Proposition 13: An Alternative Reform
[Originally presented at a meeting at the Center for
the Study of Democratic Institutions, Santa Barbara, California,
August 1978, reprinted from The Center Magazine,
What is the "message" of Proposition 13? Everyone was
invoking it this past summer to fill his sails, but what was really
blowing in the wind?
Howard Jarvis had been fighting property taxation for a score of
years with minimal success. Philip Watson, until recently more
prominent, led two property tax limitation initiatives to defeat. All
these prior efforts were tax shifts, not tax limitations. In fact,
Proposition 13 answers the same description, because, although it
limits property taxes severely, it places only frail and specious
limitations on state sales taxes and especially on income taxes.
California's graduated income tax rate structure is not indexed so
that it automatically takes a bigger share each year with inflation.
But, those are only facts, and this is California. The image of
Proposition 13 was that of overall tax limitation, and there may lie
This time around, Howard Jarvis allied himself with a band of
ideologues represented by Paul Gann, who favors over-all tax
limitation, and he seems to have taken them all into camp. Arthur
Laffer, an economist at the University of Southern California,
supported Proposition 13 with these words, "I feel equivalent
reductions in either income or sales taxes would be markedly
preferable. . . . An optimal tax structure for California should most
likely include higher taxes on property than on income or sales. To
me, the need for income and sales tax relief is of higher economic
priority than property tax relief." ("Revitalizing
California's Economy," paid for by the United Organizations of
Taxpayers, Inc., 6431 West Fifth Street, Los Angeles, California
90048; Howard Jarvis, State Chairman). Milton Friedman, editorializing
in Newsweek, said, "The property tax is far from the
Mr. Jarvis himself, in his many public statements, conspicuously
avoided over-discussing Proposition 13 itself. His primary attack was
against waste in government. He attacked symbolic and perhaps mythical
waste: long black limousines, congressmen's salaries, teachers'
meetings, and coffee breaks. I never heard him criticize any specific
program (except the racially symbolic issues of busing and abortion).
Thus he managed to work the act of the legendary congressman who
stayed in office for twenty-five years by never voting in favor of a
tax bill, or against any appropriation.
In this he was aided, of course, by the enormous state surplus which
Governor Jerry Brown had unwisely accumulated and, for his own
reasons, concealed, but which Mr. Jarvis, to his credit, divined. This
let Jarvis play Santa Claus, promising reduced taxes without reduced
services. New York City politicians had done the same thing by going
into debt, and the logical difference between going into debt and
using up a surplus is not mathematically very significant. Still, it
was enough to win the backing of many economists of the "Chicago
School," whose shibboleth is TANSTAAFL ("There ain't no such
thing as a free lunch"). That is why the "message" of
Proposition 1 3 is so different from the text of the proposition, so
confused and ambiguous. Proposition 13 was sold by talking about other
issues and making promises that have not, or will not, or cannot come
true. Here is a short list of Mr. Jarvis' firm affirmations before the
Public schools would have the first call on state revenues. It turned
out that the police and fire departments had first call.
F-I Reduced taxes would be passed through in lower rents. One must
laugh - it hurts too much to cry.
F-I Building and business would boom. This belief seems to have
overstated the level of property tax rates in the state and also to
ignore the existence of several public service bottlenecks as, for
example, sewer capacity. It ignored the impact of reduced property tax
revenues on the exclusionary motives of local zoning boards.
Housing would be cheaper.
7 Everything would be cheaper, because property taxes were believed
to be borne one hundred per cent by consumers. "Not one nickel,"
said Mr. Jarvis, "is paid by the owner of business property."
F-I Howard Jarvis would begin a new initiative against sales and
income taxation. Instead, he is now going national, while Paul Gann
carries this burden. Mr. Jarvis' national crusade is against capital
gains taxes, and against property taxes in other states.
The power of state politicians and bureaucrats would be reduced. In
fact, that power has increased, because of increased state subventions
to local government with many strings attached.
People who bought real estate between 1975-76 and 1978-79 would have
their assessments rolled back to the 1975-76 level.
F-I Proposition 1 3 would not be a tax shift but a tax reduction. In
fact, the un-indexed income tax keeps rising automatically with
inflation, and no legislation is required. In addition, there has been
a large increase in charges for municipal services. (Legislative
action subsequent to Proposition 13 moved partway toward indexing the
state income tax.)
I conclude from all this that shifting the tax burden from property
to other tax bases is not by itself a viable issue. It has a definite
constituency, of whom Neil Jacoby seems to be a type; but in order to
win, it had to be diluted and disguised. Philip Watson, who lost when
he did not disguise this proposal, calls Howard Jarvis a "demagogue."
That seems to be a tribute from the purist, who lost, to the
opportunist, who won.
Looking at the nation, the California phenomenon has been greatly
over-publicized, partly because it is California a and partly because
Howard Jarvis is typogenic, like Huey Long. In other states we see
more balanced tax limitation proposals and legislation, as in
Tennessee and Colorado whose spending limitations are by no means
aimed exclusively at the property tax or local government. Another
special factor in California is the state's high percentage of
retirees. Yet, even Florida - another haven of the retiree has not,
thus far, lined up with the Jarvis camp.
One theory to explain the passage of Proposition 13 is that
California's legislature was derelict in failing to provide timely and
adequate property tax relief along more selective and defensible
lines. That may be, but let us survey the adjustments that California
had already made.
El California had increased other taxes a great deal, notably the
graduated income tax. In the last eight years, the percentage of state
and local revenues secured from taxes on property had dropped from
thirty-eight per cent to thirty-four per cent. This merely continued
what has been a secular trend dating from the nineteenth century, when
property taxes comprised some ninety per cent of total tax revenue.
Furthermore, there is no a priori reason why property tax "relief"
should be welcome when the price has to be an increase in income
PROPOSITION 13 (The "Jarvis-Gann Initiative")
Section 1. (a) The maximum amount of any ad valorem tax on real
property shall not exceed one per cent (I %) of the full cash value of
such property. The one per cent (I %) tax to be collected by the
counties and apportioned according to law to the districts within the
(b) The limitation provided for in subdivision (a) shall not apply to
ad valorem taxes or special assessments to pay the interest and
redemption charges on any indebtedness approved by the voters prior to
the time this section becomes effective.
Section 2. (a) The full cash value means the County Assessors'
valuation of real property as shown on the 1975-76 tax bill under "full
cash value," or thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment. All real property not already
assessed up to the 1 975-76 tax levels may be reassessed to reflect
(b) The fair market value base may reflect from year to year the
inflationary rate not to exceed two per cent (2%) for any given year
or reduction as shown in the consumer price index or comparable data
for the area under taxing jurisdiction.
F The property tax rate in California is only moderate by national
standards. It is around two per cent, give or take some margin of
error. That is below the rate in Massachusetts, New Jersey, and
Wisconsin, for example. It is higher than the rate in Alabama and
Georgia. It is pretty close to the national mean. But, two per cent is
simply the official statistic. As a buyer of income properties in and
around Riverside, California, my observation is that the actual rate
is closer to one per cent. Only in some areas has the assessor brought
values up-to-date. Most real estate has not been reassessed in this
rising market; therefore, it is being taxed at substantially less than
two per cent of current market value.
F-I The Property Tax Relief Act of 1972 (S.B. 90) placed a
six-per-cent annual limitation on increases of school levies.
F-I The property tax rate is virtually frozen for purposes other than
schools (although, of course, assessed values are not).
Section 3. From and after the effective date of this article, any
changes in State taxes enacted for the purpose of increasing revenues
collected pursuant thereto whether by increased rates or changes in
methods of computation must be imposed by an Act passed by not less
than two-thirds of all members elected to each of the two houses of
the Legislature, except that no new ad valorem taxes on real property,
or sales or transaction taxes on the sales of real property may be
Section 4. Cities, Counties and special districts, by a two-thirds,
vote of the qualified electors of such district, may impose special
taxes on such district, except ad valorem taxes on real property or a
transaction tax or sales tax on the sale of real property within such
City, County, or special district.
Section 5. This article shall take effect for the tax year beginning
on July 1 following the passage of this Amendment, except Section 3
which shall become effective upon the passage of this article.
Section 6. if any section, part, clause, or phrase hereof is for any
reason held to be invalid or unconstitutional, the remaining sections
shall not be affected but will remain in full force and effect.
F7 A two-thirds majority is required to approve genera] obligation
E There is an owner exemption of seven thousand dollars on the market
value of homesteads.
There is a circuit breaker, or tax abatement, for persons over
El There is a deferment option for the elderly, bearing only seven
per cent interest (which is about the annual rate of inflation). In
California, as also in Oregon and British Columbia, hardly anyone
takes advantage of this deferment option. This fact, it seems to me,
rather calls the bluff of those who so freely allege that the woods
are full of widows with insoluble cash-flow problems, widows who are
losing their houses to the sheriff and whose heirs presumptive will
not help keep the property which they will eventually inherit.
F-I There are several laws granting preferential assessment to
alleged farmland, timberland, golf courses, and so on.
E] Business inventories are half exempt and were scheduled to become
completely so, subject to the defeat of Proposition 13.
Along the line of modern amendments to the property tax, about all
that California lacked was a circuit breaker for those under
sixty-two. One could argue the position, as the California Tax Reform
Association does, that a general circuit breaker would have made all
the difference. But one could equally argue that there were already
too many loopholes and preferences so that homeowners were rebelling
against paying the freight for timber owners, farmers, land
speculators, the Irvine estate, lessees on federal lands, and many
In spite of California's moderate property tax rate, the share of
California revenues from property is above the national average. What
accounts for this anomaly? It is that the value of property per capita
in California is far above the national average. The high. price of
California residences is well known and, of course, its current
skyrocketing increase is a modern legend. But owner-occupied homes
constitute only about one-third of the property tax base in
California. One could not establish an argument that California
homeowners were carrying the rest of the state, at least not by means
of property tax payments (homeowners pay much higher shares of the
state income and sales taxes than they do the property tax).
In spite of all that, it is still possible that for unworthy
rhetorical purposes and emotional reasons the property tax might fare
better politically with a low preferential rate for homes, as under
Minnesota's classified tax; or with generous homestead exemptions, as
in some southeastern states. That would, however, be an exercise in
the politics of symbolism, deception, and imagery. The factual
economic grounds are not convincing.
What, then, is the way to go for men and women of good will who see
some merit in having property contribute to public revenues? I have
First, we should stop maligning the property tax. We have the curious
spectacle of George McGovern, Jerry Wurf, State Senator Nicholas
Petris of California, the California Tax Reform Association, and
others along the Americans for Democratic Action position who tell us
the property tax is a bad, regressive tax, and then are dismayed when
the voters throw the tax out under right-wing leadership. Their
position is so hard to follow, I am tempted to suspect it is they who
are confused. Or perhaps they never really meant we should lower
property taxes; perhaps they really meant we should raise income
taxes. But now that the voters are in a mood to lower any tax whose
support slackens, the A.D.A. troopers had better get their act
together and look for the good in the property tax if they really want
to save it and the social welfare that it helps to finance.
Second, we need to marshal the arguments in favor of the property
tax, something that hardly anyone has done for years. Here are a few:
(I ) We hear a lot these days about cutting the fat out of the public
sector; but there is fat in the private sector too. I interpret "fat"
to mean paying someone for doing nothing, or for doing nothing useful.
Most economists agree that payments to people for holding title to
land is nonfunctional income, since the land was created by nature,
secured by the nation's armed forces, improved by public spending, and
enhanced by the progress of society. "Economic rent" is the
economist's term, but in Jarvis-talk we may call it the fat of the
land or "land-fat." It has also been called unearned
increment, unjust enrichment, and other unflattering names. Howard
Jarvis has said that the policeman or fireman who risks his life
protecting the property of others has his "nose in the public
trough." But it has seemed to generations of economists that the
owner whose land rises in value because public spending builds an
eight-lane freeway from, let us say, Anaheim to Riverside, and carries
water from the Feather River to San Diego, is the first to have his
nose in the trough. Nineteenth-century English economists who worked
this out were more decorous. They said things like "landlords
grow rich in their sleep" (John Stuart Mill), or the value of
land is a "public value" (Alfred Marshall) because the
public, not the owner, gives it value.
Some forty-three per cent of the value of taxable real estate in
California is land value. When we lower the property tax we are
untaxing not only buildings, but also land-fat.
Neil Jacoby, in an article circulated by the Jarvis committee, says
that most economists feel the property tax is overworked. As his
authority, he cites an article by Dick Netzer. Here is Netzer's
conclusion: " . . . my ideal system of local finance would
comprise user charges and land value taxation, period." (Dick
Netzer, "Is There Too Much Reliance on the Local Property Tax?"
in George Peterson [ed.] Property Tax Reform [Washington: The Urban
Institute, and The Lincoln Institute, 1973]). 1 will later agree with
Netzer (and, I presume, Jacoby) that this could be a viable way to
lower property taxes: that is, instead of reducing the rate, exempt
(2) The ownership of property is highly concentrated, much more so
than the receipt of income. Economists in recent years are
increasingly saying that the property tax is, after all, progressive
because the base is so concentrated, and because so little of it can
be shifted. But this message has not yet reached many traditional
political action groups who continue to repeat the old refrains. Two
remedies are in order. One is to collect and publish data on the
concentration of ownership of real estate. The facts are simply
overwhelming and need only to be disseminated. The second remedy is to
note how strikingly little of the Proposition 1 3 dividend is being
passed on to renters. This corroborates the belief of economists that
the property tax rests mainly on the property owner where it
originally falls, and not on the renter.
(3) A high percentage of the property tax base consists of land. In
California, as mentioned, it is about forty-three per cent. There is a
common belief that the land percentage is higher in rural areas, but I
do not believe the facts support this. In British Columbia I had an
opportunity to run an analysis of the entire provincial property tax
roll. The land percentage was well over fifty per cent in Vancouver
and ever so much lower in the smaller, rural municipalities and
regional districts. The land share in each local district was higher
in "commerce" than "farming," and higher in large
farms than small.
The whole farm-and-city antithesis is a red herring. Rural land and
urban land are both heterogeneous, and the differences within each
class are much greater than the differences between them. The point is
that in farming, as in every other industry, some people grabbed off
the best resources, and others are stuck with the leavings. The
property tax on land operates to even things out.
(4) A high percentage of real property is owned from out of state and
even out of the country. The percentage is much higher than we may
think. It is not just Japanese banks and the Arabs in Beverly Hills.
It is corporate-held property which comprises almost half the real
estate tax base. If we assume that California's share of the
stockholders equals California's share of the national population,
then ninety per cent of this property is absentee-owned; the
percentage may be higher because many of these, after all, are
multinational corporations with multinational ownership.
The "No on 13" leadership failed to capitalize on this
point. Governor Jerry Brown was the leader, and he talked about
business securing the lion's share of benefits. But most voters are
not so dumb as to be against business indiscriminately. It depends on
whose business and what business.
No one seems to have seized on the fact that half the taxable
property in California is owned by people not voting in the state.
Senator Russell Long has suggested the following principle of
taxation: "Don't tax you, don't tax me, tax that man behind the
tree." Property tax advocates have done well in the past and
should do well again in the future when they make their slogan: "Don't
tax you, don't tax me, tax that unregistered absentee. Don't tax your
voters, they'll retaliate; tax those stiffs from out of state."
Chauvinism and localism can be ugly and may be counterproductive, as
we know; but here is one instance where they may be harnessed to help
create a more healthy society. The purpose of democracy is to
represent the electorate, not the absentee who stands between the
resident and the resources of his homeland.
California's legislative analyst, William Hamm, estimates that over
fifty per cent of the value of taxable property in California is
absentee-owned. This is such a bold, bare, and enormous fact it is
hard to believe that Californians will long resist the urge to levy
taxes on all this foreign wealth. They may be put off by the argument
that they need to attract outside capital, but that carries no weight
when considering the large percentage of this property which is land
Some half of any reduction in California property taxes leaks to
out-of-state owners. Nor is this the only leakage. Net federal income
tax payments will rise by $1.5 billion, until other deductible taxes
rise to replace lost property taxes. Matching grants from the federal
government will decline, as will maintenance of effort grants. So
great is the complexity of federal programs that no person dares to
estimate the amount of loss, but it will be substantial. Sales of
local general obligation bonds have stopped and will stay stopped.
When revenue bonds are sold instead, the interest rates are higher..
Fire insurance rates must rise. And private spending substituted for
public spending will have a higher propensity to import.
This substantial leakage of economic base will result in multiple
declines in state income. In the short run this has been forestalled
by distribution of the state's surplus. In the long run Jarvisites
have promised an inflow of investment attracted by the drop in
property tax rate. I do not foresee that inflow for at least two
reasons. One is that California's property tax rate has not been high
enough; thus even the substantial cut of Proposition 13 will not make
much difference to incentives. Furthermore, under Proposition 1 3, the
major cuts go to property already here. New investment, on the other
hand, will be assessed at its current value; its owners will pay the
maximum in property taxes. To attract new investment, California would
have to assess land higher and new improvements lower. Proposition 13
does the opposite. It is designed not to attract new investors, but to
cut a melon for the old.
My second reason is that there are many infrastructure bottlenecks.
This is ironic, since California is badly oversupplied with certain
kinds of extravagant public works,- in some jurisdictions sewer
capacity is limiting, and in others, new schools are needed.
Proposition 13 has destroyed the general obligation bonding capacity
of local governments in California. Even where local governments could
eke out their operating costs through user charges and various state
and federal grants, there will still be a bottleneck in the financing
of capital outlays. New districts cannot have any tax base because it
is all claimed up. It is an ill wind that blows no good, and this may
encourage better infilling of existing patchwork developments.
However, reduced land taxes on speculative holdout landowners means
that this process will necessarily be slow and painful to those who
must buy the land.
On balance, then, it seems that California will suffer a substantial
decline in its economic base which, in a few years, will cause the
state either to sink into an Alabama-like desuetude or to repeal
(5) Property income is generally more beneficial to the receiver than
is the same income from wages or salaries, because the property owner
does not have to work for it. Yet, property income is virtually exempt
from the sales tax. There is no sales tax on rentals and certainly
none on the imputed income of owner-occupied real estate. As to income
taxation, walk into any real estate office with some spare cash and
you will be advised that you need a good tax shelter, and that there
is nothing like real estate income propertv which remains one of the
great income tax loopholes. The property tax is all we have that moves
in on this unpre-empted tax base. (6) Property, particularly land, has
been bought and sold for years on the understanding that it was
encumbered with peculiar social obligations. These are, in effect,
part of our social contract. They compensate those who have been left
out. Black activists have laid great stress in recent years on the
importance of getting a few people into medical and other professional
schools. Does it not make more sense that the landless black people
should have, through the property tax, the benefit of some equity in
the nation's land from which their ancestors were excluded while
others were cornering the supply?
A popular theme these last few years is that property owners should
pay only for services to property, narrowly construed. Who, then, is
to pay for welfare - the cripples? Who is to pay for schooling - the
children? Who should sacrifice for the blacks - Allan Bakke? Who
should finance our national defense unpaid conscripts? The concept
that one privileged group of takers can exempt itself from the giving
obligations of life denies that we are a society at all.
(7) Howard Jarvis was fond of referring to the "dictator
countries." Heavy property taxation leads us right into their
pattern, he alleged. No one at all familiar with conditions in
Guatemala, Nicaragua, Colombia, Peru, or Ecuador would give any
credence to this peculiar reversal of truth. The fact is, these
countries have been dominated by centuries of oligarchies whose
primary motive has been to prevent any substantial taxation of their
property. Indeed, to predict the long-term effects of Proposition 13,
we could do no better than study these "dictator countries,"
which have had "Proposition 13" for most of their history.
Jarvis also stressed the importance of saving America from the "English
disease," which he associated with high property taxes. Again, he
did not observe the actual situation. England has no property tax at
all, as we know it. It has a system called "rates," which is
based on imputed rental value of improved land and which exempts
vacant land altogether. There is an "English disease" all
right, but it consists of extremely high income tax rates on wages and
salaries. Property in England is treated more deferentially than in
most other leading countries of the world, under both "rates"
and the English income tax. (Jarvis' new national campaign is to make
the U.S. income tax more like the English one by exempting capital
gains. The dedication to unearned increment and concentrated wealth
remains his trademark. If this be "populism," William
Jennings Bryan was a hard-money atheist. This is imported English
disease, lacking only the redeeming graces of noblesse oblige.)
(8) We can ask that a single standard be applied to owners troubled
by higher taxes and to tenants troubled by higher rents. When widow A
is in tax trouble, it is time to turn to hearts and flowers, forebode
darkly, curse oppressive government, and demand tax relief. When widow
B has trouble with escalating rents, that touches a different button.
You have to be realistic about welfare bums who play on your sympathy
so they can tie up valuable property. You have to pay the bank, after
all. A man will grit his teeth and do what he must: garnishee her
welfare check. If that is too little, give notice. Finally, you can
call the sheriff and go to the beach until it's over. That's what we
pay taxes for.
Welfare is their problem.
Anyway, widow B is not being forced out of her own house, like widow
A and so many like her. Jarvis said that taxes are forcing three
million Californians from their homes this year. But in truth, while
evictions of tenants are frequent, sheriff's sales of homes are rare.
Those who do sell ("because of taxes," they say, as well as
all their other circumstances) usually cash out handsomely, which is,
after all, why their taxes had gone up.
Still, rather than needle people for hypocrisy we might better seize
upon the kernel of truth in the Puritan ethic underlying the double
standard and turn it to a constructive end, a theme which I will
Third, historical experience with assessment freezes, as found in
Proposition 13, shows them to be a can of worms. They are as bad as
rent control. In the case of Proposition 13, they are worse because it
now seems we will get both, the assessment freeze having created a new
demand for rent control. About ten years ago, W. A. C. Bennett, the
Premier of British Columbia, slapped a five-per-cent ceiling on annual
increments to property assessments. In just a few years, this produced
such glaring inequities and anomalies that last year British Columbia
moved manfully out from under it and went back to current market
valuation. Its experience and its failure is there for all to see. It
is probable that in California, under Proposition 13, in ten years
homeowners, who now pay one-third of the property tax, will pay
two-thirds, because of the higher turnover of owner-occupied homes
than corporate lands. It is inevitable that the assessed value of land
will fall relative to buildings, because buildings must be replaced
every few decades whereas land never must, or can be.
Then there is the fruit tree anomaly. Under Proposition 1 3, a tree
can only be assessed at its value when planted, with a two-per-cent
annual increment. The value of a seed thrown in the ground or even a
sapling planted from nursery stock is so small compared with the
mature tree that this is virtual exemption. This anomaly rather
graphically illustrates how Proposition 13 automatically favors any
appreciating property over depreciating property. The greatest gain
here goes, of course, to appreciating land.
The technical complications are endless; uniformity will be the
victim. Property is to be reassessed when transferred. What happens if
I own a one-quarter undivided interest in real estate and sell it?
What if I incorporate my real estate and sell shares to avoid its
being reassessed? You may be sure the lawyers are preparing many
loopholes. Let us get the word to all the defenders of the market
mechanism, the believers in neutrality and uniformity in taxation,
many of whom were so prominent in support of Proposition 13. Is this
the kind of tax system that free enterprisers believe will create an
efficient allocation of resources? They owe us more consistency with
their ideals and professions; or else the candor to say their
allegiance is to wealth first, and to efficiency when it is
Fourth, experience suggests that property tax defenders had best
promote stability of land values. In the nineteen-thirties we had
property tax revolts because the value of property dropped so low. In
1978 we had a revolt because property values rose so high. For decades
people put off tax reform saying it is all right to tax away the
unearned increment of those who have owned property whose value rose,
but it is wrong to raise taxes on people who have just bought at a
high price. But then, when prices actually rose, the winning theme was
just the opposite: people whose property rose, "through no fault
of their own," should not be burdened with increased taxes. Many
Californians like me have made more money in the last two years from
the increased value of their homes than they have working for a
living. And yet, most of them turned angrily against the incumbents
for the small increase in taxes that was asked in return. It reminds
one of the sergeant's lament in World War 11: "The trouble with
youse guys, you never had it so good before."
What can a legislature do to stabilize soaring land values today? It
can avoid policies which lock up valuable land in cold storage,
policies like the Coastal Zone Commission Act, the Williamson Act, and
the California Timber Preserve Zone Act (the last, little known, bases
timberland assessments on their low use value - growing timber -
rather than on their market value, often based on demand for
recreation). It can distribute state subventions strictly in
proportion to population, thus discouraging exclusionary zoning
policies. The social costs of these policies are high, and there is no
gratitude from the beneficiaries, the owners of enhanced land values.
So avoid them.
Fifth, legislators should carefully explain to their constituents how
the property tax system works.
When California moved toward partial compliance with the Serrano
decision, something called "slippage" came into school
finance as a partial move toward power equalization. It meant that in
some school districts, as assessed values and taxes rose for schools,
the voters could not see any comparable improvement in their schools
because part of the added taxes were going elsewhere. This, in turn,
made local school administrators look bad and thrust on them the
burden of explaining the system to a skeptical public. The California
legislators, meanwhile, were too clubby; they kept talking to each
other. State officials developed an inside language of acronyms,
abbreviations, and recondite terms. Voter alienation was inevitable.
Finally, build no surpluses. Surpluses attract raiders and raiders
are often organized landowners. "Property never sleeps,"
said the jurist Sir William Blackstone. "One eye is always open."
Even though the surplus was built up by taxing income, Howard Jarvis
made it seem the most righteous thing in the world that it should be
distributed to property owners. He was geared up for this because his
landlord patrons kept him constantly in the field.
This, then, is a list of lessons that property tax supporters may
learn from California's self-inflicted wound. But there is, I believe,
an even deeper lesson to learn. It is that there actually are some
warts on the property tax, and we might make an even stronger case by
reforming that tax. The property tax does penalize people for creating
and importing capital. It does penalize people for improving their
homes. It does slow down urban renewal. It does bias landowners
against improving land to its highest and best use. But all these and
other faults may be corrected simply by modifying the property tax
base to exclude improvements and include only land value. Economists
of many generations - even before Adam Smith and continuing to the
present-have preached on the advantages of land as a tax base. Let me
enumerate a few of those.
A tax on land value is the only tax known to man which is both
progressive and favorable to incentives. One can wax lyrical only
about a tax that combines these two properties, because the conflict
between progressivity and incentives has baffled tax practitioners for
centuries, and still baffles them today.
A land tax is progressive because the ownership of the base is highly
concentrated, much more so than income and even more so than the
ownership of machines and improvements. Also, the tax on land values
cannot be shifted to the consumer. The tax stimulates effort and
investment because it is a fixed charge based merely on the passage of
time. It does not rise when people work harder or invest money in
improvements. Think about this. It is remarkable. With the land tax,
there is no conflict but only harmony between progressivity in
taxation and incentives to work and invest. In one stroke it solves
one of the central divisive conflicts of all time.
The land tax does that because it cuts only the fat, not the muscle.
It takes from the taxpayer only "economic rent," only the
income he gets for doing nothing. If people could grasp this one
overriding idea, then the whole sterile, counterproductive, endless
impasse between conservatives who favor incentives and liberals who
favor welfare would be resolved in a trice, and we could get on to
The property tax levied on land values makes the landowner compensate
the landless for the latter's exclusion in three ways. First, the
landowner supports government. Second, he has to use his land to
produce goods and services for consumers. Third, he has to offer jobs
to workers to use his land. This combination seems hard on the
property owner. On the other hand, exempting improvements satisfies
the need to reward people for saving and accumulating capital.
Liberals may scoff at the latter, thus alienating potential friends.
But this is both a cultural and an economic need. It is a cultural
need because of the Puritan ethic. The elderly homeowner with a cash
flow problem is seen as a sympathetic figure rather than a "welfare
bum" because the possession of capital is the evidence of a good,
responsible life. The person once had the self-denial to consume less
than his income. It is an economic need because creating capital is
functional, unlike collecting "economic rent" or "land-fat."
The list of economists who see merit in this approach is several
pages long. There is an extensive literature which I commend for
study, with one warning: whereas some of the later nineteenth-century
literature is messianic, the modern scholastic style overreacts and is
too timid or pedestrian to signalize the remarkable qualities of a tax
which is both progressive and favorable to incentives.
Let us, rather, look at some objections. A frequent one is that such
a change in the tax system is too great a shock. In the present
context, forget it. Proposition 13 constitutes a much more massive
redistribution of wealth, and the voters, faced with this choice,
simply said, "Whoopee!" The electorate is asking for big
changes, so let's not pretend that this is a barrier.
People have objected that exempting buildings would reduce the tax
base. Again, in today's context, forget it. People are asking that the
tax base be reduced. Public bodies may take comfort in the fact that
the tax reduction caused by exempting buildings is much less than
might at first appear because the exemption of buildings from tax is
capitalized into higher land values. And there is no economic limit on
how high the land tax rate may go, once the public accepts the system.
People have objected that it is too late to shift to the taxation of
land values because people have bought at high prices and society owes
them a return on this investment. In today's context, forget it. For
one thing, we are talking here about exempting buildings, not
necessarily about increasing land taxes (although I personally favor
that). For another thing, Proposition 13 was justified not for the
sake of those who bought at high prices, but the reverse. It is
deliberately rigged to impose higher assessments on recent purchasers
than on ancient possessors. The voters did not ask for better
treatment for recent buyers.
Also, most owners of unimproved land whose taxes would not fall and
might rise in my proposed land tax program, can do something about it
by subdividing or improving their land, with no resulting increase in
People used to object - some still do - that farmers might be
penalized in a land-tax program. While in some rural states farmer
power will not let us forget this, the argument has little real force.
The main answer is to collect and acquaint oneself with the facts
about the ratios of land to improvements for various classes of
property. Both urban land and farmland are heterogeneous. As to
land-capital ratios, the differences within these classes are much
greater than the differences between them. Again, the farmland owner
is quite likely to live in the city, and the banker or matinee idol is
quite likely to own several farms, so the idea that we have a class of
citizens called "farmers" who require special treatment is
obsolete. The latest United States Department of Agriculture estimate
shows that "farmers" are now reporting nearly half again as
much non-farm income as farm income.
In my analysis of British Columbia's assessed values, I find that the
ratio of land to building values is much higher in Vancouver than
anywhere else in the province, and quite low in the rural areas.
Within the Vancouver regional district, the ratio of land to building
values is much higher for commercial land than for farmland. The
ancient antipathy of "farmers" to land taxes is based on
empty rhetoric, misinformation, and confusion, not on fact.
A more substantial objection is that new developments may cost cities
more to serve than they return in taxes. The property tax on buildings
is viewed by many as a kind of user charge to compensate for the loads
which new residents place on community services and facilities. To the
extent that this approach has merit, however, a tax on the value of
buildings is only the crudest surrogate for a user charge. Many
generators of fiscal deficit get in under this radar. Old decaying
houses are an obvious example. As to trailers and tract homes, one
reason they may generate fiscal deficits is that the lucky landowner
is allowed to walk off with most of the potential surplus in the
absence of adequate land taxation. But, more generally there is a
large and rapidly growing problem of local awareness of its fiscal
bookkeeping, a problem which, in my opinion, can only be met by
distributing state revenues on a per-capita basis, regardless of the
mode of property taxation.
Summing up, Walter Rybeck, an administrative assistant for
Congressman Henry Reuss of Wisconsin, and head of the League for Urban
Land Conservation, has sagely suggested that we distinguish two
functions of business: wealth-creating and resource holding. A good
tax system will not make people pay for creating wealth but simply for
holding resources. Most taxes wait on a "taxable event" -
they shoot anything that moves, while sparing those who just sit still
on their resources.
If we really want to revive the work ethic and put the United States
back on its feet, we had better take steps to change the effect of
taxes on incentives. Legislatures have got in the habit of acting as
though persons with energy and talent, and with character for
self-denial, should be punished, as if guilty of some crime against
humanity. We cannot study the tax laws without inferring that Congress
regards giving and receiving employment to be some kind of social
evil, like liquor and tobacco, to be taxed and discouraged by all
means not inconsistent with the rights of property. Little wonder the
natives are getting restless. If we tax people for holding resources
rather than creating wealth and serving each other's needs, we will be
taking a giant step toward a good and healthy society.