The mega-investor Warren Buffett famously lives in Omaha, Neb., but he owns two houses in Laguna Beach, Calif. Buffett's three houses became a small issue in the recent California recall campaign, in a way that needn't detain us. What's interesting is a letter Buffett wrote to the Wall Street Journal, which published it on Monday. In it, he contrasted the tax burdens on his two virtually adjacent California houses. One house is worth about $2 million, and the property tax bill on it runs about $12,000 a year. The other California house is worth $4 million, but annual property taxes are only $2,700. Double the house, one-fifth the tax burden—and both in the same state. Buffett's point was: Crazy, no? Answer: Yes, crazy indeed.
The craziness comes from Proposition 13, the famous antitax initiative of 1978. In many ways Prop. 13 created the political world we now live in. It was the first big and successful conservative use of "initiative and recall"—the provisions in many state constitutions, especially in the West, allowing citizens to enact laws by popular vote and to vote out incumbents without waiting for their official terms to expire. These populist provisions were artifacts of the progressive era around the turn of the 20th century and were designed to be tools of the left. But in recent decades, they have become highly successful tools of the right. Even when some tax-cutting proposition loses, the campaign serves to organize and galvanize conservatives. And even on the federal level, where representative democracy cannot be overruled by a few thousand signatures and a special election, our politics is clotted with the same kind of laboratory-designed hot-button issues—term limits, gay marriage, flag-burning, taxes, taxes, taxes.
The specific craziness of Prop. 13 was that it didn't just roll back property tax assessments. It ordered that major increases in property tax assessments could occur only when a home changed hands. For a quarter-century now, California real estate prices have continued to soar. As Buffett points out, the results are wild disparities in tax burdens. The biggest factor in setting your California property tax bill is not the value of your house, or your general financial condition, or the tax rate set by your local community. It is how long you have owned your property.
This creates some perverse effects, similar to those of rent control. People stay in big houses they no longer need because moving to a smaller place will mean a huge property tax hit. With these houses off the market, people who do need a bigger place have fewer to choose from and must pay more to get one. But the real perversity is one of fairness. What possessed the people of California to vote for a system in which two identical houses, side-by-side, carry radically different tax burdens?
The answer to that is grandfather-clause politics. A "grandfather clause" is a provision in a legal document that says, roughly: Whatever unpleasantness this document involves does not apply to anyone who is already doing whatever it is the document is about. If you're in the hot tub, you can stay there. But if you're not, you can't jump in. The term originated in post-Civil War laws imposing a poll tax but exempting anyone whose grandfather had been eligible to vote (nudge, nudge). California's Prop. 13 was a sort of rolling grandfather clause. Everyone who owned a house at the time it passed was exempt from big tax increases—until that person bought a new house, when he or she became "grandfathered" once again at a new level.
A more straightforward, almost literal, example of grandfather-clause politics is President Bush's Medicare reform proposal. (And the various Democratic proposals generally do the same thing.) As Bush describes it, the process of saving Medicare from financial ruin will primarily involve adding new services and offering delightful new options for the nation's wonderful senior citizens. But just in case seniors don't find these options quite so wonderful, Bush promises that all current and imminent retirees will be allowed to opt out of nirvana and retain their present arrangements. Unsaid but implied: Future retirees will not have this choice. These folks (possibly including you) will be stuck with the new options, which either are not going to solve the Medicare problem or are not going to be as pleasant as Bush portrays them.
Bush's most recent round of tax cuts includes a gimmick that isn't exactly a grandfather clause but has the same political use and effect. Some of the cuts are scheduled to expire after nine years. This helps the 10-year budget outlook to appear less catastrophic, although nobody believes it will really happen. Politically, that doesn't matter. People can enjoy their tax cut now and worry about what happens nine years from now in eight years and 10 or 11 months.
The appeal of grandfather-clause politics to politicians is obvious. The people enjoying some benefit now are going to be more attached to it than those who may get it in the future. People are more attached to advantages they enjoy now than to advantages they themselves will be due in the future. Grandfather-clause politics is a way to buy off the noisiest elements of opposition among voters, or even within individual voters.
The good thing about grandfather-clause politics is that it greases the wheels of change. Medicare reform may be impossible without buying off the seniors. Grandfather-clause politics takes a great character flaw of democracy—its short time horizons; its overvaluing of today and undervaluing of tomorrow—and performs a bit of jujitsu, using that flaw against itself. But grandfather-clause politics is undemocratic and usually unfair. Why should side-by-side neighbors pay wildly different property taxes? Why should general tax revenues from today's workers be used to exempt current Medicare beneficiaries from reforms that today's workers themselves will have to endure?