|Wealth and Want
|... because democracy alone is not enough to produce widely shared prosperity.
Insights, 26 Oct 03 — Common Ground
For better or worse, California has recalled its governor and elected Arnold Schwarzenegger (A.S.) to replace him. A.S. has revealed no specifics of how he will stanch our deficit. He campaigned on generalities: he is against taxes, against waste in government, against measures to rein in vehicle use, and nostalgic about the good old days when Governor Pat Brown was spending heavily on roads and water projects. No one seems sure how he will connect the dots. After his first visit to Sacto last week, he seemed not sure, either.
His choice of advisors, however, tells us A.S. will repeat Pete Wilson's performance from the early 1990s. Chief of Staff Patricia Clarey is a good soldier from Wilson's old staff; Auditor Donna Arduin is from Jeb Bush's Florida. The gurus who set the doctrinal tone give the clearest hints: they are neo-classical economists of deepest dye. These are advisors George Shultz and Michael Boskin from the Hoover Institution. Economics, to them, is a set of dismal choices. California's choice is to cut public services, or lose business and jobs. That is what they told Wilson in 1994. All taxes are the same, always "burdens," always driving away "business."
In 1994, Wilson appointed Shultz and Boskin heads of his "Task Force on California Tax Reform and Reduction." They "urged" a 15% cut in income taxes, personal and corporate. Biggest cuts would be for corporations, and the highest brackets. Boskin said "savings to business are crucial to the State's recovery." Shultz said it will "spur job creation," and "make California more competitive." Wilson endorsed the report, to make California "a friendlier place for taxpayers." Other usual suspects like The State Chamber of Commerce jumped right on board, to "stimulate the economy." It could have been a dress rehearsal for G.W. Bush in Washington.
They promised it would increase revenues, on the Laffer-curve hypothesis. Failing that, they would cut "waste in government," that perpetual whipping boy. On the last matter, they stifled two important points.
Boskin and Shultz, posing their dismal choice for California, dismissed by silence that we can raise needed revenues while also spurring job creation and stimulating the economy. It is simple: restore that part of the property tax that falls on land, while continuing to cap the rate on buildings. Attorney Charles Haughey has drafted a simple amendment to Prop. 13 that accomplishes this by changing just a few words here and there. Boskin and Shultz's silence is not from ignorance. Boskin was the protégé of George Break, a member of Schalkenbach's Committee on Taxation, Resources, and Economic Development (TRED). He is the colleague of Hoover staffer Charles McLure, another TRED member, and of Milton Friedman who has (reluctantly and patronizingly) muttered a few good words about taxing land values. It is rather that the Georgist message gets filtered out.
How does that happen? Pete Wilson, when Governor, was thick with major landowners, who are also major political contributors. Wilson as Governor used one of the residences of Donald Bren, owner of the Irvine Co., for official meetings. Irvine has owned for years about 1/5 of Orange Cnty., and its interest has ever been to maximize the value of its lands. It is not hard to fathom why A.S. told Warren Buffet to do 500 pushups the moment Buffet suggested reviving property taxation.
It is also alleged that land values are too small to support government. Let us test that idea. In 2003, at the current rate, there will be about 15,000 "confirmed" sales of owner-occupied urban California residences at prices over $1 million. That is from DataQuick, a standard source of current real estate data. 15,000 is about 2.7% of all confirmed sales. Some of those go much higher. The mean is probably over $2 million.
Turnover of costlier homes is lower than that of ordinary homes. (For example, turnover of existing homes is 30% greater in Riverside County, with lower values, than in Orange County, with higher values.) 2% a year is a fair guess at the turnover of homes valued at $1 million or more. If so, there are 50 x 15,000, or 750,000 homes in Calif valued at a mean $2 millions. Their aggregate value is 750,000 x $2 million = $1.5 trillions.
These are not large buildings: they average 2864 s.f., with 4 bdrms, 3 baths. In the north end of Sta. Monica, a vacant lot alone is over $1m. They are not new buildings: only 9% are new. It's the land that makes them worth so much.
A tax of 1% on that value would yield $15 billions a year. That's from only 2.7% of the urban homes in Calif. The data exclude many sales, country manors, for example. Some well-known lands thus excluded are
10% of the residential units are vacant. Vacancy rates are especially high in beach cities with resort qualities and very high prices. These also include "beach, yacht and business" cities like Newport Beach.
A high fraction of California real estate is absentee owned. The Sultan of Brunei, for example, owns several houses and sites in Beverly Hills and Bel Air. California's official Legislative Analyst, the highly respected William Hamm, estimated in 1978 that over fifty per cent of the value of taxable property in California was absentee-owned. This is such a bold, bare, and enormous fact it is hard to understand how Californians have been misled into resisting the urge to levy land 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 value, and which may be taxed separately from buildings.
Some half of any reduction in California property taxes leaks to out-of-state owners. Nor is this the only leakage.
Many rents may be taxed in other ways. Georgists have long noted that parking meters are a way of collecting rent for use of public land, but they are pikers when it comes to estimating the value thereof. Donald Shoup, a UCLA professor, estimates the value of street parking, if properly priced, as enough to replace the entire property tax.
Parking, however, is less than half the story. Vehicles also use public space when they are moving, often bumper-to-bumper in heavy traffic. Bridge, tunnel and ferry tolls reflect this obvious fact, and yet even most Georgists resist the obvious logical extension of the principle: taxes on vehicles and fuels are a kind of rough "land tax on wheels." The revenue potentials are breathtaking. Auto dealers, of course, spearhead the opposition. Observe how many acres each dealership preempts, and you will understand how they make so much money to brainwash the public into rejecting such taxes, along, of course, with conventional property taxes on their land.
Many valuable land resources are held by license, rather than title, and escape the property tax almost entirely. Licenses to divert water are an obvious case, and worth enough to replace billions of dollars of sales and income taxes. More on this, and the recent transfer of Colorado River water to San Diego, will appear in the next installment of Insights.
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper