Foreclosures Dramatically Change California into a Dysfunctional State

July 3rd, 2009

The foreclosure crisis has dramatically changed California from being a “model and magnet for the nation” into an “irrational and dysfunctional state.” Columnist Dough Ford has blamed Proposition 13 for this state of affairs.

Prior to 1978 the cities, districts as well as the counties had the right to raise taxes on property. It did not require the approval of the voters. Each law making body would pass an annual budget and then fix the rate of tax as required to generate the necessary volume of revenue. These many rates were then added and applied to the then present market value of the property of the individual.

Thus the owners of houses had no control over the rising market value of their units or over the increasing budgets of the multiple government bodies. Thus they had no way of handling their tax responsibilities. It was thus a common thing for senior citizens with fixed income, whose mortgage dues had been clear, to nevertheless lose their houses because of foreclosure thanks to being unable to pay taxes.

In 1978 the voters took the initiative in enacting Proposition 13 to protect their ownership of houses by having control over the runaway taxes. In short, Proposition 13 limited the taxes on property to 1% of the assessed value and put checks on increases to 2% annually until the property was transferred to another. As per the statute today the county collects the 1% property tax and then it distributes it to the various departments that functions under its jurisdiction.

The question is whether Proposition 13 has caused the government to have very little money to operate. It is hardly so. From the time of start of Proposition 13 till now the revenue from property tax has increased by 580%. In this time span the population of California went up from 24 million to 38 million marking a spike of 58%. This shows that government revenue as per Proposition 13 has grown ten times the population rate growth.

As per the statue the property taxes go up at a steady 2% per year irrespective of the fluctuations in the economy as well as the real estate market. This has made revenue coming in from property a stable source of income for the government in comparison to income, sales and other taxes.

Pundits opine that the tax system in California punishes the rich but Ford feels that the wealthy Californians are leniently taxed.