Raising Property Taxes for Public Pensions

Tuesday, August 29, 2017

Page 9

IN MY OPINION (Column)

Raising Property Taxes for Public Pensions

By JON COUPAL

California’s iconic 1978 tax cutting measure, Proposition 13, was motivated by a desire to, first and foremost, limit out of control property taxes. To that end, the measure has been a remarkable success saving California property owners more than half a trillion dollars in its 39 year history. (Notwithstanding that achievement, California still ranks in the top third of all states in per capita property tax collections). Prop. 13 was less effective, however, in its secondary goal of limiting the growth in government spending. In fact, it is not unfair to say it has fallen far short given today’s high overall tax burden and the state’s profligate spending habit. Government remains California’s number one growth industry.

Some California citizens who voted for Proposition 13 almost four decades ago may have forgotten that the drafters were in fact concerned about government spending as well as tax relief.

A few still contend that taxpayer groups such as Howard Jarvis Taxpayers Association should focus only on protecting homeowners against rising property taxes and avoid issues like the costs of regulation, environmental policies or the cost of public employee pensions. But fortunately, most astute taxpayers understand that their tax burden is inextricably related to government spending and that there are tremendous risks in failing to engage on government policies that drive up public costs.

One Illinois town has learned that the hard way. The city of Harvey has been ordered by a state appellate court to approve a property tax levy specifically for its firefighters’ pension. That court order, however, may be difficult to enforce given that Harvey already has effective tax rates of 5.7 percent for residential and 14.3 percent for commercial properties. (Under Proposition 13, the maximum tax rate for all real property is 1 percent).

As stunning as this decision may be, residents of Illinois better prepare themselves because Harvey won’t be the last. Many of Illinois’ 600-plus local police and firefighter pensions are similarly underfunded which may explain massive flight out of the state by its taxpaying citizens.

The real question for California taxpayers is whether what is going on in Illinois could happen here in California. More specifically, could a California court order a city, county or special district to raise property taxes to cover unfunded public employee pension obligations? It’s possible, but it would be more difficult for those who seek such a move. First, Proposition 13’s one percent rate limit is in the constitution, so a state court would have to find—which it could—that the pension obligations were guaranteed under the United States Constitution.

That is not an inconceivable outcome. Indeed, it is possible that a federal court might reach that conclusion more easily.

That a federal court might order a local property tax increase is not without precedence. In 1990, the U.S. Supreme Court ruled that federal judges may order local governments to increase taxes to remedy constitutional violations such as school segregation. The court took an expansive view of judicial power to actively manage institutions and activities usually within the power of states and localities.

If property owners need a reason to watch the entire controversy over public employee compensation, especially pension benefits, this is it. Don’t assume what happened in Harvey, Illinois couldn’t happen here.