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Friday, August 15, 2003

Arnold, Buffett and Prop 13

Warren Buffett, now an economic adviser to Arnold Schwarzenegger, has hinted that California's property taxes are too low, according to a front-page story in today's Wall Street Journal:

"Warren Buffett, the billionaire financial adviser to Arnold Schwarzenegger's campaign for California governor, strongly suggested in an interview that the state's property taxes need to be higher.

"Mr. Buffett, the chairman of Berkshire Hathaway Inc., took on California's famous Proposition 13, which has limited property taxes there since 1978. As an example, he pointed out the difference between his own property-tax bills for homes he owns in California and Nebraska.

"His home in Omaha, he said, is valued at roughly $500,000. His current yearly property tax bill on that home: $14,401.

"In California, he owns a Laguna Beach home valued at $4 million, or eight times as much. The annual property taxes on that home are just $2,264 -- a fraction of what he pays in Omaha.

"More to the point, said Mr. Buffett, the taxes on his Omaha home rose $1,920 this year, compared with $23 on the Laguna Beach home. Mr. Buffett attributed the scant jump in California to the restrictions of Proposition 13, which generally limits property-tax increases to 2% a year, no matter how much the value of a property appreciates.

"Mr. Buffett stopped short of saying he would urge Mr. Schwarzenegger to seek a reversal of Proposition 13 to increase property taxes -- a move that would almost certainly be attacked by many of Mr. Schwarzenegger's fellow Republicans. But he left little doubt that that is where he is leaning...

"Proposition 13 limits on property taxes aren't directly responsible for California's current fiscal problems, which had the state facing a deficit of $38 billion for the fiscal year that started July 1. But in general, the limitations on property taxes have forced state government to rely on other taxes, such as the personal income tax, and to engage in complicated maneuvers to reallocate the state's revenue and help entities that faced funding gaps, especially schools. Even with those constraints, state spending grew faster than inflation in the 1990s, but then leveled off and is down this year.

"Mr. Schwarzenegger, like other candidates, has vowed to improve the state's fiscal picture. But suggestions that tax increases could be an answer could represent a problem for Republicans and the Bush White House, who have pursued tax cuts as the best way to improve the economy overall. Democrats are sure to leap at the contradiction, and the Buffett comments may likely to deepen the biggest fear of many national Republicans: that the moderate views of Mr. Schwarzenegger, for all his appeal as a candidate, could spark infighting within the party."

This is going to get very interesting. The moderate stances on social issues, while not in line with conservative orthodoxy, can be construed as necessary in order to win state-wide office in a state like California, and the right is likely to tolerate Arnold's pro-choice, pro-gay views if they help the Republicans win the governor's job. But Prop 13 is another matter. It is often held up as an example of a major change in economic thinking in this country, marking the rise of conservative tax policy that would reach its height under Reagan in the 1980s. Such an iconic piece of legislation cannot be repudiated lightly.

The more Arnold moves to the left, the more likely fissures in the Republican party become, and the less devastating a Schwarzenegger victory becomes for progressives anyway.