PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

STATE SPOTLIGHT: California Voters to Weigh in on a Very Different Prop 13

By at 26 February, 2020, 11:00 am

 

by Raymond J. Keating-

Small Business Policy Index 2019: California ranked 49th – second worst – among the 50 states.

SBE Council’s “Small Business Policy Index 2019” ranks the 50 states according to 62 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2019: California ranked 49th – second worst – among the 50 states.

SBE Council’s “Small Business Tax Index 2019” is included in the Policy Index report, ranking the states according to a wide array of tax measures, including income, capital gains, property, death, unemployment, and various consumption-based taxes like state gas and diesel levies.

California’s Anti-Business Environment

California offers one of the very worst policy climates in the nation for entrepreneurship, small business and investment in businesses. And it would get even worse if voters approve a new Proposition 13 to be voted on this coming March 3, which, by the way, is very different from the famous Proposition 13 that passed in California in 1978.

SBE Council’s “Small Business Policy Index 2019: Ranking the States on Policy Measures and Costs Impacting Entrepreneurship and Small Business Growth” ranks the 50 states according to 62 different policy measures, including assorted tax, regulatory and government spending measures. California ranked 49th among the 50 states. The state also came in 49th on the “Small Business Tax Index 2019,” which is a subset of the larger Policy Index, whereby the states are ranked just on tax measures.

Obviously, California’s ills are many, including the highest state personal income and individual capital gains tax rates; high corporate income and capital gains taxes; the second highest gas tax; the highest diesel tax; second highest energy regulatory burden; second highest workers’ compensation costs; high levels of state and local government spending and debt; a high minimum wage mandate; and poor private property protections.

Yikes!

However, on one major tax, California doesn’t rank among the worst, but instead comes in at 21st among the 50 states, that is, property taxes (as measured by property taxes as a share of personal income based on Census Bureau data). Why is California at least relatively restrained on property taxes? Well, it dates back to state voters overwhelmingly passing Proposition 13 in 1978.

The Original Prop 13 versus the New One

What did Prop 13 do? The Howard Jarvis Taxpayers Association explains: “On June 6th, 1978, nearly two-thirds of California’s voters passed Proposition 13, reducing property tax rates on homes, businesses, and farms by about 57%. Now, according to the newly amended state constitution property tax rates could not exceed 1 percent of the property’s market value and valuations couldn’t grow by more than 2% per annum unless the property was sold.”

What was the situation prior to 1978’s Prop 13? The association went on to note:

“Prior to Proposition 13, the tax rate throughout California averaged a little less than 3% of market value, and there were no limits on increases either for the tax rate or property value assessments. Some properties were reassessed 50% to 100% in just one year and their owners’ tax bills jumped correspondingly. Under the tax cut measure, property tax valuation was set at the 1976 assessed value. As stated above, property tax increases on any given property were limited to no more than 2% a year as long as the property was not sold. Once sold, the property was reassessed at 1% of the new market value with the 2% yearly cap placed on this new assessment. Thus, the new buyer is aware of what the taxes will be and knows the maximum amount property taxes can increase each year for as long as he or she owns the property.”

For good measure, Proposition 13 required “all state tax rate increases be approved by a two-thirds vote of the legislature and that local tax rates also have to be approved by a vote of the people.”

As bad as things are in California currently regarding taxes, as hard as it might be to believe, matters would be far worse if not for Proposition 13, which also served to spark a nationwide taxpayer revolt.

Fast forward to today, and voters will face a very different Proposition 13 (unrelated to the original) at the ballot box on March 3rd.  This other Proposition 13 calls for issuance of a $15 billion state bond to pay for an assortment of government education goodies. So, the state’s already high level of government debt would increase, with taxpayers facing increased annual debt service costs of $740 million for 35 years at the state level

However, taxpayers would face increased burdens at the local level as this Proposition 13 would increase the caps on local bond debt, from 1.25 percent of assessed property value to 2 percent for elementary and high school districts, and from 2.5 percent to 4 percent for unified school districts and community college districts. Note that the state funds a portion of project costs, and that would change under this measure as follows (as explained by the state’s Legislative Analysis Office): “First, the state’s existing share of project costs (50 percent for new construction and 60 percent for renovation) would be replaced with a sliding scale. Under the sliding scale, school districts would qualify for state funding equal to between 50 percent and 55 percent of costs for new construction projects and between 60 percent and 65 percent for renovation projects.” Nonetheless, local debt burdens on taxpayers would increase.

But there’s, unfortunately, more. This Proposition 13 would increase construction costs. Again, The Howard Jarvis Taxpayers Association explains:

Additionally, this ‘Proposition 13’ needlessly raises the cost of school construction projects by giving priority for funding to districts that agree to use a Project Labor Agreement, or PLA. These agreements limit competitive bidding and require districts to pay the very highest labor costs in the area. This is an inefficient use of taxpayer dollars.”

The new Proposition 13 stands in stark contrast to the Proposition 13 that made taxpayer history 42 years ago. It would increase government spending, debt and tax burdens. Let’s hope that California voters have the common sense today to overwhelmingly reject the new Proposition 13. But if voters instead vote “yes” on this new Proposition 13, the long counter-productive trend of California’s policy environment being hostile to individuals, families, entrepreneurs, businesses and workers will continue to get worse.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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