The Frost Conundrum (1/4/18)

© by Mark Dempsey

Supervisor Sue Frost’s latest constituent newsletter contains a puzzle. She suggests revising proposition 13 so home buyers keep the assessment of homes they previously occupied. Any potential property tax increase would no longer make homeowners hesitant to sell, then buy another home. Would someone moving from 1,000 to 3,000 square feet get a proportional tax boost? She doesn’t say, but who doesn’t want lower taxes, right?

In previous newsletters Ms. Frost criticized the County’s budget reserves as too small compared to other counties. (Must we keep up with Tuolumne county?) So she proposes changing prop 13 to lower tax revenue and the county must reduce spending even more (for bigger reserves).

What she proposes is austerity. What is its potential as a “solution”?... “Austerity was tried, and tried again--its application was not wanting--and it simply didn’t work. In fact, its repeated application made things worse, not better, and it was only when states stopped pursuing austerity that [their economies] began to recover.” (Mark Blyth, Austerity: The History of a Dangerous Idea)

Some austerity promoters blame public sector pensions for governments’ fiscal woes. They persist, even though in the American economy’s “greatest” years 70% of America’s workforce had defined benefit pensions (not just 401K and IRA plans). Only the public sector survived corporate America looting workers’ pension plans to boost stock prices and CEO compensation. (See Ellen Schultz’s Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers for the details)

Public workers get smaller paychecks than for equivalent work in the private sector, but some believe the public is getting gouged for those pensions--and any abuses make the headlines. Reform to avoid abuses is worth exploring, but on average the public pays only 26% of public pensions. Investments and the pensioners themselves provide the balance. The average California public pension ($31,500 annually), hardly amounting to dreams of retirement avarice. (Most figures from https://www.calpers.ca.gov/)

Oddly enough, Ms. Frost does not mention the loophole in proposition 13. When residential real estate changes hands, the County reassesses it at the sale price, but it does not reassess commercial property unless sellers sell more than 50%.  So when Michael Dell (of Dell Computers) bought a Santa Monica hotel, splitting the transaction between himself, his wife and his son--all buying less than 50%--the property retained the old assessment and lower tax rate.

What about driving businesses out of state with higher tax rates? Some commercial properties can take advantage of the loophole, and remain assessed at pre-inflation property values, but some can’t. So most commercial developments are patchworks of current values and loophole-derived lower assessments. New businesses and new commercial buildings in particular pay higher taxes--just the opposite of the “business friendly” climate our austerity-favoring friends claim they want.

Makeitfairca.com estimates that, statewide, the loophole costs Californians $5 billion a year in lost revenue.

So Ms. Frost is an enigma. Besides wanting higher reserves, she wants to open a loosely-specified new, revenue-lowering tax loophole for residences, but remains silent about the $5 billion commercial property tax break that hurts new businesses and/or new construction. And somehow, although it never works, she wants austerity too. One wonders what will wake her from this trance.