things worse (ex. prop 19).
As an alternative to the failed prop 15 for commercial property taxation, I would propose a tax on underutilized properties such as empty storefronts, parking lots, and vacant lots, such as Andrew Yang’s mayoral campaign proposal to tax vacant lots. Examples of very desirable real estate, that due to current policies, is immensely underutilized include the strip mall corridor of El Camino Real throughout the Silicon Valley, The LA Country Club next to Century City and Beverly Hills, and the massive parking lot at Dodger Stadium in LA. Besides raising funds this would vastly improve urbanism and incentivize more walkable communities.
As for reforming split role in residential property taxation, rather than scraping prop 13 protections, I would proposed a progressive incremental tax increase on the amount that is currently deducted from market rate value. For instance I would keep protections on homes worth less than $1.4 Million then a gradual increase divided up into brackets starting at a 4% annual tax from the amount deducted, gradually increased to an estimated full repeal of prop 13 protections for homes worth over $12 Million.
I would also call for taxing private investors and private equity firms, a residential vacancy tax beyond one vacation home, and a tax on mega mansions. There could also be a taxation formula that takes into account the square footage of a property, assessed value, person’s income, and number of residents. This alternative might be more complex but is fairer than prop 13 or the alternative of scraping it altogether.
Tax cuts are important too in that they foster better resource allocation and act as a buffer against tax policies intended to erode the ownership society and a way to avoid penalizing production. It is a way to deal with excessive wealth hording without hampering an ownership society and generational wealth. For instance I would call for property tax cuts on a scale mirroring raises, with tax rates further lowered in brackets for each child, and could also be extended to adult children or for caretakers. These proposed cuts could supersede the raises, for instances a family with a home worth $1.7 million but with 3 children would end up paying a lot less than a retired couple with a home worth the same. I would also freeze these cuts on homes worth $12 Million or more.
With populations the same principle of allocation of resources applies as part of an agenda that must incentivize family formation and higher social capital. I would also propose residential tax cuts that incentivize good land use such as communal spaces, walkability, and incentives for improving one’s property. The outcome of these incentives could help retrofit suburbia and transform mansions in the wealthiest areas into more communal structures such as micro villages based on the resort model that serve a future that is more neo-tribal, enclavist, or accommodating inter-generational housing. My assessment is that this is the only viable alternative to single family homes or the rent-based society (pod living meme).
Tax policy is a vehicle that shapes the social, political, and demographic trends of a society via incentivization. It is important to stress that zoning reform is not at odds with property rights as it is the scarcity of housing due to zoning, and thus a limited tax base that contributes to the push for higher taxation. Zoning reform is the best way to increase tax revenue without raising taxes. I put forth a version that is fair and addresses the issues of Californians that can be used as a guideline for the future debate on property taxation, as there will be greater political pressure to raise taxes in the future.