The Golden State’s War on Itself
city-journal.org
city-journal.org
Not too long ago I found out that not only does California have incredibly high state income taxes, but it also has really high state capital gains taxes. It actually amazes me that silicon valley has thrived under those burdens which leads me to ask two very important questions:
1. Why hasn't the high taxes driven people out of Silicon Valley (and will it?)
2. How is California broke?
I come from Florida and in Florida, there are barely no state taxes at all because it's all on tourism. Somehow California has these insanely high taxes and still can't pay any bills. Other than blaming illegal immigrants (a dubious politically motivated response), I've never really gotten a straight up answer on what makes California and Florida so different.
Our spending and policies are definitely out of whack, as demonstrated in the article, but not being able to raise taxes to compensate isn't helping either. I'm not a fan of raising taxes, but I consider our state being broke to be a bit worse.
Why is cutting spending not an option?
CA's tax revenues are significantly higher than the spending just a few years ago. Would it really be unreasonable to cut back to that level of spending? (Note that unemployment is largely paid for by the federal govt, so ....)
1) Extremely generous social services
2) A bizarre (and arguably unfair) property tax regime. Property taxes on owned property only rise 2% a year. (very low, consider that my parent's Bay Area home has risen by about 5.7% yearly since the 1980s) What that leaves you with is entrenched residential and commercial property owners paying relatively very little in taxes. If you are a new resident though, you get no immediate benefit - your taxes are assessed at the purchased value.
According to supporters, the law that set this up (Proposition 13) has saved taxpayers $528 billion (http://www.hjta.org/about-hjta/history-hjta); that's $17.6 billion a year - pretty much the budget deficit of the state.
Opportunities come and go, and committing to live in the same place for 20 years is a huge risk if that place dries up and someplace else starts to boom.
It was last listed at $386K before the listing was finally removed.
All we can really say is that in the last 50 years, home ownership was a better buy than renting. I don't know anyone confident about their 20 year forecasts regarding California Real Estate right now...
As for me - I'm renting a room for $750/month.
I don't think that I would ever have come out even if I hadn't sold my Condo. The key thing to realize, is that sometimes the decision isn't "Buy or Rent", it sometimes (in my case) is Downsize+Rent. Gives you flexibility + reduced costs.
I'm not complaining since I earn a good salary as a programmer and our apartment is in a well-managed complex in a nice neighborhood, but it would be easy to spend more and difficult to find something substantially less in the same general area.
But it does serve to confirm the article's thesis that California is becoming increasingly bifurcated between a high-paid "knowledge class" and a de facto servant underclass, largely composed of illegal immigrants (e.g., Irvine's landscaped parks and streets are beautifully maintained by an army of gardeners, but there's no way those gardeners can afford to live in Irvine). The traditional middle class is being squeezed out, and long term I do not believe that's healthy for California as it's too reminiscent of the very wide disparity of incomes that I've seen in the third world.
The basic problem with California and real estate can be summarized by the graph at the start of "A Tale of Two Townhouses:" http://www.theatlantic.com/magazine/archive/2007/11/a-tale-o... . Notice how high San Francisco, LA, and San Diego are; in many places along coastal California, it is effectively impossible to build substantial numbers of new building at sufficient vertical heights to meet demand.
Econ 101: if you restrict supply while demand is still very high... you get price increases (and sprawl, that other ubiquitous problem in California). This is one of the major stories of California over the last two decades, and one that gets less attention than it deserves.
Come to think of it, I think I'll submit "A Tale of Two Townhouses" to HN.
Actually the biggest expense for the state is K-12 education (over 43% of the budget).
As for Prop 13, I fully agree that many people (perhaps even my parents) may have had to move to smaller homes or even out of the Bay Area due to property taxes. So yes, my family has benefited. But that doesn't make the proposition "right". I find it much more unfair that new or non home owners are subsidizing the older ones though a highly regressive tax system. This only feels more absurd when you consider that part of the reason housing is so damn pricey in the bay area is because of zoning restrictions (both green lining and density restrictions) passed by the baby boomer generation.
Something else to bear in mind is that when commercial property is owned by a corporation which is a wholly owned subsidiary of another (eg BigCorp owns Big Property LLC, whose sole asset is the Big Tower building), the corporation can be sold without triggering the tax reassessment (ie BiggerCorp buys Big Property LLC, which remains the titleholder of Big Tower). This hurts new companies just as much as new homebuyers; here's a 2003 press release from Shoerenstein co. grumbling about how they pay $16/sqft in downtown San Francisco while most of Disneyland is taxed at 5c/sqft although the land is worth about 7x more than that figure suggests.
Property taxes are reassessed periodically, but prop 13 limits increases in tax to 2%/year, so for those who hold real estate it takes 36 years for the tax to double in value even if the price of the land goes up much faster or inflation is high. Back in 79 stagflation was a pressing economic problem, so the net effect of Prop 13 was to reduce property taxes for existing homeowners - inflation was ~8% then, so a 2% tax increase cap meant your property tax was going down by 6% in real terms.
You're forgetting that their property taxes are continuing to go up even though property values have gone down significantly. Why? Because their assessed value is below market value and as long as that's true, their taxes go up.
That factor makes property tax revenues far less volatile than they would be otherwise.
We know what counties and cities do when property tax revenues boom without a cap - they ramp up their spending. When property values crash, as they do every decade or so, that tanks their revenue, so cities and counties jack up the rates.
> If you are a new resident though, you get no immediate benefit - your taxes are assessed at the purchased value.
You get the benefit of knowing how your property taxes will behave. (If you buy right before a crash, you do get a respite until values recover.)
> that's $17.6 billion a year - pretty much the budget deficit of the state.
It's also significantly less than state spending has increased in the last few years. Note that the state isn't supposed to get property tax revenues - they're collected by cities and counties.
2) cities overspending: The better answer is to require neutral-cyclical spending. e.g. if revenues greatly rise, a large % must be placed into a fund.
3) Ignoring federal funds (which tend to be associated with mandates out of the state's hands), the state's expenditures have risen by $18B since 2005 and $25B since 2000. The $20B number represents a 20% rise, which might seem high. But then again inflation accounts for 25% and population growth another 9% - in a sense California is spending less than it was in 2000.
You say that like it's a bad thing.
You're also ignoring the fact that CA's property tax rates tend to be among the highest in the country, even ignoring the various surcharges and so on. (Almost every jurisdiction is at the statutory max. The surcharges in San Jose are almost equal to my base tax.)
> 2) cities overspending: The better answer is to require neutral-cyclical spending. e.g. if revenues greatly rise, a large % must be placed into a fund.
And then they'll spend the fund.... That's why I mentioned that we have experience with this.
After you demonstrate that actually working, we'll talk. In other words, we've heard that story. Excuse us for insisting that you demonstrate that things will be different this time.
CA spends far more per person than most other states. What are we getting for it?
> But then again inflation accounts for 25%
Median wages haven't gone up by 25% since 2000, so why would govt expenses, which are wage-dominated, have gone up significantly? Oh yes, more govt employees, higher govt wages, and better govt pensions.
I'd love to spend 20% more than I get to keep after taxes, but to do so would be irresponsible.
Prop 13 has been law for decades. It isn't a surprise. The legislature and governor knew how much they had to spend and decided to spend more. The fact that they chose $17B is completely arbitrary on their part, so it's absurd to use it as an argument about prop 13.
CA govt has a lot of money to spend. Why isn't it reasonable to expect it to stay within those bounds?
If not the current bounds, then what bounds?
Note that CA has ramped up its spending significantly (beyond inflation) over the past few decades with almost nothing to show for it. In fact, CA govt spending during the "golden era" was significantly less (inflation adjusted) than it is now....
Based on what we're getting, CA govt arguably spends too much. If you want something more from govt, find something to cut. LIFO works for me.
Some major problems: California's state constitution is a mess; its initiative process is out of control; conventional tax increases are impossible; Prop 13 distorts incentives. Many of these are structural issues. A bunch of articles have appeared on HN lately about how powerful, complex societies and institutions fail by being unable to flexibly adapt to change. That, in a nutshell, appears to be California's problem, which has been papered over to some extent by Silicon Valley Hollywood, agriculture, and weather. But even those rich sources of income can eventually be exhausted by the infinite demands of special interests and others.
California's initiative system creates problems wherein the populace votes emotionally (PROP 8). A lot of times, the initiative system has a weakness in the fact that the voting public is easily swayed by easy simplifications of complex issues and is unable to see the big picture.
Reference? I'd like to see what percentage of California's population is the result of post-1960's immigration, the total tax input from this segment and their costs in government services.
I only point this out because some people I've come across on HN who think a Canadian-style immigration system is racist seem to think that public display of their own good intentions is much more important that looking up the numbers.
* California has a huge budget deficit
* California is declining economically
I don't doubt that these two facts are true. Nor do I doubt that both facts affect each other. However, California is one of (if not the) largest economies in the US. I seriously doubt the situation is this simple. To place this solely at the feet of the state's progressive politics is a bit partisan. To me, this reads like a set of conservative talking points dressed up as an intellectual policy paper.
EDIT: Not coincidentally, City Journal is published by a conservative think-tank: http://en.wikipedia.org/wiki/Manhattan_Institute
This is the most shocking line from the article. How did they let costs balloon so badly?
Expenditures are estimated to drop from $78.1 billion in 2002-03 to $70.8 billion in 2003-04, a 10 percent decline. Most of this decline can be explained by four factors: the VLF rate increase (which reduces state subventions to backfill local governments), new federal funds, borrowing to cover the state's 2003-04 pension obligations, and the Medi-Cal accounting shift from an accrual to cash basis. Absent these factors, underlying spending would be roughly equal between the two years. The 2003-04 spending level is considerably less than what would be required to maintain baseline spending for the year.
http://www.lao.ca.gov/2003/major_features_03-04/major_featur...