Palo Alto Weekly

Spectrum - February 10, 2012

On Deadline: Silicon Valley is 'two valleys' — Data at Joint Venture conference reveals growing split between well-to-do and the struggling

by Jay Thorwaldson

The main course at today's (Feb. 10) annual Joint Venture Silicon Valley "State of the Valley" conference in San Jose is a fact-filled platter with the 1978 Proposition 13 tax-limitation initiative in the center.

It is surrounded by all the trimmings of the Silicon Valley Index, the annual economic-status report laden with charts, graphs and statistics — a dry diet for the average person.

But if it were possible to translate the numbers and charts into lives of real people there would be heart-wrenching stories along with surging signs of recovery. Joint Venture President and CEO Russell Hancock says the early signs of recovery must be balanced against a disturbing trend toward "two valleys," one doing incredibly well and the other struggling to survive economically.

Hancock noted the broader Silicon Valley subregion (Santa Clara and San Mateo counties, as well as parts of several neighboring counties) was among the last areas nationally to feel the impact of the 2008 recession, and it is one of the first to show signs of recovery.

Yet there is a darker side holding back the recovery. The drags include an out-of-date property-tax system that no longer reflects the driving engines of the economy: Internet-based purchasing and the dominance of services rather than property and sales taxes on which government and schools have depended for much of the past century.

"Small businesses are clearly not out of the rough," Hancock said. "The public sector is still in the throes of a fiscal crisis and median household income continues to fall as the gap between those succeeding and those struggling grows wider and wider.

"It's as if we're becoming two valleys."

Emmett Carson, president and CEO of the Silicon Valley Community Foundation, which has partnered with Joint Venture on the conferences since 2008, outlined concerns about the lingering side effects of Prop. 13, the 1978 tax-revolt initiative.

Both Hancock and Carson reiterated a key point: That the 2008 "Great Recession" broke the property-tax system by causing home values to plummet in most of California (Palo Alto being a notable exception).

Carson referred repeatedly to "the Great Recession" of 2008. He said there is no real hope for a quick recovery that could restore much of the pre-2008 tax base.

"The bottom line is that because of the Great Recession the system is broken," Carson said.

Hancock emphasized that the purpose of this year's special analysis of Prop. 13 is to present facts as a basis for a dialogue during the coming year. "The spirit is not to advocate. We may do that, but that is not the spirit of this document," he emphasized.

Just presenting facts has its own rewards, he said.

"The great fun of this is to back away" and watch reactions to the facts, he said. "It's a Rorschach test of our region."

Coincidentally, the section of the Index that includes the Prop. 13 analysis is bordered in black. Not intentional, officials said. (The Index is at www.jointventure.org — a press release succinctly summarizes the perceived economic pluses and minuses.)

The analysis of Prop. 13 was prepared by Steven Levy of the Palo Alto-based Center for the Study of the California Economy, while the overall statistics of the Index were prepared by San Mateo-based Collaborative Economics, represented by CEO Doug Henton and Vice President Tracey Grose.

Levy, who has already taken heat from Prop. 13 defenders (as have I, from a blog posted Jan. 24 at www.paloaltoonline.com/square/index.php?i=3&d=&t=16938) nevertheless outlines conditions that led to Prop. 13's appeal. The background of its 65-to-35 percent approval included a dramatic rise in home values in the 1970s. Median home prices shot from $26,880 in 1971 to $70,890 in 1978, a 164 percent increase (at 7 to 28 percent per year). This in turn led to property re-assessments and increased taxes, and voters "feared that more increases were on the way."

Do those prices seem like peanuts today?

Median home prices were "far outpacing the rate of overall inflation and income gains. Even though income gains were historically large and outpaced the growth in consumer prices, both measures were overshadowed by the 164 percent increase in median home prices," Levy said.

For persons on fixed incomes, "the effects of rising home prices, assessed values, and property taxes were even more of a problem" financially.

There was a final straw: "Though assessed values were surging, local governments did not respond by lowering local tax rates." Seeds of a tax revolt.

Voters easily understood the two main effects of Prop. 13: the 1 percent limit on property tax versus property value, and the 2 percent annual cap on increasing property taxes for properties that didn't change ownership (residential and business).

But Levy cites three other elements not widely analyzed during the emotional campaign.

The best known today is that Prop. 13 requires a two-thirds voter approval for future state taxes, local special-purpose taxes and local bonds.

Two other aspects were (and are) virtually unknown: Prop. 13 (1) prohibited local governments and school districts from going to voters to seek approval of property-tax increases to maintain or increase public services, and (2) transferred the authority to allocate property taxes from local jurisdictions to the state.

Levy sums up: "Now more than 30 years later, thousands of pages of analysis have delineated the major consequences" of Prop. 13:

1) The 2 percent limit on assessed-value increases means they are now about half as large as inflation increases over the past 30 years.

2) Most local school revenues now come from the state instead of local taxpayers, "severing the connection between local taxes and quality of services."

3) Cities and counties responding to sharp declines in revenues "have introduced a wide variety of new local taxes and fees," increasing since the 2008 recession.

4) Tax measures that would have passed by majority vote have been defeated by the two-thirds-approval requirement.

5) Owners of similar-value properties "pay substantially different amounts" in taxes depending on the date of acquisition.

6) The share of property taxes paid by homeowners has increased, while the share paid by owners of non-residential properties has decreased, a significant shift.

There are complications in analyzing the effects of Prop. 13 due to state budget decisions, changes approved by voters, and the recent recession with its further plunge in revenues, Levy notes.

But the overriding message of the conference is that there are no easy fixes, just plenty for Silicon Valley — and officials and citizens statewide — to talk about in the next politics-laden year.

Or maybe for the next third of a century.

Former Weekly Editor Jay Thorwaldson can be emailed at jthorwaldson@paweekly.com with a cc: to jaythor@well.com.

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