Alan Reynolds

Washington Times columnist Don Lambro recently wrote that some supply-siders (not me) were wary of Arnold Schwarzenegger because adviser Warren Buffett said it makes no sense to pay more property taxes on his $500,000 house in Omaha than on his $4 million house in Laguna Beach.

That remark bothered many but just struck me as naive. Having lived in California for 27 years, I assumed that a half million bucks in Omaha probably buys a much nicer place than $4 million in a California beach town. Buffett has owned that California house for decades, so he didn't pay much for it. Ever since the 1978 Proposition 13, California's constitution requires that property taxes be initially based on what you paid for a house (not on what you might sell it for) and annual increases are limited to 2 percent. Since all houses are eventually sold, this works out surprisingly well. The assessed value of California property rose 4.8 percent a year from 1990 to 2002, virtually identical to the 4.9 percent annual growth of personal income. Schwarzenegger obviously understands this, though Buffett did not.

What made no sense was for Buffett to even hint about a policy change that would require an unlikely change in the state constitution. There are much easier and quicker chores to attend to. Buffett's blunder demonstrated that it made no sense for Schwarzanegger to go all the way to Nebraska in search of economic advice from a non-economist. The tens of thousands who flee California taxes each week are not heading for Nebraska, which the Tax Foundation rates as having the 45th worst tax climate in the nation (California is 49th).

If Schwarzenegger were looking for economic advice from a Democrat, he could have called Robert Hall at Stanford, co-architect of the Hall-Rabushka flat tax. If he'd settle for a Republican, he could have asked Mike Boskin, David Henderson, Art Laffer or Ben Zycher. There's plenty of local talent, and not just among such older giants as George Schultz. Indeed, Schwarzenegger himself seems fundamentally sound on the critical tax and spending issues, and so do rivals Bill Simon and Tom McClintock.

The trouble with California taxes is not that property taxes are too low, but that income and sales taxes are way too high. The personal income tax rates are high enough to provoke an exodus of skilled people -- a "brain drain." Corporate tax rates are high enough to provoke an exodus of business capital -- "capital flight." Sales tax rates are high enough to provoke wholesale tax avoidance.

Alan Reynolds

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