Monday, January 26, 2009


Below is a recent Reuters article on the state of the state of California. As usual they blame Prop 13 for the economic woes of the 8th largest economy in the world.

California's "train wreck" a golden opportunity?

By Dan Whitcomb

LOS ANGELES (Reuters) - With California facing a $42 billion deficit in the current economic downturn, a glum Gov. Arnold Schwarzenegger has warned that the Golden State is on the brink of insolvency.

More people have left California than any other U.S. state over the past year, some disenchanted with snarled traffic, scarce jobs and some of the highest taxes in the nation. Add the prospect of still higher taxes and fewer public services, and normally sunny Californians have little to celebrate.

Still, experts say the most populous U.S. state and the world's eighth-largest economy is well placed to rise again and that this crisis could spur major changes in the economy that will pay dividends in the long term.

Abundant natural resources, big ports, access to the Pacific Rim, a large, relatively young work force, entrepreneurial draw and tech-oriented industries augur well for the future, economists and historians say.

"The prophets of doom and gloom are just not looking at the reality of California," said Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast.

"The government has created kind of a mess and that's a problem to be solved, but the negatives are actually fairly small. I think you can expect a lot of good out of California," he said.

The typically upbeat Schwarzenegger made international headlines this month when, instead of delivering his usual cheery "state of the state" speech, he issued a short, bleak message about California's roughly $1.5 trillion economy.


"California is in a state of emergency," said the former actor and bodybuilder, whose second term ends next year. "Addressing this emergency is the first and greatest thing we must do for the people. The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off."

Controller John Chiang then told Californians he would delay sending out $3.7 billion in tax refunds and other payments because the state was running out of money.

The dismal state of the state would have been hard to imagine in California's post-World War Two golden years, when incomes were rising, land was plentiful, homes were affordable and wide-open freeways stretched in all directions.

The good times came to a screeching halt with the 1973 OPEC recession, said Dowell Myers, a professor of urban planning and demography at the University of Southern California, and in some ways they have never really returned.

At the heart of California's problems, economists say, is the government's heavy reliance on personal income taxes, which produces wild swings in revenue as its coffers overflow in good years and dry up in leaner times.

California is a pioneer state famous for its entrepreneurial spirit. But an entrepreneur who might make $2 million in boom times could go bust in a recession.

A big reason for the state's reliance on income taxes is Proposition 13, a voter-approved change to the state Constitution that limits property tax increases and requires any plan to boost taxes to receive the approval of at least two-thirds of the legislature. read the whole article here.


  1. Enron was a problem to be solved too.

  2. as well they should. even if you're in favor of keeping your parents property tax bill low - prop 13 does more harm than good. the limit on property tax increases is only part of the package that was prop 13. Unfortunately it changed the way that property tax revenues were distributed (previously each county had control of property tax revenue, after prop 13 the state managed the divvying up). Worse yet, communities that no longer had the cash they needed to do things began to look for other ways to finance themselves (can you say outlet mall?) - the proliferation of crappy strip malls all over california was absolutely related to the decrease in property tax revenues from prop 13. and on top of all that, the schools in CA were great when i was a kid. no more.

  3. When Prop. 13 was passed, the Bill presented to the public stated that it would prevent " older people from losing their homes. At that time property taxes were skyrocketing, and some people were losing their homes because they could not pay the ever increasing taxes. However, as always, there were things the voters were not told, unless they could read the fine print, decipher the legal "mumbo jumbo", and loopholes. If it was really about letting people keep their homes and that was the end of the story, I would still be in favor of it. I would like to believe that Howard Jarvis (author of the bill) really wanted just that. But politicians screwed around with it and anyone who owns any rentals, apartments (no matter how large the complex) gets to take advantage of Prop. 13. If the Bill was written that each person could only use Prop. 13 on the home they own and live in, the State would have the extra money it says it needs. However, it has become a "sacred cow." I would love to see it amended, however, it would be a hard sell to the people who make the most money out of it. Unfortunately, they also have most money to launch another fear campaign.

  4. Easy for you to say old lady Lorri, who doesn't own rentals to pay her bills. I think they need to tax dogs that go to dog whispers and dog owners that go to dog whispers that allowed their dogs to get screwed up in the first place.

    The more the Government tries to fix things the more things get screwed up. secondly, old people are always whining about being broke and want everything for free. Get over it. You shouldn't have spent everything you earned in life. My grandkids shouldn't have to pay for your stupidity.

    I am telling you, the younger generations will hate our babyboomer generation for destroying America. I am teaching my grandkids about the generation that sold them out. I am encouraging them to elect people to office to end Social Security and Medicare, and all forms of Govenment workfare. I tell them they will never benefit from the tax, so why pay. There is no consideration.

    To fix things they need to simplify.
    First, end the ridiculous pension of the Government slackers. That is 90% of government’s problems. Don’t people get it, welfare kills your soul.

    2nd Rid the state of property tax and income tax. Implement a flat sales tax. Simple and fair. Everybody has the same tax rate. It would encourage savings and those that love to spend pay taxes.

  5. Hank is onto something. A flat sales tax would cover everyone - all the people working under the table, dealing drugs, illegal aliens would have to pay their fair share at the cash register. The apparatus is already in place to collect the tax as all stores are in the State Board of Equalization system, so zero start up costs.

    And Hank, you are right - the next bubble to pop will be underfunded union employee pensions - probably as severe, if not worse, as the housing bubble.

    BTW, only 8% of houses are still occupied by the original people who owned them when Prop 13 passed, so there's no gold mine there for the politicos to collect and spend.

  6. Part of the problem is government union employees who get 14 paid holidays, 25 paid vacation days, 12 paid sick days and full medical, dental and vision coverage - plus their oversized, underfunded pensions. What a rip-off of the taxpayers!

  7. During the last 10 years of overinflated home prices think of what would have happened to your property tax bill. Someone decides the ratty old beachhouse you bought back in 1970 is suddenly worth $800,000 and now you gotta pay that property tax? That would have been a nightmare.

  8. Dear Hank:
    You are right. I am an old lady of 60. However you are wrong about the other assumption about me. I do own property and rent it out. We rent to good people, and we do not increase their rent once we set it. Therefore, we have long term tenants and they are always great. However, I would gladly pay the a higher tax on them if it would help the younger people be able to purchase a home and solve the economic crisis in California. I also believe in a flat tax. As far as not saving any money that is not quite true. However, I do have to admit my Schwab account has been decreasing quite a bit lately. My practice is also hurting because as people get laid off they cannot afford healthcare, including a psychologist. If the younger generation hates the babyboomers, then I guess I will just have to worry about it then. I think my karma is pretty good so I am not too concerned. I cannot help what others have done. I can say for certain that I don't "screw over" anyone. I am now working for free with some of my patients who lost their jobs. I don't expect some big award for it-it is just what I do to help a bit.I also work, at no charge, with some the the veterans returning from Iraq. Just as I serve on the Parks and Recreation Commission at no charge. It is my way of attempting to give back. Any by the way, to the best of my knowledge my bills are paid. Did I miss something?

  9. The problem is not insufficient tax revenue (we have the highest taxes in the country by far), the problem is crazy spending. Literally half of the California government programs and employees are completely unnecessary and should be eliminated wholesale. Government has been transformed from something that was simply supposed to keep the peace and protect property and individual rights into this monster that sticks its nose into every area it can, hemorrhaging money along the way. This is not sustainable any longer. If the state slashes government, it will survive. If it raises taxes to make it completely unaffordable to live here or do business here, guess what, a lot of people will move away and others will not move here in the first place.

  10. At the heart of Calif's problems is a screwed up taxing system. Prop 13 for homeowners is minuscule, but for commercial property owners that are in a corporation their taxes don't get reappraised upon sale as do private homeowners causing their rates to stay artificially low since Prop 13 passed. The state is losing billions in revenue.
    Plus the state has probably 50% more employees than needed, but will not lay off or fire any of them. The money needed to pay for wages, health care, vacations, holidays and retirement is astronomical.
    The politicians in power are beholding to special interests, state employee unions, corporations and when termed out they go to work for these same special interests.
    To bad we can't have a revolution and start over like in 1776.

  11. Dont hold your breath.... but some form of revolution is the only thing that will change things now. The range can be from a ghandi style all the way to a WWIII. the current Republicrats will push for the big WWIII, so they can retain power. Scarrrry!

  12. In college they told us if prop 13 passed, several departments at the college would close. That was BS. Prop 13 passed and the departments flourished.

  13. The current American adults get me sick today. A complete example of irresponsibility.

    First they borrow against our future against all common sense and knowing that it will have an impact and create an artificially high economy and consumer spending (bubbles).

    Then when a correction comes, they scream that it’s not fair, and the government decides to get into more debt so solve the problem.

    The thought is “why should our generation should need to feel any pain, when we can pawn it off on our kids and future generations of America?”

    Bailouts for Companies and individuals are a crime against our children. Its called stealing.

    The politicians should be jailed for crimes against our children and the public should be ashamed for electing these morons who are addicted to borrowing money like a junkie addicted to heroin.

    Sad Day in America. Thank God we have Hope.

  14. As a kid who grew up under Prop 13, I can tell you it did have an effect on the schools. No more music and keep that old textbook. Dr. Lori is right, the idea behind prop 13 was good, but the implementation was not. You could apply that reasoning to most of our initiative style propositions.

    What we need is to dump the 2/3 majority required to pass the budget, and start a mandatory rainy day fund so we quit stealing the transportation fund. Do that and put the car tax back to where it was for the prior 50 years.

    As for the flat tax, that benefits people with the most money. There's an excellent book by David cay Johnston on how big corporations and other high rollers avoid taxes in this country, thus putting a higher burden on the rest of it. Great reading...

  15. "As for the flat tax, that benefits people with the most money. There's an excellent book by David cay Johnston on how big corporations and other high rollers avoid taxes in this country"


    The rich and the poor avoid tax under the current system. thats why the rich avoid flat tax propotions like the plaque.

    Flat tax is fair. the Rich would pay higher tax. In fact, everyone pays the same. If you don't like to pay tax spend less.

  16. "I can tell you it did have an effect on the schools. No more music and keep that old textbook."

    Which school in what year cut music from their cirriculum?

    When I worked at the San Dieguito High School District in the 90's in shipping/recieving, I saw government waste first hand. Teachers are allowed a budget each year of many thousands of dollars. If they don't spend it each year, they don't get as much the next year. Soooo, at the end of the year they're in a mad rush to spend the balance of their budget, ordering literealy tons of new (and many times crappy) books and surplus products etc. Is that any incentive? They should be rewarded for saving money, not punished for not using it.


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