A tale of the old west and its taxes

Commentary by Bob Perkins

May 2011

Widow Jones has managed to keep her ranch, but times are tough.  The big spread nearby sold for a high price.  Widow Jones gets a letter from the county assessor that says her property taxes have increased because land values are going up.  She can’t afford the taxes and will have to sell the place or lose it.

Retired schoolteacher Sanchez lives in town.  Surrounding homes are going for higher prices.  She too gets an assessors’ letter informing her that increased property values have pushed her taxes way up.  Her fixed income can’t cover the increase, so she will lose her home.

Farmer Smith is a big employer on the edge of town, but profits are thin.  The assessor has determined that the highest and best use of his land would be for new stores for the town, so his taxes are going up, wiping out his profits.  His must choose to sell or build.  The farm jobs will go away.

Is this a tale from the old west?  No, it’s a story that could – often did – happen just over 30 years ago, right here in California, before voters approved Proposition 13.

Do you remember what it was like, and why we have Proposition 13 and subsequent tax limiting measures?  A lot of people, including farmers, ranchers and rural landowners, have forgotten what it was like before this landmark tax measure was adopted in 1978.  The subject is relevant again because the state's budget picture has politicians scrambling for tax revenue.  They're betting that recovery will bring higher property values, and they want to cash in.

You may think this is a question only for city residents, but it affects rural landowners, businesses, the very fabric of our community.

What Proposition 13 did was to change the California constitution, to cap property taxes at one percent of value at time of acquisition, limit increases to two percent a year, put state lawmakers in charge of allocating property taxes, require a two-thirds vote of the Legislature to increase state revenue, and require voter approval for new local taxes.

Why was all of this important to agriculture?  Remember who owns most of the private land in California: farmers and ranchers.  But they’re only two percent of the population.  Before 13, it was easy for the non-farmers to shift government costs to rural landowners.

Prices of property have skyrocketed from time to time, like they did when voters approved Proposition 13 in 1978.  Without 13’s protections, rising taxes would hammer long-established homeowners, farmers, ranchers and rural residents.  Without Proposition 13, your property taxes would be based on what your neighbor is able to pay, not on what you can afford.

In the face of California’s budget crisis, you’ll hear a lot of proposals to change or eliminate Proposition 13.  For instance, one recurring suggestion is to charge higher taxes on businesses, an idea that could drive more employers out of the state and raise the cost of everything we buy.  Proposition 13 is a topic you should keep an eye on.  Be sure you know how any changes would affect you and your community.

Agriculture has always been a low margin business.  Net income is thin and doesen't rise fast enough to keep up with the rise in property values.  There's not much net income to pay taxes.  When the pre-Proposition 13 tax burden got too great, farmers were tempted to look for more profitable land uses ... like houses. 

Proposition 13 changed California’s Constitution

Many of us have forgotten what Proposition 13 did.  It made six basic changes to the California state constitution:

·        It capped, with limited exceptions, property tax rates at one percent of full cash value at the time of acquisition;

·        It rolled back property values for tax purposes to their 1975-76 level;

·        It gave state lawmakers responsibility for allocating property tax revenues among local jurisdictions, instead of allowing local jurisdictions to set tax rates;

·        It provides that property is reassessed based on cost at acquisition, instead of adjusting taxes based on changes in value of neighboring properties, and it limits increases to no more than two percent;

·        It requires a two-thirds vote of the Legislature to increase state revenues; and,

·        It requires that two-thirds of voters approve special taxes.

In 1996, Proposition 218 added limits on local taxes and fees, tightened voter requirements, required property owner votes on new charges, and limited fees to the cost of providing a service.

More than 30 years ago, property was an important source of local taxes.  Local governments could adopt and increase property taxes by a majority vote of the local body -- your supervisors or city council.  County tax assessors adjusted (that means raised) everyone's property taxes based on changing value of properties in the area.  When one property sold for a new, high price, the neighboring property was assessed at the higher value.  It gave "keeping up with the Joneses" a painfully-real meaning.

Another wrinkle was when assessors determined property value based on "highest and best use."  If your neighbor started growing strawberries, the assessor figured you could be growing them too ... and you paid the same tax.  If you had urban land and your neighbor built a shopping center, the assessor figured your lot could be a shopping center too, and should be taxed at the higher rate.  You had to increase your return on investment just to pay the taxes.  That could mean changing your land use whether you wanted to or not ... or selling out to someone who would.

The Williamson Act protected farms, but not everyone wanted to sign a Williamson Act contract.  County governments depended on state reimbursement – called a subvention – to make up at least part of the reduction in taxes that Williamson Act allowed participating land owners.  When the state faced its annual budget crisis, the amount of money provided to local governments dwindled.  Unlike Proposition 13’s solid constitutional guarantee, the Williamson Act proved to be a mirage that has now dried up.

Predictability

The common condition before 13 was that no one could predict their future taxes.  Proposition 13 changed that by setting a fixed base of 1% and a fixed increase of 2% a year.  If you bought a property, you could calculate the taxes in advance. 

One argument you'll often hear about Proposition 13 is how your neighbor pays less tax than you do.  The U. S. Supreme Court looked at this question and decided the difference in tax is acceptable.  It stabilizes neighborhoods -- and communities.  In any case there's no direct correlation between tax paid and amount of service provided.  Otherwise a wealthy neighborhood would get more police and fire protection, when the need may be greater in less affluent areas.

For over 30 years government agencies and many media outlets have carped about how wrong Proposition 13 has been.  Voters haven't bought it, but someday they might, when enough people have forgotten what it was like before Proposition 13.  Do you remember?

In an era when real estate prices were rising faster than incomes in the late 1970s -- which looked a lot like the early 2000s -- homeowners were being taxed out of their homes and farmers and ranchers were being taxed off their lands.  Tax receipts were flooding into government so fast they couldn't spend it.  The state amassed a huge surplus at the same time retirees were losing their homes.  Taxes were driving urban residents to rural areas, crowding out agriculture and pushing up taxes there too.  Voters reacted by putting the brakes on, with Proposition 13.

It was a huge protection for agriculture.  Farm land taxes were rolled back to 1976 valuations, and future taxes were based on the purchase price of each property.  Land owners who held on to their land -- and think of the generations of owners in Monterey County -- retained their low tax rate.  Land that sold was reassessed at the sale price.  Buyers knew what their taxes would be.

If Proposition 13 suddenly went away, what would it mean?

Farmers and ranchers could see their property taxes shift unpredictably, adding new uncertainty to an already uncertain business and potentially erasing the slim profit margins that sustain the industry.  It could induce more property owners to seek non-agricultural land uses ... those highest and best uses that would return more and pay the higher taxes.  Long-established residents -- those of you who bought your homes 10, 20 or more years ago -- would find your taxes suddenly ratcheted up to full present market value.  If you think people were upset back when California decided to triple its car tax, wait until the same (or worse) happens to your property tax.

The victims of such a change would be those least able to protect themselves.  The smaller, independent farmers.  The low-income families struggling to get by.  The retirees living on fixed incomes.  These are the people who could be crushed by higher taxes.

Will voters change Proposition 13?  They might, when enough voters forget what it was like before 13 ... or when enough new voters move in and decide to raise taxes on established residents.

I was a homeowner in 1978, struggling to pay a mortgage and raise a family.  I voted for Proposition 13.  I’d vote for it again today, and I oppose any attempt to weaken or eliminate its valuable protections.

Author’s note: I drafted this commentary in 2003 when home and land prices were skyrocketing, but it’s just as meaningful in 2011.  The descriptions of rising home and land prices seem out of place in today’s recession, but you can bet recovery will eventually push prices up again.  The same dynamics will come into play.  Budget crises, media attacks and the growing population of young voters who don’t understand Proposition 13 make this commentary as timely as ever.

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E-mail BobPerkins@redshift.com

Wednesday, November 09, 2011 12:08:36