In December, we will present our 43rd Annual Economic Forecast Conference. If one does the math, 43 years ago puts that first Chapman conference in 1978, the same year Proposition 13 was passed. That’s not a coincidence.
When Howard Jarvis and Paul Gann spearheaded the drive to bring Prop 13 or “People’s Initiative to Limit Property Taxation” to the voters, I was a young newly minted Ph.D. teaching a course in econometrics. Since it was the first time we ever offered econometrics at Chapman, I thought it would be interesting to use the class as a laboratory to measure the economic impact of Prop 13 on the California economy.
It was an in-house project designed to make the otherwise dry subject matter of econometrics a little more interesting and timely. By the end of the class, my students and I concluded that Prop 13 would have a very positive economic impact not only in California but Orange County as well.
That would have been the end of the story if it weren’t for a UCLA forecast that came out announcing dire economic consequences for California because of Prop 13’s passage.
I related our differing results to George Argyros, who at the time was Chapman’s Chairman of the Board of Trustees. Sounding a bit like Judy Garland and Mickey Rooney’s “Let’s put on a show” routine, George said, “Let’s do a Chapman Forecast.”
That first forecast took place at the then futuristic Fluor corporate headquarters in Irvine and was attended by a captive audience of about 30 of George’s friends that he had corralled for the occasion.
Unlike UCLA’s forecast that Prop 13 would cut California’s job growth in half, we announced that California would prosper.
Our forecast proved prescient.
One year after the passage of Prop 13, California’s job growth of around 5% was double the U.S.’s 2.5%. Our nascent model was able to capture not only Prop 13’s beneficial impact to the state’s construction sector but also to “higher nominal personal income levels induced by Proposition 13 tax savings.” (The Chapman Business Forecast, 1978, page 3)
Leaping forward 43 years from this ancient history brings us to a new economic order. Instead of outperforming the U.S. economy, California is hard-pressed to maintain parity. Instead of leading the way in reducing taxes, California now ranks second highest in state and local taxes. Instead of people moving to California in droves to take advantage of the state’s many riches, people are moving out in record numbers (see Chart 1).
From 2014-18, 680,000 more people moved out of California than those who moved in from other states. The only other state that suffered a greater net loss was New York. Not surprisingly, according to the Tax Foundation’s most recent “State Business Tax Climate,” California ranked second highest with New York following closely behind at third.
The two states with the highest net inflows between 2014-18 were Florida at 677,000 and Texas at 456,000. It’s not a coincidence that Florida ranked 46th and Texas 35th in their state and local tax rankings.
People are voting with their feet. Recent studies at our A. Gary Anderson Center for Economic Research suggest that California’s high taxes and home prices are to blame for the exodus, with taxes being the most important reason.
This exodus leads to a destructive economic cycle: As people leave states with high relative state taxes, those states increase taxes even more, thereby exacerbating the net migration outflow.
Perhaps that explains why voters in California are now facing Prop 15. Also known as the split roll initiative, Prop 15 is designed to raise an estimated $12 billion annually by raising taxes on commercial and industrial properties. Such a rollback in property tax savings brought about 43 years ago by Prop 13 likely represents the first step in its ultimate dismantling.
It’s been argued that Texas has higher property taxes than California. That’s true. Thanks to Prop 13, California’s overall property tax rank is 14th lowest of all 50 states while Texas’ is 37th. But California’s individual income tax is 46th highest versus Texas’ 6th. That helps explain why people are leaving California and flocking to Texas.
Forty-three years ago, voters faced a choice and decided to pass a proposition that ultimately spurred our state’s economic growth. On Nov. 3, voters will also face a choice – Prop 15.
But this time around, as Shakespeare said, “There is little choice in a barrel of rotten apples.”
Editor’s Note: Jim Doti, president emeritus and professor of economics at Chapman University, is one of the nation’s most prescient GDP forecasters. His next economic forecast is scheduled for Dec. 17.
