Prop 13, Or, California's Progressive Blindspot Illuminated
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sfbamo.com
This guy is eminently quotable too:
> “Revolt” sounds too noble to me, even “populist.” I prefer to call it feudalism.
And on the popular anti-tech sentiment:
> New, young computer programmers with six-figure salaries may easy to scapegoat as the emblem of the Bay Area’s 21st Century inequality, but even if they can afford real estate, their privilege is chump change compared to that of pre-1979 homebuyers and their descendants.
A few key observations in there:
* The power imbalance between buyers and renters in the country is already bad due to the interest rate deductions, but Prop 13 adds insult to injury. While rent control (for renters) is not widespread, owners in California (who are often the upper class stratas, especially in the Bay Area) have built-in rent control everywhere, forever. You can even pass it down to your kids!
* He uses the term BMR (Below Market Rate) instead of "affordable housing". There's been a concerted attempt by politicians to conflate these terms to buy more populist votes. As noted in the article, an important aspect of BMR is that its cost is passed on to new buyers; the perfect political tool: a tax that's not called a tax!
* Many of the local anti-development politicians are riding off the aforementioned "feudal" privilege. Kudos to the author for pulling information on a few of them. Of course the data is anecdotal, but it's amazing how many of these high-income people inherited their primary residence from their parents during their working lifetimes. That's very hard to imagine in most of North America.
Prop 13 for protecting individual residential property owners on a fixed income from escalating "assessed" property values makes a good deal of sense. Especially in a state like California, if left unchecked, would be raising all sorts of taxes and fees for failed experiments.
(Note - born/raised/ life long Bay Area resident)
Prop 13 needs a revision to exempt commercial property...
From this point of view, commercial property is at least used for economic activity. Exempting it from Prop 13 would reduce inequitable treatment of different commercial property owners, yes, but it would also impose yet another burden on productive activity, and ultimately on the overtaxed serfs. Instead of reducing feudalism, it would exacerbate it.
No, the biggest problem is precisely residential property.
Track 13 and the commercial revenue space and the ease with which getting around 13 is available.
Sorry corporations aren't people.
A librarian inheriting property worth an interesting amount shouldn't be forced to sell it based on tax predictions... when corporations have exemptions that shelter them from the same exemptions...
It is always interesting reading HN libertarian comments from people who haven't grown up in a region or community.
The discussion on manhattan and traffic is classic.
Maybe spend a few years living and understanding.
Looking forward to the down votes.
Oftentimes, properties in California (especially multi-family residential) are owned by a corp/LLC which owns nothing other than that single property. That corp is then owned by a larger company who can sell a stake in single property company if the right buyer comes around. The CPAs have avoiding a prop 13 reassessment down to a science. If you write a rent check to a company that has your street number or street name in the company name, that's why.
Much of valuable property in this state was developed before 1978 and as a result the owners are paying just a fraction of what their taxes would be after a assessment. Sales and income taxes are subsidizing this difference. Now, the counterpoint to this is that raising property taxes will result in some of those taxes being passed on to renters. While this is true, not all of it could be due to simple supply and demand. The worst offenders will be able to pass on the least of that difference. The state would also be able to lower corporate, sales or income taxes as a result of phasing in market property taxes too. Maybe that last part is just wishful thinking on my part.
Regardless of your take on residential vs commercial property and prop 13, this is a problem that is only going to get worse with time. With no changes, 50 years from now, there will literally be people and companies paying property taxes like it is 1990. The result is that in order to make up that difference, corporate, sales, income and "new" property taxes will have to be higher than they are today. If those other taxes rise enough, people leave the state for greener pastures and property values fall or stagnate which is another more painful way to equilibrium.
Significantly higher property/land taxes in this state than we have now would solve or curb a lot of problems. From housing bubbles (probably merely curbed) to encouraging cities like SF to build more densely to allowing lower income/sales/corp taxes to encourage investment, many of the states problems were created or exacerbated by prop 13. When Warren Buffett was Schwarzenegger's economic advisor during the campaign he said that prop 13 doesn't make sense. He was right.
If prop 13 went away statewide but local rent control laws remained in effect, owners would be looking around to make up the difference.
If an apartment building saw regular property tax hikes, the owner's inability to pass most of the higher tax costs on to renters would cause new unintended consequences (e.g. reduced building maintenance).
and eliminating prop 13 would mean less profit. if the experience of rent control laws over the last forty years in places like Santa Monica is any guide, the property owners will cut corners on building maintenance if they are not allowed to raise rents and pass the tax hikes through to tenants.
It's comical in an ironic sort of way walking around SOMA. You find yourself treading what is literally some of the most valuable land on the entire planet, and yet you're surrounded by automechanics, private parking garages, old warehouses, and frequently — even empty lots. In a world without prop 13 the development of this sort of low value use would be highly incentivized because your tax bill would go up with the surrounding land, but in modern day California these things can stay ~forever (or at least until a developer comes along with an offer so preposterous that the owner cannot refuse it).
I do have to add the caveat that it's mostly bad, but not _all_ bad: some of my favorite spots in town would have almost certainly had to evacuate the city by now if they weren't grandfathered into a certain tax rate (usually cafes/restaurants/bars).
This is certainly true-- it does create its share of "hidden treasures," but I find that for every favorite business that sticks around because it owns its property, I see two favorite businesses that close because they rent.
Agreed. Unfortunately it's a case where the lucky [1] survived. Even in the few years that I've been in SF I've seen a lot of amazing places disappear.
[1] I use "lucky" because no one 30-40 years ago could have predicted the disproportionate lucrativity that real estate would have compared to any other class of investment. It wasn't all that unreasonable to rent at the time.
All arguments _for_ Prop 13 are about people who live in their homes whose value appreciate abruptly. Prop 13 needs to be revised to narrowly target this group and only this group.
Prop 13 was a half-baked, short-term solution to a terrible issue. Real-estate taxes should be scaled with both income and wealth progressive tests to prevent both obscene burdens and tax dodging, so that they are affordable, encourage people both to attract residents to the state and pay their fair shares, but knowing how Sacramento dances around hardly doing anything, it's unlikely to ever be revisited without a sustained, on-message campaign and buckets of crowdfunded cash.
Prop 13, FWIW, is almost precisely the opposite of a LVT. It's been putting more of the burden of financing California onto income, sales taxes, etc, in order to subsidize landowners.
But... does that still mean people might be taxed out of their home?
I hope it would be rare, because it is a bummer, but I am convinced that there is no sustainable system in which people wouldn't be "taxed out of their home" in some cases. However, consider that they'd still get a sizeable payout, and plenty of available options in their community.
It's the sad truth about land-- if someone is using it inefficiently (which is the case with the single-family households having trouble with property taxes), it's a market signal that the land should be developed more densely...
In both places I've lived in the Bay Area, there were vacant houses on the block. In the old town, apparently the house was owned by an old widow who is in a nursing home and who refuses to sell. In the new neighborhood, the house has fire damage. The owner apparently has several properties around the Bay, and just isn't in a hurry to do anything -- the house has been that way for five years or more.
I hear from people living in Palo Alto that their neighborhoods are dotted with vacant homes owned by overseas investors.
Meanwhile, people making $200k a year are commuting an hour each way because they can't afford to live any closer.
Market rate property taxation would provide a strong incentive for these owners to either sell or rent out their properties.
http://www.cbc.ca/news/canada/british-columbia/vancouver-vac...
Another option would be a Community Land Trust[1], which would take the responsibility of land ownership away, and allow residents to have more stability at the cost of not directly being responsible for land stewardship.
[0] http://kaalvtn.blogspot.co.uk/2013/01/a-poor-widow-bogey.htm...
If the purpose of property taxes is to encourage or force efficient land use, what happens to local zoning laws? The taxes go up and the homeowner responds by trying to build, say, a 4 unit apartment where their single family dwelling was - but the city zoning does not allow it.
Now what? Where's the increased efficiency of land use?
If you cant afford the tax, you should move out and sell/rent out. This whole premise is absurd.
Sorry down voter. But this is a fact. We have property tax to discourage under utilization of scarce resources. If you can't afford the tax rate, you should you should find some way to increase your income. This is a prime example of why we don't need the 0.001% to screw over the rest of us. We the 99% are perfectly capable of screwing over ourselves!
The "community" doesn't owe long time residents or new residents anything just because they decided to buy instead of renting. Let's be rational here.
This makes zero sense to me. Someone bought the property 50 years ago and now is the sole owner, but it is reasonable to force them off their property / out of their home? I get it, other people are willing to pay more for it, but it is the owner's property.
I'm going to have to ask for a citation on that. In places where land is cheap and plentiful, and there not even remotely a problem with under utilization of scarce resources, they still tend to have property taxes. Property tax rates tend to be set at a level that correlates almost perfectly with local government funding needs. That suggests that we have property taxes to fund local government.
You own land in downtown SF? That's a very scarce resource, and you ought to be taxed on it in order to make sure it's correctly utilized. (Note: the infrastructure within SF is relatively good, which is theoretically what the land tax is paying for.)
You own land outside of a small town and you wish to build a factory? Your land is next to valueless, and the improvements you build shouldn't be discouraged through taxes. (Note: the infrastructure out here is fairly poor, which explains why the land tax is minimal.)
To jump to a theoretical conclusion, Joseph Stiglitz demonstrated through the Henry George Theorem[0] that the quantity of public goods a municipal government supplies is equal to the amount it would receive in a land value tax, given certain assumptions. In short, a land value tax would optimally fund local government.
It would make more sense to me to either do nothing and let home owners get a reverse mortgage and use that to pay their tax bill or have the gov't just put a lien on the property and when the next sale happens they get their cut.
It would seem to me that homeowners facing a higher tax bill because their home drastically increased in value should be the last ones you subsidize.
Suppose I hire a young, unknown artist to paint a portrait for me, for $100. Thirty years later, the artist is very famous and recognized as one of the most talented and important artists of his generation, and his early works (such as my portrait) sell for tens of millions of dollars.
The way we handle taxing that tens of millions of value that my painting gained is that when I sell it, the difference between the sales price and what I paid counts as income (probably long term capital gains income in this case), and I pay tax on it.
Property taxes are usually used to fund local government and the services it provides. Those don't really correlate well with the value of property. My house and land are assessed about twice as much as that of my neighbor two houses away for instance, and about half of my neighbor across the street, but we are all provide about the same burden on the city for services and all reap about the same benefits.
Thus, I wonder if the way we should do this is that property taxes to fund local government should simply be per lot (or maybe per family, or something like that), and not be tied to the market value of the property. The value of the property would figure into income taxes, when those changes are realized during a sale of the property, using the same rules that we now use for personal property.
That's not fair.
I am young so I do not benefit from Prop 13, but I can see why its an undue burden on people who just want to live their life.
Someone suggested pegging it off of income, or other assets, and I think that's fair.
Maybe it's even more fair to peg the local government budget based on what could be collected from the surrounding homeowners. If the government can't afford to keep the neighborhood super nice, then perhaps the home value would remain low, thus self-justifying the low tax.
Man buys a house house for $100K in 1980, pays it off by 2010 and owns it outright. The value of the home has increased to $1.5M. All of his mortgage payments amounted to $250K, so that's $1.25M in profit.
He's on a fixed income, so he can't afford it when his property tax bill rises to $12,000 per year. As a result, he get a cut on his property taxes while his $1.25M in equity just sits there. After he dies, all that money goes to his heirs.
I consider that unfair.
(I live half a world away from there and really don't have a horse in that race, but you have to be wilfully blind not to see both the injustice and the economic inefficiency.)
What on earth is fair about taxation based on property value anyway? Other countries e.g. the U.K. do it by property size and the implied use of services.
Why shouldn't it be possible to buy a home safe in the knowledge that you won't be forced out because of the choices of people around you that you have nothing to do with?
If you're going to talk about random lotteries - why aren't you taking about raising taxes on people who made paper money from other unsold assets that happen to have appreciated dramatically in the last 30 years?
Nordlinger v Hahn (1992)[0] challenged the Constitutionality of this under the Equal Protection Clause of the 14th Amendment. They ruled 8-1 that it was (John Paul Stevens dissenting)[1]. Stevens' dissent is worth reading. To excerpt:
> These property owners (hereinafter Squires) are guaranteed that, so long as they retain their property and do not improve it, their taxes will not increase more than 2% in any given year. As a direct result of this windfall for the Squires, later purchasers must pay far more than their fair share of property taxes.
[0] https://www.oyez.org/cases/1991/90-1912
[1] https://supreme.justia.com/cases/federal/us/505/1/case.html
Ultimately, this will not sufficiently increase housing stock enough to solve the problem. The problem here isn't that the State of California isn't making enough money in income taxes, but that there's an artificial ceiling on the tax base, because people can't afford to move in (to new developments) and start paying property taxes themselves.
Ultimately, allowing people to stay will only exacerbate the problem. NIMBY is a political phenomenon advanced by an artificially small voting base which is acting in its own interests. If their taxes normalize, and they start to move out, then so does their political influence also start to wane. This will gradually allow for new development to start up and for new people to move in, which will both bring additional tax revenue and proportionally reduce political support for NIMBY. Over time, this becomes a self-reinforcing positive cycle for development.
And no, I don't have any sympathy for Grandma and Grandpa having to move. First of all, because they're going to get a massive payday for doing so, since their real estate is worth so much. And second of all, because the laws of economics are blind. Are Grandma and Grandpa really more deserving of affordable housing than anybody else? Prop 13 is the government picking winners and losers, and calling Grandma and Grandpa "losers" because they were forced to sell for millions is, quite frankly, offensive to anybody who is losing under Prop 13.
The reason this doesn't apply to a place like SF is that the tax assessment is in the noise: a severe shortage of places raises the price. If the tax assessment were adjusted normally, rents would go UP.
I benefit from Prop 13 in multiple ways: not only has my property tax been largely fixed, but I live in a neighborhood of people who've mostly lived in their homes for decades. It makes for a nice mix of ages from 20s to 70s. Those on a fixed income would have been forced out, and while it's nice to have new neighbors move in the stability is valuable to me as a QoL issue.
(Prop 13 has screwed up things like school funding and the like as well -- I'm quite aware of its problems. This screed simply doesn't get into them).
As I've argued a few times on HN [0] [1], the way it should have been done would have been simply to defer the excess tax until the property was sold, not to simply return it to the homeowner.
Basically you'd solve nothing and make it worse.
No, this wouldn't happen, because the lien is only on 1% of the excess gain (the amount the value increased over 2%). If, for one example, the value jumped in the first year and then went flat, the payment would continue to grow at 2% annually until it caught up to the value. The only scenario that generates a lien larger than the owner's gain is if the market has been up but then drops sharply just before the owner wants to sell -- in short, if there was a bubble. Well, bubbles produce lots of dislocation; I don't think they make for a good argument against this proposal.
But they aren't. So it doesn't.
Peoples reaction would be exactly what I described and your explanation doesn't change that. It just shows you're incapable of understanding why they'd react that way.
I get why people react this way: they'll look for any way they can to shoot down a proposal that would have them paying more taxes. So even though the objection you're raising is not, in fact, true, it's a lie people would want to believe.
I know it would take a sea change in sentiment to enact this proposal post-Prop. 13. (I don't know that such a sea change is impossible in the long run, which is why I'm talking about this now, but I understand that it won't happen soon.)
But if we imagine ourselves back in 1978, and if the structure I'm suggesting had been the proposal on the table instead of Prop. 13 as it was, it would have passed easily, being a clear improvement on the status quo ante. There would have been no case in which someone would have paid more tax, or done so at a less convenient time, than under the previous system -- quite the contrary. So it would have been totally possible then.
But again, given that Prop. 13 exists in its present form, the modification I'm proposing is a tough sell. Maybe we'd have to stipulate that the amount of the lien will be limited to 1/2 of the gain on the sale, after commissions, and would be zero in the case of a loss.
BTW, I'm attempting to respond constructively to your post on principle, but I don't feel yours was offered in the same spirit.
If it wanted to be fair, Prop 13 should be exactly the opposite of what it is: it should tax the one who bought the house 10 times cheaper more and the new guy less.
There wasn't the same need to retire/die in the house you raised your kids in, its a ton of maintenance for too much space anyways. Why do elderly folks on fixed income in CA want to keep their homes forever, is it because there are no smaller condos in the same neighborhood (development problem) or because they expect the property value to increase enough to warrant keeping the home. The later doesn't seem to apply in Toronto as home values in Toronto have skyrocketed...
If you allow the clowns in the state legislature to raise taxes ad infinitum they will do so, and then wail endlessly about white flight.
California Secession Now; they must serve as a warning to others.
- There are older folks that have owned their homes for over 30+ yrs that are on fixed income that wouldn't be able to absorb increased taxes. My grandparents would've been in this case.
- There are folks that are middle class folks, think central California that couldn't absorb increased taxes.
- The variability year to year dealing with the assessments makes it difficult to plan for the potential increase in taxes. Look at what happened in Cook County in Illinois. Some homeowners were facing thousands of dollars of taxes none of them were prepared to pay.
The argument of telling someone to just move if they can't afford the taxes doesn't fly with me. Because I would just put it back on those individuals, you don't like the housing prices... Get out of the bay area. I mean I know you can go to Bakersfield get a palace for 500-600K. Case in point, brand new construction 462k 4BR, 3BA (http://www.zillow.com/community/camden-cove-pinnacle-series/...)
I think there are ways to address some of the issues without a blanket reversal of Prop 13, because this would effect more than just the bay area.
So what potential changes could you make. Couple of ideas:
- Transfer of property through inheritance would be subject to re-assessment. At that point the original owners have presumably passed and the new owners aren't necessarily living in the property. If the taxes were adjusted to the current property value that decreases the profit from just renting the home.
- Remove the applicability to commercial properties. Other articles on the subject that I've read, describe techniques that people use to try to game the re-assessment of a property through exchanges of corporate entities, eliminate that practice, especially for homes that are zoned residential.
- If the issue is around vacancy, do what Vancouver did, tax vacant properties. If there is an abundant supply of vacant homes, force rental of those homes through taxing of vacant homes. That increased the supply of available homes, depressing rent and lowered home prices within a few weeks of its enactment.
I'm not saying at all that Prop 13 is perfect and no doubt there is abuse of the rules. I'd focus on closing the loopholes around transfers of property first before trying to change something that would affect every single homeowner.
I mean – you can certainly argue that people are wrong to try to protect the unique character of their neighborhood. But that argument seems to be completely separate from Prop 13, except maybe with regards to the line of "protecting incumbent residents".
When this is decoupled, residents (who control all zoning decisions) have every incentive to approve every anti-housing measure, insofar as they're insulated from the costs.
In short, while I would fully support the repeal of Prop 13, I don't think it would suddenly result in an about-face on zoning policy to limit home price appreciation.
MA has its own "Prop 2 1/2" which caps real estate taxes at 2.5% of assessed value, and limits annual increases in the total assessment to 2.5%.
Quite literally, the cities and towns are continuously re-assessing their property base, and literally re-set the tax rate on an annual basis to deliver the revenue that they need to run the town. Thus, you see Cambridge's rate plunging by 25% year over year, presumably as property values on high-dollar properties have boomed. This gives lie to the idea that politicians would just take the increased taxes from higher property values as a windfall. In actuality, the tax burden is redistributed as real estate wealth is created.
In Cambridge, MA, its .69 percent (down from .83 percent in 2015 !!!), with an exemption on the first $277,000 in value.
These are communities with top-notch schools and amenities, and a state-wide income tax rate half that of California's.
Same idea but cap it at.. 2-3% a year or something? Would protect buyers from wild swings but allow growth in tax revenue over time.
It's the lock-in that's the issue, surely?
Also then fix it just for fixed income as an exception. Or make it a tax credit you can claim from state.
There are a ton of really easy and trivial solutions that any legislation that was designed to solve that problem could of used.
It didn't - they knew what they were doing.
And yes, the site is connected with the Yimby Party[0] and SFBARF[1], who have been featured in HN before.[2]
FWIW, I helped put together the website, which uses Armin Ronacher's Lektor CMS.[3] And as far as this has gone, it's been a tremendous success, for putting together a straightforward news site that is usable for both tech-savvy operators as well as those unacquainted with the command-line.
[0] http://sfbamo.com/news/tweets-from-the-front-palo-alto-city-...
I'm a "tech worker" who moved here for a job, and I'm pretty sick of being the scapegoat for the housing woes while half my income goes to my landlord who enjoys the benefit of being perceived as an upstanding long-term member of the community as he grows fat suckling at my teat.