Prop. 5: More Debt, More Taxes

Summary of the Proposition

Proposition 5 would lower the number of votes required to pass local bonds related to public infrastructure or housing assistance. As a quick recap, a bond is a type of debt that the government sells to investors to fund specific programs upfront. Essentially, the government sells a piece of paper to an investor, and in return the investor gives the state the dollar value of the bond; the state is then required to pay that money back over time. The bond is paid back with interest applied, similar to the way you would pay back a mortgage. Bonds have to be approved by voters before the government can sell them and take on the debt.

The California constitution currently requires 66% of votes to pass a bond, but Proposition 5 would lower that to a 55% majority vote.[1] What that means is that currently, when there is a proposition on the ballot to pass a bond, the proposition needs to get a 66%, or 2/3rds, yes vote in order to pass. However, Proposition 5 would reduce that requirement to just 55%, thus making it easier to pass bond initiatives, specifically ones that go toward infrastructure or affordable housing.

Support & Opposition

Who is supporting this proposition and why? This proposition was actually introduced by the California Legislature. This is known as a legislative measure. If a member of the legislature wants to place a proposition on the ballot, they will go through the legislature to get a majority vote; after getting that vote, the proposition will go on the ballot rather than going to the governor for approval.[2] Assemblymember Cecilia Aguiar-Curry previously tried to place a proposition like this on the ballot, but until this point she has been unsuccessful in winning over the majority vote in the legislature, until this year when she became Assembly majority leader.[3]  In fact, previous versions of the proposition have been voted down within the Legislature three prior times.[4] Proposition 5 was approved by the legislature last year, but its original draft had some components still up for debate, which reopened negotiations. Legislators finally reached agreement, and so the initiative is making it to the ballot this election.

Supporters of the proposition include the Democratic Party, the California Housing Partnership, the California Labor Federation, and the California State Building and Construction Trades Council. They argue that the current threshold – 2/3rds vote – is undemocratic. They say that a majority vote should be enough to allow local governments to borrow money to fund these issues. Supporters also note that lowering the threshold will make it easier for these types of bond initiatives to be passed, and therefore make local governments less depend less on statewide bonds or funding.[5] 

On the other hand, there are several groups opposed to the proposition. These include groups like the California Chamber of Commerce, the Howard Jarvis Taxpayers association, the National Federation of Independent Businesses, and the Catalyst for Local Control. The proposition is also opposed by the California Association of Realtors; however, in the process of negotiations, an exception was added - which we will cover the details of in just a minute - and as a result, the California Association of Realtors agreed to not campaign against the measure even though it disagrees with the content. Opposing groups argue that incurring debt is paid for by property owners through higher taxes. The decision to take on debt should be made through a broad consensus rather than by majority alone. They also argue that historic attempts to keep property taxes low in California, which have been approved by voters, would effectively be undone by this ballot measure.[6]

When it comes to funding invested for and against this proposition, opposing groups have far out funded supporters, with $5 million dollars coming from supporting groups, while a total of $29.6 millions dollars were raised from opposing groups.[7]

Background

There are a few components we need to break down and define here:

Existing Voter Requirement

Let’s start with the existing 66% voter requirement. Where does it come from and why is it in place?

As I mentioned before, these bonds currently require a supermajority – 2/3rds vote – to pass. That threshold was outlined during California’s inaugural constitutional convention, which goes all the way back to the year 1849.[8] Section 37 of the state constitution reads,

“It shall be the duty of the Legislature to provide for the organization of cities and incorporated villages, and to restrict their power of taxation, assessment, borrowing money, contracting debts, and loaning their credit, so as to prevent abuses in assessments and in contracting debts by such municipal corporations.”[9]

The reason given for such a threshold is stated in the constitution – to prevent abuses in contracting debts. As we have talked about for the past two weeks, bond issuances passed by voters are paid for by increases in taxes – specifically property taxes, income taxes, and sales taxes. Because of the direct effect on voters, passing billions of dollars in bonds should be taken seriously. It isn’t free money, it must be paid back with interest, and it will require higher taxes for decades as the debt is paid off.

Property Taxes

We also need to talk specifically about property taxes. I mentioned briefly in a previous article that property taxes were limited to 1% of property values in the state of California. That limit was set when voters passed Proposition 13 back in 1978.[10] This massively reduced property taxes across the state, and even to this day voters still agree that it was a good measure. However, not too shortly after Prop. 13 was passed, voters also approved another ballot initiative looking to overrule the 1% property tax limit when it comes to local, voter-approved bonds. This was Proposition 46, which was passed in 1986.[11] This meant that when 66% of votes passed these bond issuances – known as general obligation bonds – local property tax rates could be increased above the 1% threshold to help pay for them. In this way, local governments could rely on passing bonds to fund certain projects. They wouldn’t in turn have to worry about how to fund those bonds, because they were free to raise property taxes. So, if proposition 5 is lowering the requirement for local bonds to pass, in turn, it is also essentially increasing the frequency and likelihood of property tax rate increases on a local level.

Scope of the Proposition

But proposition 5 specifies that it is only for bonds that relate to funding public infrastructure or affordable housing. What exactly then would this scope include or exclude? 

When reading from the actual text of the proposition, it includes many activities, and doesn’t exclude much. Public infrastructure includes any facilities that deliver public services – so that can include education, police services, fire protection, parks, libraries, public transit, airports, even seaports, and so much more. Then there is the affordable housing component, which is just as broad. This is defined as any initiative to provide housing to individuals, families, veterans, people with disabilities, or so on, as well as downpayment assistance and any facilities costs associated with serving residents of affordable housing.[12] These definitions are both broad and vague.

Different sources have gone through these lists to further break down projects that could qualify that aren’t expressly stated. One source cites expanding broadband internet and protecting against sea level rise as initiatives that could classify under public infrastructure.[13] Another source highlights that the housing component could include costs for homelessness facilities, or programs for people with mental illnesses.[14]

Clearly, all of these definitions serve to show that what would be covered under these bond initiatives could be a wide range of activities. The only exemption I could find around it was that legislators agreed it could not be used to fund the purchase of single-family homes for the purpose of turning them into affordable housing. This was the exception written into the proposition as part of negotiations with the California Association of Realtors, as mentioned earlier.[15] Outside of that exception, it seems this would lower the requirements for essentially any local bond proposition, as most activities funded by a bond can be captured under the category of either public infrastructure or affordable housing.

Potential Effects of Proposition 5’s Passage

We have looked at the background of the voter requirement, the specific effects to property taxes, and the types of bonds this proposition pertains to. Next, we have to ask the question, if this were to pass, what is the projected increase in passed bond issuances? And in conjunction with that, what would the impact be, both to our debt as well as to the taxpayer?

Obviously, this would greatly depend on what local governments decided to propose in future elections. However, the Legislative Analyst’s Office analyzed past elections and concluded that, an additional 20 to 50 percent of local bond measures would have passed with just the 55% requirement in recent years.[16] That is definitely more bonds being passed, which in turn results in both 1) more debt for our government and 2) more need for taxpayer revenue to pay it back. The California Taxpayers Association predicts that the passage of Proposition 5 could lead to an increase in over $250 million in increased taxes each election cycle.”[17]

The reality is that we actually don’t have to guess about the impact this proposition will have, because a similar measure passed over two decades ago. Back in 2000, Proposition 39 lowered the voter requirements to pass bonds specifically related to school and community college initiatives. What was the outcome of the reduced requirement for school bonds? According to the Public Policy Institute of California, the passage rate just for K-12 bonds increased from 62% to 79%, and the median bond amount increased by more than double, from $20 million dollar proposals to $45 million dollar proposals.[18] The statistics are even higher for community college bonds, which had a passage rate of just 42% before Prop. 39, and skyrocketed to 86% after the proposition passed. The median amount for bonds also increased exponentially, nearly tripling from $87 million dollars to $350 million dollars.[19] 

Responses

With all of this background, what are we to think about Proposition 5? I see three problems that I think need to be addressed when considering how to vote on this proposition.

The first problem I see is the broad reach of bond initiatives that this would apply to. We saw that this lowers the voting threshold on bonds related to public infrastructure and affordable housing, but those two categories alone can encompass nearly every type of project that bonds usually fund. In California, the most common initiatives that bonds are used to fund relate to schools, roads, infrastructure, water, housing, parks, and environmental projects.[20] Literally every one of those categories could be encompassed within the description of Proposition 5. What type of bond initiative would be even be leftover requiring a 2/3rds vote?

This means that there would be an increase in the amount and dollar value of bonds passed related to nearly every category imaginable, just as we saw happen after the lower threshold passed for school bonds. And because bonds are outside of the property tax limit set by Proposition 13, drastic increases in the amount of debt taken on by these bonds will require drastic increases in revenues to pay them back.

Just think for a moment for how this incentivizes local governments to put bonds on the ballot. If a local government really wants to fund an infrastructure project, but it knows it cannot raise the property taxes or other sources of revenue to pay for it out of the budget, that government can instead put it to a vote. Then, because it passes as a voter approved bond, it can raise the tax rates, and fund the project through additional taxes, rather than the budget. This disincentivizes working to allocate the tax revenue in the budget – the taxes you’re already paying – to high priority items. It is much harder to steward those revenues wisely and choose to fund only the most important initiatives, and it is much easier to rely on the people to pass bonds to cover the cost of desired projects. This is downright disastrous.

It’s disastrous not only because of this incentive to take on more debt and the increase in taxes, but also because of the long-term effects this will have due to the length of time it takes to pay back bonds. If you remember our last two episodes, Prop. 2 proposed a bond that would be spread over 35 years, and Prop. 4 proposed a bond that would be spread over 40 years. If bonds like these are passed by a 55% majority vote, then even if this constitutional amendment is repealed in the next election, any bonds passed in the four years between now and then will be in effect for decades. According to Dr. Gary Galles, who is an economics professor at Pepperdine University, because bond measures often last for 30 years or more, the impact of Proposition 5 cannot be undone for a generation, even if it’s repealed in the next decade.[21] Based on these facts, I am first and foremost concerned about the reach and long-term effects of this change.

The second problem I see here is the unfair nature of a majority vote passing initiatives with serious economic implications. Robert Alt, the President of a conservative public policy think tank in Columbus, Ohio, put it this way, “Supermajority requirements ensure that people who are out of favor with the ruling class have protections from the whims of the majority.”[22] This is important in every state, but it is especially important in a state like California where there is a clear supermajority of one political party across the legislature. It is so important to preserve the voices of those who might not agree with the majority, especially when it comes to passing measures that will have a direct economic impact on those individuals. We see this in many other areas of government as well, like the electoral college when it comes to the general election, or the requirements that many other states have to pass constitutional amendments. Even from the very founding of the United States, the founding fathers knew that there was danger in a direct majority because not all voters would be fully informed on their votes, and because mob mentality had the tendency to take over especially in populated areas. Supermajority requirements are a safeguard to ensure that our system of democracy is taking into consideration the voices of the people while also requiring a higher standard for certain issues – especially those with heavy economic impacts.

And what are those economic impacts? That leads to the third problem I see, which is the inevitable result of higher taxes for California residents. This matters because California residents are already some of the most burdened people across the country when it comes to taxes. California ranks number one in the nation for the state with the highest individual income tax burden. Not only that, but when it comes to total tax burden, California is in fifth place out of all 50 states, coming in behind New York, Hawaii, Vermont, and Maine.[23] We pay some of the highest taxes in the country, which means that both our government leaders, and we as state residents, should take issues that will increase taxes further very seriously.

Why take taxes so seriously? The Mercatus Center in Virginia conducted a study on “State Economic Prosperity and Taxation,” and it found that, “A higher average tax burden reduces state economic growth. Dividing total tax revenue by gross state product (GSP) shows that a 1 percent increase in a state’s average tax rate is associated with a decrease of 1.9 percent in the growth rate of its gross state product.”[24] Put simply, when the government increases taxes, it results in some level of economic decline.

They also found that higher average tax burdens lead to migration out of high tax states and into low tax states – which is absolutely happening with California! California continues to see a net loss in residents year over year. There has been a net decrease in the number of residents due to people moving out of the state every year since 2000.20 In 2022 alone, there was a net loss of just over 341,800 residents.21 And where are they moving to? Four of the top states Californians are moving to are Texas, Florida, Washington, and Tennessee.[25] These are states with no personal income tax, and far lower overall tax burdens than California. These reasons - economic growth and population stability - highlight the reasons why state governments should place importance on lowering the tax burden wherever possible for their residents.

Another economic impact, once again, is the housing market. Lowering the requirements to pass bonds, which inevitably result in higher property taxes, does not in any way help housing affordability. This is ironic, because supporters of Proposition 5 cite wanting to help housing affordability. They want local governments to have funding for housing affordability programs. But, the effects of passing bonds will actually reduce housing affordability. Why? Because prospective homeowners have to consider the property tax burden they are taking on when purchasing a home, as opposed to having no property tax burden when renting. One of the very things Proposition 5 sets out to do, it will actually just make worse.

To summarize, Proposition 5 is vague and overbroad, it gives the power to the whims of the majority, and it will result in higher taxes and therefore less affordability across the board, including housing. It’s tempting to look at an issue like Proposition 5 and think, well who really cares? Who really cares if certain bonds require 11% less of the vote in order to pass? Who really cares if local governments take out bonds to build public infrastructure or affordable housing? But, as we have just seen, the reality is that our state government should care, and you should care. 

This is an issue that affects your life, your finances, the taxes levied on you, your ability to afford a home, and the overall state of California’s economic growth as well as health of the population. We also care, once again, about making effective change, rooted in truth and reality of outcomes. This change is not effective. It will not have the desired outcome of making public infrastructure or housing more affordable across the state. Instead, it will just pass the burden of responsibility from the government to the taxpayer, and continue to perpetuate the high cost of living and high amount of debt in our state. We have to be honest with ourselves about these realities, and refuse solutions that are temporary in nature and harmful in the long-term.

How do we do that? Vote no on proposition 5.

References:

[1] Legislative Analyst’s Office, “Proposition 5 [Ballot],” 2024, https://lao.ca.gov/BallotAnalysis/Proposition?number=5&year=2024.

[2] Hernández, Caitlin. “Understanding California Propositions.” LAist, March 25, 2024. https://laist.com/news/politics/2024-election-california-general-propositions-explained.

[3] Christopher, Ben. “California Proposition 5: Lower Voting Threshold.” CalMatters, September 13, 2024. https://calmatters.org/california-voter-guide-2024/propositions/prop-5-vote-threshold/.

[4] Ben Christopher, “California Real Estate Group Won’t Fight Affordable Housing Measure, for a Price,” CalMatters, June 24, 2024, https://calmatters.org/housing/2024/06/california-housing-realtors-ballot-measure/.

[5] Christopher, “California Proposition 5: Lower Voting Threshold.”

[6] Ibid.

[7] Ibid.

[8] Shelley, Susan. “Want Property Taxes to Go up? Why California Should Reject Ballot Measure Easing Bond Votes.” CalMatters, August 16, 2024. https://calmatters.org/commentary/2024/08/vote-threshold-bonds-proposition-5/.

[9] State of California. “CONSTITUTION OF THE STATE OF CALIFORNIA (1849).” CONSTITUTION OF THE STATE OF CALIFORNIA, 1849. http://www.dircost.unito.it/cs/pdf/18490000_UsaCalifornia_eng.pdf.

[10] Baldassare, Mark, Dean Bonner, Alyssa Dykman, and Lunna Lopes. “Proposition 13: 40 Years Later.” Public Policy Institute of California, June 2018. https://www.ppic.org/publication/proposition-13-40-years-later/.

[11] Ballotpedia. “California Proposition 46, Authorize Local Tax Increases for Bond Repayment Amendment (June 1986) - Ballotpedia,” n.d. https://ballotpedia.org/California_Proposition_46,_Authorize_Local_Tax_Increases_for_Bond_Repayment_Amendment_(June_1986).

[12] Digital Democracy: CalMatters. “ACA 10: Local Government Financing: Affordable Housing and Public Infrastructure: Voter Approval. | Digital Democracy,” June 27, 2024. https://digitaldemocracy.calmatters.org/bills/ca_202320240aca10?_gl=1*1nusd92*_gcl_au*NjExNzYyODUxLjE3MjQzMDExMDk.*_ga*NjAwNjkyNDE3LjE3MjQzMDExMDk.*_ga_5TKXNLE5NK*MTcyNjI2MzM1Ni4yNS4wLjE3MjYyNjMzNTYuNjAuMC4w*_ga_DX0K9PCWYH*MTcyNjI2MTA4Ni4yNC4xLjE3MjYyNjExMDcuMC4wLjA.*_ga_GNY4L81DZE*MTcyNjI2MTA4Ni4yNC4xLjE3MjYyNjExMDcuMC4wLjA.

[13] Nixon, Nicole. “Proposition 5 Explained: What California’s Local Bond Ballot Measure Is Asking You.” The Sacramento Bee, September 4, 2024. https://www.sacbee.com/news/politics-government/capitol-alert/article291893405.html.

[14] Shelley, “Want Property Taxes to Go up? Why California Should Reject Ballot Measure Easing Bond Votes.”

[15] Christopher, Ben. “California Proposition 5: Lower Voting Threshold.” CalMatters, September 5, 2024. https://calmatters.org/california-voter-guide-2024/propositions/prop-5-vote-threshold/.

[16] Nixon, “Proposition 5 Explained: What California’s Local Bond Ballot Measure Is Asking You.”

[17] Wiley, Hannah. “2024 Measure Asks Voters to Lower Bar for New Taxes and Bonds - Los Angeles Times.” Los Angeles Times, September 14, 2023. https://www.latimes.com/california/story/2023-09-14/aca-1-california-legislature-taxes-bonds-housing-infrastructure-ballot-measure-2024-voters.

[18] Murphy, Patrick, and Jennifer Paluch. “LAUSD’s Measure EE and the Parcel Tax Vote Threshold.” Public Policy Institute of California, June 3, 2019. https://www.ppic.org/blog/lausds-measure-ee-and-the-parcel-tax-vote-threshold/.

[19] Ibid.

[20] Legislative Analyst’s Office. “Bonds,” n.d. https://lao.ca.gov/BallotAnalysis/Bonds.

[21] Willard, Mimi. “The First Wave of Tax Tsunami on November Horizon.” The Marin Post, April 3, 2024. https://marinpost.org/blog/2024/4/3/the-first-wave-of-tax-tsunami-on-november-horizon.

[22] Alt, Robert. “Buckeye Institute CEO: Vote ‘yes’ on Issue 1 to ‘fend off the Californication of Ohio.’” The Columbus Dispatch, July 28, 2023. https://www.dispatch.com/story/opinion/columns/guest/2023/07/27/august-8th-special-election-ohio-heres-why-you-should-vote-yes-on-issue-1-the-buckeye-institute/70457877007/.

[23] Bramwell, Jason. “How The 50 States Rank by Tax Burden.” CPA Practice Advisor, April 10, 2024. https://www.cpapracticeadvisor.com/2024/04/09/how-the-50-states-rank-by-tax-burden/103495/.

[24] Yakovlev, Pavel. “State Economic Prosperity and Taxation.” Mercatus Center. Mercatus Center, July 2014. https://www.mercatus.org/research/working-papers/state-economic-prosperity-and-taxation.

[25] Keight, Alex. “Why Are People Leaving California?” PODS Enterprises LLC, August 19, 2024. https://www.pods.com/blog/people-leaving-california.