The natural response to this turn of events would be to rebalance the revenue mix. California Democrats could offer a bargain: Lower personal income tax rates combined with a property tax rate more in line with the rest of the country. Of course, that would require voters to first repeal Proposition 13, which since 1978 has severely limited property taxes.
The result could be highly progressive. If income tax cuts are on the first $50,000 of income, everyone would benefit, but the main winners would be the working poor and the middle class. Plus, tax increases on property do not directly affect renters, who are, in general, lower income-earners than homeowners. (Landlords surely could pass property tax increases on to renters, but if the changes to housing taxes work as expected to actually reduce prices, the effect would be muted.)
Because property taxes remain deductible, Californians likely would save money. And the new tax system would be more predictable, less reliant on volatile income and more on home values, which outside of the historic housing bubble of the 2000s are generally more stable.
Proposition 13’s legacy has been to reward the wealthy while constraining state and local spending on key priorities like education. This has stunted economic growth and widened inequality across the state.
Proposition 13 has been a particular boon to corporations. Absurdly, manufacturing facilities or office buildings can change hands numerous times without triggering a tax reassessment because of complicated deal structuring. Freezing corporate property tax rates at 1978 levels costs California $9 billion a year, by some estimates.
Democrats have quietly discussed moving to a “split-roll” — assessing commercial and industrial properties at full market value while keeping residential property tax rates the same. But efforts to make even modest changes related to Proposition 13, like closing the reassessment loophole, always have gotten bogged down in the Legislature.
If, however, property taxes become deductible and state income taxes aren’t, that’s a flashing red signal to fundamentally change the revenue structure at the ballot for individuals and corporations alike.
This seems optimistic to me, if only because I don’t think we should ever underestimate the level of pure greed among voters, even among California progressive Democrats. Prop 13 and its follow-up laws around the nation devastated tax bases and laid the groundwork for the government defunding of social services. If you want to know why college tuition is so much, this is one reason, as states began lowering the percentage of operating expenses they covered in response to the loss of tax money. In Oregon, Ballot Measure 5, passed in 1990, was absolutely devastating and led to a situation when I was there a few years later of the school basically taking any Californian wealthy enough to pay full tuition but not smart enough to get into the UC schools. Repealing Prop 13 would be as groundbreaking as its creation, as it would genuinely show that at least in blue states, the old era of “lower taxes and smaller government” that defined decades of late 20th century politics are genuinely over and we can start thinking about broad new social programs that people will support enough to pay for.