State governments are facing funding issues. Not all states as George Mason’s analysis points out but the ones that pop up on the national news as dysfunctional (illinois) but even the fantastic, cool coastal states like Massachusetts, New Jersey and California. Many of these states already burden their citizens with a variety of taxes to maximize revenue. This is at the heart of the blue state push-back to the Trump tax reform. As these states dip bluer, ideas will emerge to wreck their economies due to the tantalizing golden apples just within reach. California has already set the ladder under the tree for the fabled source just out of reach. On the 2020 ballot, there will be a voter referendum for a partial repeal of the famous Prop 13 property tax cap measure.
Prop 13 was a 1978 voter referendum that sailed through California. It capped the increases on property taxes to 2% per year, and new assessments could only occur at the time of sale. This was to protect homeowners. Is it fair? Does this matter? The taxpayer revolt was routed around by other means. The state and counties found ways to squeeze citizens for revenue by installing sales taxes and some of the most progressive state income taxes in America.
The secret to Prop 13 was that it applied to commercial and industrial real estate as well as residential. Prop 13 fixed costs for companies, which made it so labor was the input they had to find a way to control. One can argue that Prop 13, a supposed conservative win, ended up fueling the demand for illegal and legal immigration to cap wage growth and help California business competitiveness.
Now that the left has the vote blocs to enact what it wants, a repeal of Prop 13 can happen. No governor would do this, and Gov. Newsom is wise enough to merely be there to sign this when it passes as the will of the people. Note that this repeal is a commercial and industrial repeal only. Advocates know that going after homeowners is a loser right now, but they can eagerly stand under the commercial money tree and wait for the bills to fall into their palm. Businesses under 50 employees are exempt as would agribusiness. The article goes into detail about why a repeal will not generate what the advocates expect. They mention the costs to staffing and legal fees for the government (this is a plus for the left). They also cite that firms will find even better ways to get new assessments repealed or mitigated, making revenue expectations nothing but dreams.
What the article avoids is that rather than waste time fighting new assessments, firms will just leave. It is foolish to think firms will fight this out in courts in a state already known for being difficult to navigate. California still has a legacy of manufacturing (over $300 billion) and plenty of domiciled services that will leave. No amount of immigration will make up for this abrupt change to their fixed expenses. Entire properties will see the costs associated with them rise to exceed the total payroll of employees they contain. Small businesses would become bound at the 50 employee line and use 1099 contract workers to avoid triggering eligibility for the new rules. What will commercial real estate do to rents for businesses in an era where commercial real estate has problems of overcapacity?
This leads to the next step. Businesses will vanish, taking the homeowners they employ with them. This is all going to happen right as California also layers in state mandated employee benefit programs like paid family leave. Other businesses will set up operations outside of California or utilize technology for more remote employees. The tax revenue will fail to meet expectations. California will get bluer. The logical next step will be to repeal the Prop 13 measures for residential real estate. An exodus of retirees will occur and likely workers with jobs that have transferable skills. Just their luck, America has been transformed into a work environment that rewards the nomadic lifestyle, making abandoning California easier.
The final transformation due to Prop 13 repeal will take an odd turn, but a familiar turn. Power or glamour American cities are known for attracting foreign homeowners. It is the name that draws them, but there is also the use of real estate as a piggybank. The laundering of ill gotten gains is rampant in this, and the Trump admin has targeted specific cities for suspicious sales. If you ever wondered why after the global financial crisis the US government forced the Swiss to end their famous banking secrecy, it involved this. By ending Swiss banking secrecy, the wealthy global elite needed a way to park their loot but also in a manner that would not scrutinize them and allow them to have liquidity. American real estate transactions are exempt from all money laundering laws. Russian oligarchs, Arab sheiks and Chinese kleptocrats became the buyers that rescued the high end real estate markets after the 2008 crash because they could buy US real estate and then take out lines of credit against their holdings.
This is how it ends for California. The Manhattan and South Beach real estate game goes state wide on the West Coast. California will be dependent on foreign buyers of real estate. Maybe they will use it for a month or two in the year. Maybe they will use it for the Chinese government to set up spy safe houses. Maybe cartels will buy homes for distribution hubs and much more malicious ideas. Anyone willing to pay the taxes that keep the machine moving will be there. California will not end up a rentier society or even a Brazil. It will become an amusement park for the rich, a small class of middle men, and an incredibly poor servant class-slash-marginal borrower-slash-vote bank that will forever vote along right with them.