KRUGMAN CONTRADICTS KRUGMAN ON CALIFORNIA

Earlier this week Paul Krugman's NYT column discussed the sorry state of California finances. According to Krugman, the reason the Golden State is in such a hole these last few years, is because of a tax revolt in 1978:

The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

The result was a tax system that is both inequitable and unstable. It’s inequitable because older homeowners often pay far less property tax than their younger neighbors. It’s unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions.

For those who don't know about it, Prop. 13 was awesome. (I am well aware of its details because of my time spent working for Arthur Laffer, who at the time was one of its biggest proponents.) By limiting real estate taxes to 1 percent of the assessed value, it overnight cut property taxes by more than half. (!) The ballot initiative's authors were also smart to add in a provision that the assessed value could rise at most by 2 percent per year, unless there were a transfer of ownership. So for people who stayed in their homes, the most their property taxes could rise was 2 percent a year. Read the rest...Bob Murphy's blog

-flynn