It is amazing how so many people continue to misunderstand the intent, extent and impact of California’s Proposition 13.
• Is $6,000/yr on a modest 2br tract home too low?
• Is it fair to charge tax based on the stupidest person’s in the neighborhood’s price?
• Is it fair to charge tax based on what the government thinks you owe?
• Is it fair to charge based on your pro rata share of what the government wants to spend?
California and Prop 13 is the stuff of legend and many a Doctoral Thesis. Starting at the beginning:
1974-1975 property valuations and property mil rates were spiraling out of control relative to municipal services rendered. So what. BFD. The big bad government was stealing and people were balking. Enter the “democratic” process. So in 1978 the “people” voted their bread and circuses by limiting property taxes to 1% of the 1975 assessed value and -sales- price thereafter.
Using a theoretical example. A house bought bought in 1995 for $250,000. Today’s price, $1m. Yeah, weird. So anyway the effective property tax rate is 1/4 of 1% annually. The sames house provided
outright, at today’s price, property taxes would be $900 per month. The owner cannot relocate to a different but equivalent home because of the tax consequences. Think of it reversed. The owners’ personal travel budget makes it desirable to commute $900 worth (direct costs and my value) rather than move closer to work.
Prop 13 so raised the value of good housing that it also all but requires two earner income families. That means two sub-optimal commutes and child care travel trips. See where the Exurban Nation comes from?
Prop 13 correctly protects people and businesses against arbitrary government distortions of the market. That’s one point of government regulation in the first place isn’t it?
I have no truck with the market aspects nor even the speculative portion of home buying decisions. I just think Prop 13 does a good job of capitating some of the non market risks with no external costs. I’m sure others feel otherwise and I’m only expressing an opinion among many. Perhaps we can go about this in reverse. I’ve got a 4 bed 2.5 bath SFR California ranch. How much should I be paying in taxes? California has 36.6 million people and spends/incurs $116 billion. That’s a whopping $3400 per person. How much of that should come from property taxes? It isn’t easy to answer in part because, for instance, what happens to the property tax that is sent off to Sacramento so that from there lots of money can be transferred from the high performing school districts to the worst school districts. You see in 1978 the same year as Prop 13 it was deemed illegal to spend different amounts locally as previously when California was 4th in the nation for school performance. So now we spend different amounts locally as directed by the State as commanded by the Supremes and are now lowered to the 4th worst in terms of results.
Sorry, I got distracted. Were we talking about investments and government meddling? No! We are talking North San Diego County real estate. As long as Prop 13 continues to protect NSD real estate from fractional confiscation it will continue to be a nice place to live and invest. [At the right price of course.]
You want tax reform? I’d rather herd cats.
Prop 13 discounts the effect of older sales on the property tax revenue stream, as RB illustrated. The older the sale, the less ongoing contribution to revenue from that sale via property taxes.
Another way of saying the exact same thing is that is has served to emphasize very recent sales. The more recent the sale, the more it matters to the money brought in via property taxes.
An obvious and inevitable outcome is that California becomes more exaggeratedly sensitive to fluctuations in housing prices. In the up years, money comes pouring in and government programs expand to spend the extra money. During the subsequent bust period, you get less revenue exactly at the same time that you’re saddle with expanded spending programs. We would be better served with a scheme that averages over a longer period, reducing both the uptick in revenues during booms and the downtick during busts. Prop 13 should be recrafted to avoid its obvious problems while still trying to retain its core principles.
Rob,
We can beat this issue to death, I know. But, just as you are convinced that Prop 13 is a good idea, I’m also convinced that it is a horrendous idea. Look, I get the “please don’t tax me out of my house because some idiot down the road paid more” aspect of it. I fully get that. So, some sort of Prop 13 “lite” may be required to keep things sane. But the old lady will sell her 2 million 50-year old house at the beach one day. Well, when that day comes, she should be hit with a capital gains tax that is exactly equal to the property taxes that she avoided paying over all these 50 years due to Prop 13. It could be as simple as that. Nice and fair.
Look, Rob, having your cake and eating it too is unfair to everyone else. Lots of people in these nice old coastal neighborhoods pay less property taxes than everyone else, and then they walk away with millions when they sell.
It’s all politics. It’s the very definition of politics, I would argue. The new California residents (many of whom, like the Indian and Chinese engineers, won’t get the right to vote for a decade or more) get the short end of the stick. Prop 13, Mello-Roos, zoning laws, opposition to home building, you name it, everything is stacked against them.
PS: Prop 13 aside, I agree with your rant about the foolishness of government expenditures.
PPS: I do live in a nice old coastal neighborhood 🙂
First one of the smartest investment minds, Warrne Buffet, feels excactly the opposite of you and personally I listen to Warren and take what he says very seriously.
Second, higher property tax on recent sales vs. much much lower on old sales distorts rather than makes a market work. Is it fair that those of us who are younger should pay a much disproportionate share of taxes? If you feel a anti regressive tax is fair (poor pay much more than rich) then I guess you are right.
Third, is it smart to have a system that creates a very strong disincentive for younger people not to live in CA? Surely you must agree that we need to lower, not increase the cost of business and having a property tax that does not unduly penalize new home buyers over existing homeowners will in the long run lower costs.
And finally, the property tax under Prop 13 in my economic mind is similar to rent control. In the long run almost all economists, right or left, will tell you rent control is a very bad idea for economic development.
I think you should strongly re-consider your position on Prop 13 if you want a state that has any chance of future and sustainable economic growth.
Prop 13 is insipidly stupid and should be repealed.
I’m certain that any attempt to mess with Prop 13 would result in a taxpayer revolt/war of mega proportions. Had it not gone into effect in 1978, property taxes on my 100K valued condo would have been over $6000/yr. Many senior citizens would have been forced to sell their homes. Renters are the big complainers about Prop 13 because they don’t and can’t own their own home and resent people who do own. Screw them.
If they repealed Prop 13 I would never buy a house in California.
Did you know it applies to commercial real estate, too, though? I wouldn’t mind if strip mall owners got re-assessed to current market value.
The problem then is the same problem now; not so much taxes as spending. Prop. 13 was an attempt to rein in the beast, and yet all it did was shift it’s feeding ground to income & sales taxes. Sigh.
A better solution would’ve been simply to limit growth of overall state tax revenues — from any and all sources — to the rate of state growth. Unfortunately that did not happen. Oh well.
The best part of Prop 13 is the super-majority to raise taxes. [Too bad the minority party has no integrity and no balls.] The worst part is the loophole that allows a longtime homeowner to borrow $1M against a house purchased for $100K without changing his/her tax basis — paper profits my a$$. Oh, and the most egregious Prop. 13 ruling ever was that over “recapturing”.
I can live with the “welcome stranger” aspect of Prop. 13 because I’m comfortable in the knowledge that California RRE is on the verge of a historic meltdown… and I’ll buy at the bottom, locking in low taxes forever more.
I have to get into the Pro Prop 13 camp. Yeah, so what if it keeps the older coastal neighborhoods intact, those people aren’t likely to sell anyway unless they have to. What would be nice is an amendment that anytime there is any change – refi, transfer, etc the property tax resets to current value. This would keep people from refinancing too much to cash out of their house or attempting to transfer it within the family to hold onto the low tax rate.
My support for Prop 13 is based solely on what the CA legislature would do with the ability to raise property taxes instead of balancing the budget and learning to live within their means. 31% of the CA budget goes to K-12 schools, yet our schools are at the bottom of the list. More money isn’t going to solve that problem, the problem is the rot that goes all the way to the top. We spend too much on administration and not enough on actual schools. All the money we currently throw at schools isn’t trickling down, it’s pooling in administration.
Raising property taxes only allows the legislature to keep making bad decisions. It’s time to start cutting the fat.
Well, once Prop 13 was put in place, it’s almost impossible to go back. The current system unfairly burdens new citizens and families in CA with a disproportionate property tax.
There are some things that can be done to make the system more fair, because getting rid of it completely is not going to happen.
such as:
– Allow the current limit on property tax increase to continue for residents with 60+. Must be primary residence, name on lien. Lien can only have owner, partner, etc. However, no children of owners can be included on lien.
– Transfer of lien/title to family members/trusts/etc in a non-sale would trigger reassessment
– Keep tax increase limit for first 2 years of ownership.
– After 2 years, some type of graduated increase in property tax increase would occur up to a higher limit, say 3-4x the current
– At fair market assessed value over $2M, property tax is assessed on market value. This could be graduated in so it is not a step jump in tax burden.
– Prop 13 only occurs on primary residence. So 2nd homes, investment property is taxed at fair market value.
The main point is to limit Prop 13 in the middle tier of homes so prices don’t jump as quickly and allow for families to own primary residences. In other states, property prices don’t rise so much since the tax burden increases also.
I’d love to see a chart historically breaking down K-12 expenditures by category. I’d be extremely surprised if the amount actually going into the classroom (sans teacher) was up on a percentage basis anywhere close to the salaries, benefits and pensions of teachers, administrators, etc. We already know that spending has been up 40+% during Ahnold’s “tenure” despite declining enrollment.
OT, but…
http://globaleconomicanalysis.blogspot.com/2009/05/option-to-shut-down-fannie-freddie.html
Where will housing prices go when there’s no mortgages?
I don’t understand all this pointless discussion about whether Prop 13 is “fair” or not. Fair’s got nothing to do with it. The significant net effect of Prop 13 is that in this state we have relatively low taxes on economic rents and relatively high taxes on productive industry and commerce. Anyone who doesn’t get why this is a very bad thing, I can’t help.
I’d love to see a chart historically breaking down K-12 expenditures by category. I’d be extremely surprised if the amount actually going into the classroom (sans teacher) was up on a percentage basis anywhere close to the salaries, benefits and pensions of teachers, administrators, etc.
Try this link.
N.B. NOT JtR
Rob Dawg is a rent-seeker, naturally he is going to like things like Prop 13.
People’s positions on things like Prop 13 are rarely based on logic, but rather their position in the economy.
I think for the purposes of Jim’s excellent blog we can all agree that dimunitions to Prop 13 would severely impact the regions of California where he does that thing he does so well. Basically the monthly cost of housing rented or purchased would jump. Eventually it would all seek a new level but the process would be disruptive to say the least.
W.C. Varones said it best. Without Prop 13 the innate value of houses in California are imperiled.
For all its obvious flaws Prop 13 is two things; consistent and voluntary.
N.B. NOT JtR
Rob Dawg is driving his own hobby horse.
Wake me up in a week when Jim’s back.
Housing follows employment.
Props 1A-F are going to fail.
The Assembly has already said we have “revenue” shortfalls and that they’ll raise taxes…
Prop 1F has a 70% approval rating among likely voters.
N.B. NOT JtR
Poor test scores have little to do with the school budgets and everything to do with who is attending these schools. We are importing poverty by the bucketful and it will take generations to get them up to speed, if ever…
(my bet is it will never happen and we will become a South American style nation with little real enterprise or commercial productivity)
I don’t know if we’re really are 4th worst in the nation. I don’t know if it’s even possible to measure that kind of thing. For example, you can’t use SATs (you’ll get skewed results). Illinois will soundly beat California in terms of average SATs… until you realize that 50-70% of California students take SATs and the corresponding percentage in Illinois is only 10%.
I do know that California is in the bottom 5 in the country in terms of white students and in the top 5 in terms of english learners. There are five states in the country with oversized populations of first and second generation Mexican immigrants. They are: California, Nevada, Arizona, New Mexico, and Texas. It does not take a genius to figure out that these five states will have low overall scores.
If you compare scores of California whites against scores of Illinois whites, maybe things won’t be looking quite so bad.
The taxes in California are some of the highest in the country. I’d say they’re pretty maxed out for what people will pay. The state government has spent outrageously and got caught in the downturn. They’re answer? Raise taxes.
I understand folks complaining about high property taxes vis a vis people who’ve lived in their houses longer. With no prop 13, however, the same thing would have happened to property taxes – they’re be maxed out now and you’d be paying the same taxes, if not higher than you are now.
The taxes in California are some of the highest in the country. I’d say they’re pretty maxed out for what people will pay.
The original 2009-10 budget expected to collect $103 billion for 36.8 million people in general fund revenues, or $2,800/person. Latest governor’s budget (with higher sales tax, cigarette taxes, and everything) is based on $97.7 billion collections or $2,650/person. Special fund revenues were projected to amount to $18 billion, or $500/person. If we add up general & special fund revenues, the result ($3,150) is basically in agreement with Rob’s claim of 3,400 per person.
Texas, which should be the epitome of fiscal responsibility, expected to collect $156.8 billion during the 2008-09 biennium, with the population just over 24 million – which comes out to $3,200 per person per year. And life in Texas is way cheaper than here, so they can afford to pay less to state employees for the same jobs.
2009-11 biennial budget of the state of Oregon totals $54 billion from all sources. Given the population of 3,790,000, that’s a whopping $7,100/person/year. Where do they get the money? It turns out that they get to the tune of $2,500/person/year in handouts from the federal government (which is almost as big as our whole budget). A big source is an opaque category called “other funds”; it seems that the money is raised by monetizing all kinds of services provided by the government, but there’s no clear breakdown of those “other funds” as far as I can tell.
K-12 education is a third of our budget (~$1000/person). It is only 12% of Oregon’s budget (also $1000/person).
It does not look like our state government has been overspending, at least not compared to our neighbors.
If they repealed Prop 13 I would never buy a house in California.
Did you know it applies to commercial real estate, too, though? I wouldn’t mind if strip mall owners got re-assessed to current market value.
W.C. Varones | May 11th, 2009 at 6:54 pm
——————
Agree 100% on both issues.
Also, I would eliminate Prop 13 protection on non-primary residences (rentals/investments), as we are subsidizing landlords’ profits because they are NOT going to volunteer to give up their profits and pass them along to the renters. That’s the LLs’ argument in favor of Prop 13 for investments, BTW.
As to refis…it’s odd that after all we’ve just seen, people think that refinancing a house means a person somehow gained income. Debt is NOT wealth, and any (cash-out) refi is off-set by an equal amount of debt **that is also incurring an interest expense.** These idiots are WORSE OFF if they refi, they are not wealthier.
All that being said, I agree that IF Prop 13 protection is passed onto heirs, then the heirs should not be able to maintain the original cost basis WRT capital gains. Either they should pay the higher property tax OR they need to pay the cap gains tax based on the original sales price (which the prop tax is tied to).
Also, Rob failed to mention (though I know he’s very aware) that property taxes do go up for existing owners, at 2% per year. So they are not paying 1% of $250K (1/4 of 1% of the current market value), as per his example above; they are paying quite a bit more.
Please realize that buyers **choose** to pay these elevated taxes when they decide to overpay for a house. If they are not taking full PITI payments into consideration when buying, then how is that anyone else’s problem? If you volunteer for it, don’t complain about it later. Prop 13 should actually keep prices LOWER…if buyers were smart, because they would REFUSE to pay the prices that forces prop taxes to be so high.
Not sure where the entitlement mentality comes from WRT people who move here from other countries or states. Newbies seem to feel they have a right to displace long-time and native residents. Why?
Also:
PROP 90 allows counties to elect to accept transfers of Prop 13 values for moves from other counties when a primary residence is replaced with a less expensive (but see below) home. If you are over 55 and move into a county which accepts Prop 90, you may take your old, lower Prop 13 value, regardless of from which county you move.
7 COUNTIES WHICH ACCEPT PROP 90 (Current as of 6/1/2008)
Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura. [Contra Costa, Inyo, Kern, Riverside, Modoc, Monterey, and Marin have dropped out of the Prop 90 program.]
http://www.wwlaw.com/prop60.htm
The notion that people are “stuck in their homes, and therefore keeping inventory off the market” is entirely false. They are in their homes because they **choose** to live in their homes. They can transfer their tax basis any time they want within or across these counties.
Messed up on this part:
All that being said, I agree that IF Prop 13 protection is passed onto heirs, then the heirs should not be able to maintain the original cost basis WRT capital gains.
—————–
Meant to say that the heirs should not be able to **step-up** the cost basis for cap gains purposes.
BTW, sorry for such a lengthy post. 🙁
O.K. this blog is getting way too serious with Jim away….I miss my morning dose of Jim humor!
Irene,
I cannot compete with JtR and won’t even try. The idea is to touch a few issues that while topical are a bit different. I miss his deadpan as well.
“You see in 1978 the same year as Prop 13 it was deemed illegal to spend different amounts locally as previously when California was 4th in the nation for school performance. So now we spend different amounts locally as directed by the State as commanded by the Supremes and are now lowered to the 4th worst in terms of results.”
This is basically the reason Prop 13 passed. Basically, before that court ruling, schools in rich areas got more money than schools in poor areas because they had more local property taxes. The court (correctly) said that discrimated against minorities, etc.
Before that ruling, people were more likely to agree to higher taxes, knowing the money went to local schools. After that ruling, rich white people didn’t want to subsidize poor black/latino inner city schools, so they were less likely to want to pay higher taxes, hence why Prop 13 passed. So schools (overall) get less money, and fall behind.
It’s racism and classism, basically.
I don’t live in CA anymore, so I’m not as emotionally attached to this issue as many of you. I see both sides: on the one hand if you are “richer” as your house increases in value, then you should pay more tax. (As an aside, this should be especially true when you hit the equity ATM.) On the other hand, if you are trying to live on a budget, then you shouldn’t get taxed out of your house based on a bubble. (As another aside, it will be interesting to see if reform happens now that tax bills may be based on a burst bubble price.)
Where I live now, we have the traditional assesment system. It works, but its not without its flaws. Also, because the data they use for assessments tends to lag a little bit, there’s a bit of a smoothing effect. The assessment goes up slowly, and is now going down slowly.
Where I live, property taxes are on par with CA (about 1 and change). In some parts of the east coast (like NJ), the property tax can be in the 2-3% range, which is nuts.
Utlimately, CA’s tax problems and schools problems are separate problems. The state needs moer money, especially for schools. If the people don’t want to fund via property taxes or want to restrain property taxes for other reasons, that’s fine. But, you have to make the money up somewhere else.
CA Renter – I’m confused about what you say about heirs and cap gains taxes.
I am in the situation you described. My dad sold the house I grew up in, to me. At market rate. So he made a tidy profit – but since there is a cap gains forgiveness on the house of 500k. Since he’d lived in the house for almost 40 years, he did owe… and he paid it at that time.
Any capital gains I owe would be based on the price I paid – which was semi-frothy bubble prices (2003).
That said – I’m not sure if I agree with heirs getting the prop 13 rate – but it was a deciding factor (if not THE deciding factor) in buying this house. It made the house within our budget. If the law allows it, I’ll take advantage of the heir thing on prop 13 tax rates.
FWIW – my block has several middle aged owners who bought from their parents, the original owners. It has added to the stability of the neighborhood – which is a good thing. And we all did it because of the prop 13 generational thing.
Without Prop 13, I would sell all my 9 properties, cash out of the rental business, and take everything to another more favorable state.
It would lead to an extreme market death spiral in California.
Government needs to stay the hell out of everyone’s business. They are the crooks that caused the housing meltdown by forcing lenders to give loans to people who cannot qualify.
The good effect of Prop 13 is to protect property taxes from market fluctuations. The bad effect of Prop 13 is to create a huge gap in property tax burden based on time of purchase and market fluctuations. I love that when I buy a home, I’m locked in at a far lower rate than those who bought in the bubble!
Even if they get reassessed, in a matter of years they’ll be back above me. The least they will probably pay is my cap, but in practice a lot more in the long term.
So we’ve taken the arbitrary annual market fluctuation rule out of the picture and replaced it with an arbitrary purchase market fluctuation and arbitrary “I was first” rules. The recurring argument is that these two new arbitrary rules are a little less bad. I can see both ways here, but the bottom line most of us are thinking is how do we exploit it.
If you don’t want to buy in California, someone else will. It doesn’t matter what ridiculous rules we have.
BTW threatening not to buy in California is a gift, not a threat. That’s like threatening not to buy tech stocks during the dot-com bubble.
Property tax in CA is low relative to what the budget and costs of the state are. Prop 13 causes strange behavior (like tax avoidance) and limits the liquidity of house stock in certain areas. It basically favors asset-holders (people who bought house earlier / cheaper) over income-earners (the people who can afford to live in california now). Longer-term, if you’re an up and comer (younger, earning, asset-light) why would you locate in CA unless you had to? So more of the brain trust go to other states making CA non-competitive longer-term. There are exceptions where you need to be in CA but they are exceptions (tech, bio, entertainment)
It doesn’t surprise me that San Diego (housing rich, income poor) have the pitchforks out over this. A bunch of people threatening to leave if the property tax goes up doesn’t matter. You sell your assets; prices go down and the younger generation buys in. Why is that bad? It’s not like older people with 10 properties are massively helping the CA economy.
I am surprised at the arguments against Prop 13.
First,the argument that newer owners are saddled with a “disproportionate burden” might make sense if property tax rates were eggregious. But they’re not! If there were no Prop 13 our tax rates might sit at 3% or 5% or 7%. Try paying $14000 a year in taxes on a $200,000 condo. That’s ridiculous, particularly if you are retired on a fixed income and bought that condo 25 years ago for $45,000.
Second, there actually is a built-in annual increase of 2% which is supposed to keep up with basic inflation pressures. It may not seem like much but someone getting a $45,000 condo 25 years ago would now be paying property tax as if their assessment was on an $85,000 condo.
Finally, and most important, the problem is not with the revenue, it is with the crazy SPENDING. One comment said “In the up years, money comes pouring in and government programs expand to spend the extra money. During the subsequent bust period, you get less revenue exactly at the same time that you’re saddle with expanded spending programs.” Well, the most glaring problem is that when money is pouring in, the government expands spending, permanently. Anyone else have a problem with this?? Our laws should not allow the kinds of increased that come with windfall tax-revenue periods. If any laws are going to be changed, it should be those.
I’m going to be a traitor to generation Y for a minute.
I am for Prop 13. If you buy a house at X then you know, that from now till the end of time what your prop tax will be. You can budget for that.
Also, it’s stupid to say that young families are more burdened with the taxes due to prop 13. Newsflash, young families are the ones with children attending public schools. These poor young families are the ones that our tax dollars are going to. 50 year olds that bought their houses in the 70-80’s don’t have children in schools any longer. They paid their dues with higher proportioned taxes 20 years ago.
What’s fair is fair.
BTW, since I was the one who said that money comes pouring in during the up years and government spending expands, I just wanted to say explicitly that I agree this is a problem. The question is what to do about it. As a pragmatist, I think eliminating the money source that enables the spending is the best way, since eliminating the spending once it’s there is difficult and painful. I think the details in the way prop 13 is structured encourage the sudden expansion in revenue, so I am against the particular way it’s formulated.
Many of the problems with prop 13 could be fixed simply by changing the 2%/year increase in assessed value to the *national* (not California) consumer price index. That would keep tax revenues from “old” sales more on a par with modern sales, but still would prevent the craziness of west coast housing markets from pricing people out of their homes. The more equal weighting of old and new sales would smooth out the fluctuations in revenue, preventing them from increasing so much during a bubble (and so choking off money that enables new spending) and also preventing them from falling so drastically during a bubble.
I forget the guy’s name, Howard …something or other, but he was an old coot who became the face and spokesperson for the Prop. 13 movement.
He didn’t realize what Prop. 13 would ultimately do, he just wanted immediate tax relief.
Prop. 13 has so distorted taxation in California and the buying and selling of homes, that it has turned the whole process into a weird thing with many, many negative unintended consequences.
California has in turn served at a model for weird, convoluted tax and real estate practices and sent them out to the rest of the country. Thank you California for inventing many of the Frankenstein real estate and mortgage practices that are now common across the country.
The Howard guy is long since gone, but everyone else has to live with his notion that “simple is the best way to go”. Often, it isn’t.
I forget the guy’s name, Howard …something or other, but he was an old coot who became the face and spokesperson for the Prop. 13 movement.
Howard Jarvis. Also cowriter of the infamous Jarvis Briggs amendment.
Don the Realtor–Well put!
Garbler,
Nothing is fair with taxes. Young families (high earners) generally don’t send their kids to public schools (if they can afford it). San Diego is a rare exception in CA where the public schools are generally in good shape. Go to SF or LA and try and make the same argument.
UCGal,
From what I understand from your post, you **bought** from your living parent. Aren’t you paying property taxes based on the price **you paid** instead of the price they paid? Then you would not be getting the Prop 13 protection I’m talking about when a parent passes away.
My folks passed away in 2007, and if I were to have kept their properties, I would have paid on what **their** purchase price was (plus the 2% annual increase). I would NOT have had to re-appraise the house when inheriting it for property tax purposes.
OTOH, I also got to “step-up” the cost basis to the value at the time they passed away for cap gains purposes. So, if mom bought her house for $100K and the new value (based on appraisal at the time of death) was $400K, I can sell it with NO capital gains taxes due if I sell it for $400K, even if I never lived there.
Either we give heirs Prop 13 protection on inherited houses — at the original purchase price (and I’m NOT opposed to this for primary residences where the kids move into their familiy homes…and it should ONLY apply to primary residences), OR we need to eliminate the ability to “step-up” the cost basis to the value at time of death.
As it stands now, the heirs get the benefit of the low (original) cost basis on property taxes, AND also get the benefit of a stepped-up cost basis for cap gains. Heirs should not get the benefit of both.
An easy partial fix for this is to remove prop 13 protections for commercial and rental properties. But that’s a tax increase, so the Howard Jarvis’s of the world yell and scream and it gets voted down.
Heck, I would go further and also remove prop 13 protections for people who make more than, say, $100k a year for singles and $200k a year for couples (maybe with a phase out at borderline incomes, allowing it to rise 3% a year until $120k, 4% a year until $140k, 5% a year until $160k, and at market rates above that). This way, grandma on social security isn’t taxed out of the house she’s lived in for forty years, but property taxes are more fair overall, so other taxes (like sales taxes or income taxes) don’t have to be raised and things like schools and road construction and repair can be properly funded.
I would phase out prop 13 protection. I would phase out mortgage deduction and I would phase out 6 figure pensions for govt employees, and I would absolutely phase out them getting pensions while they go back to work for the govt while drawing full pensions. Luckily for you/them, I don’t get to vote.
The system is so inefficient it is unbelievable. It takes man-days if not man-weeks to dot the i s and cross the t s to make sure the taxes are done right so you don’t end up under or over paying. My taxes this year were dozens of pages long – and I didn’t even own real estate.
I always regarded the Prop 13 protection as a big disincentive to buy even if I was sure I planned to stay put for a very long time. The people enjoying the reduced taxes are presumably also the ones who enjoyed the reduced purchase prices.
I truly believe you guys are between a rock and a hard place once you own in a local where the govt keep dipping into the cookie jar and spending spending spending – especially when the spending is for their own futures – and to heck with yours – cos you as property owners will be paying for it. The schools are going to go down hill – how can they not do so when there isn’t enough money and there are so many levels of bureaucrats? The fires aren’t getting any better – every year the cost of fighting them goes up – and its not just money – people get burned, people die – the police don’t enforce penalties on people who throw lighted cigarettes out of car windows…. their argument is that they didn’t personally see the guy that did it – so they aren’t interested. Think about this, San Diego has lots of military and govt workers. Lots of retired people. Lots of unemployed people – how many actual workers are paying taxes to support the expenditure of all these neighbors? Maybe we should ALL pay more taxes – including over half of our neighbors who don’t pay any taxes… because they are deemed to be too poor – including the old coots who have structured their income so that it is largely tax-free or tax advantaged dividends.
Lots of Marxist ideologues on this blog. Move to New Jersey if you love high property taxes.
Wow, Dawg, you sure seem to have a knack for finding topics that touch a nerve..what will you discuss tomorrow? Jim will be proud that you’re keeping his readers engaged.
They are some very good suggestions here. But as with all such issues, there are so many implications and “baggage” associated with this law, that most politicians are afraid to touch it. It’ll be fascinating to watch this topic unfold–or not unfold. What is it they say in the Catholic church, “A sin of omission is still a sin” ?
And as someone who’s been a homeowner in NJ, taxes here are indeed, FAR cheaper!
But in NJ there’s no sales tax on clothing, shoes, etc.. So maybe it’s a wash….
Todd, please do move out of California. I grew up in FL, where people like you refused to support schools, and left the state to the grifters and racists. CA is well on its way thanks in large part to Prop 13.
Same to you Desert Realtor, as you obviously have no clue of what you speak. If my job hadn’t moved here my kids would be in a NJ PS classroom with 18 kids instead of the 30+ they now have in the “prized” Encinitas school district. My kids’school back East had a music program, two full time Phys. Ed. teachers, an excellent gifted students curriculum, and a fantastic cafeteria. Here we get none of those things, but we do get a side of fries and a churro for dessert.
And garbler, remeber what you wrote here when some poorly educated, barely literate, unemployable child of a young family who “deserves to pay more taxes” sticks a gun in your face for a piece of your carefully protected, non-taxed earnings. Here in the real world (outside gated community utopias) there is a direct connection between other people’s educations and your own quality of life.
This anti-taxaion fetishism, usually accompanied by demands for government sponsored safety and comfortprograms, reminds me of a quote from Galbraith:
“The modern conservative is engaged in one of man’s oldest excuses in moral philosophy; that is, the search for a superior moral justification for selfishness.”
California’s property tax rates per capita ($1031 per capita) ranked 28th in the nation in 2006. That was right below Minnesota and right above Nevada. From:
http://www.taxfoundation.org/taxdata/show/251.html
However, California has either the first or second most expensive housing costs in the country and has something around 15 of the most expensive housing markets out of the top 25.
California collects a bit over 3k in taxes per capita, ranking about 10th nationally. California has the 6th highest wages nationally, so we have slightly lower taxes per wages nationally.
California has high housing costs and high income taxes that deter young people from choosing to start families in this state. However, it also has vibrant cities and good job opportunities in major urban areas for educated individuals. Prop. 13 does not help our current economy to attract people who will contribute to the state economy in the next 20 years, and it does deter them.
Here’s an anecdote. I was sitting at a table a few months ago with three other 30-something couples, all of which were double income no kids with either M.D. or PhD degrees for both partners and none of us owned houses because living within 30 miles of our jobs was too expensive. If my cliched yuppie demographic isn’t buying homes, how the hell does a blue-collar family ever consider buying in California?
I think you’d be hard pressed to find a single Californian (either 30+ year resident or native) who thinks that the newcomers of the past thirty years are a “benefit” to this state. Our QOL has severly deteriorated over this time, largely because of this excess immigration (foreign and domestic).
All of these newbies lower our wages (labor competition) and concurrently drive up our cost of living (high demand for housing), while clogging our freeways and over-burdening our infrastructure. Our once-beautiful orange groves and agricultural crops have been paved over with tacky McMansions on tiny lots, and we can’t afford to live near where we work — which we were largely able to do prior to the 80s.
We have plenty of well-educated, hard-working, native Californians and their offspring to maintain a healthy economy. We do not need to sacrifice for those who want to destroy our state.
It’s all about one’s perspective on things.
Think about how that fits into the bigger picture though. Thirty years’ development of transportation and communication has made it effectively easier to move. What that means is locations to live and work are essentially in competition with each other. If some family knows they can have a better life in California than Kentucky, why wouldn’t they move here?
In the limit that relocating is costless, people would relocate until every place became equally desirable (or undesirable, if you look at it that way). If you live in a place that’s desirable to start with, it will get more crowded until it drops in desirability to equal everywhere else. If you live in an undesirable place, it will get less crowded until you can afford to buy as much house as you care to maintain.
This is just another statement of the illegal immigration problem. If you could move anywhere in the *world* without cost, eventually the standard of living in California would drop to the world average. And believe me, that’s a lot lower than what we experience now.
You hit the nail on the head, CA renter. Yes, people migrate to here (from Denver, Bangalore, wherever). Yes, the locals don’t like that. But here’s the rub: you have no legal or moral authority to stop them. Absolutely none. You can stop someone from entering your house, because you own it, but you can’t stop someone from moving down the street. Because you don’t own the house down the street. You may not like it, but you don’t OWN California just because you’ve been around longer than others. Prop 13, Mello-Roos, NIMBY-ism are all efforts (and very strong ones, I admit it) to stack the deck against newcomers. And, after some years, the newcomers usually adopt the “if you can’t beat them, join them” mantra.
I remember reading an article a few years back about opposition to a plan that would allow farmers in the Salinas Valley to sell their land to developers. You would probably shudder at the thought. The good Salinas citizens did, too, and successfully blocked the plan. I was sick to my stomach (and I didn’t have any personal stake in it). The winning argument: “we don’t want Salinas Valley to turn into another Silicon Valley”. Very well put, indeed. Silicon Valley must be a blight on the face of the planet, we should try hard not to make that mistake again. Oh, and the best part: the lady interviewed for the article, a self-described “ardent environmentalist”, was leaving alone in a 6,000 sq ft ocean front house with solar panels on the roof. You can’t make up stuff like that.
You can easily stop people from moving to California or America via various immigration restrictions and/or property development restrictions.
Many places and countries do it very successfully and in fact the United States has done it quite well in the past.
Don’t ever believe someone who says “it can’t be done.”
As for California schools, it is not total revenue that is the problem, it is the requirement that the money be distributed to each district through Sacramento that is the main problem (plus huge Hispanic immigration).
The East Coast keep money in the local district (for the most part) which creates better local schools in most areas. And it give more local control, which I liked.
I’m going to tell you a (fictional) story. I was walking on the beach one day, and I arrived to a spot where I had a beautiful view of the sunset. I was alone there; it was quiet and wonderful. I kept coming to that spot day after day to watch the sunset in solitude.
After awhile though, a few other people discovered it. Then more and more. Soon enough, dozens, then hundreds of people were coming by my spot to watch the sunset. Some were nice and quiet, like me. Some were noisy. Some were rowdy teenagers. Some were extended Mexican families.
I was very upset. That used to be my spot. Mine and mine alone. It used to be quiet and beautiful. Now I had to share it with all these people, it was all ruined. I wished I could somehow stop these people from coming. They were taking away what was righfully mine.
This, in essence, is the problem. CA renter and others like him/her (probably a majority of voters) are understandably upset about the situation. But their position is morally repugnant. Instead of being thankful that they were lucky enough to once enjoy a sunset in solitude (even though they can’t anymore), they want to still hold on to that, at the expense of everyone else. Maybe one day California will have 200 million people. CA renter won’t like that, and maybe neither will I. But we will have to accept it.
Please understand the reason for my post. What’s most disturbing to me is the **entitlement mentality** coming from the newcomers, as if THEY have more right than the natives do to live here, and that they have the right to displace native families so that the newcomers can live here instead (tax the natives/long-time residents out of their homes so the newbies can live there instead).
The analogy about the sunset doesn’t apply because we are talking about people who OWN their homes. They are not simply squatting on public lands.
Which do you think drives up prices more (and subsequent “tax disparity”):
1. The act of native/long-time Californians living in their own homes…
OR
2. The out-of-control in-migration of people from other states and countries?
THAT is what I’m talking about. If people don’t want to pay high taxes, then they shouldn’t volunteer to move here and pay high prices (because they, and others like them are flooding this state) which push up property taxes on those homes that are available.
It’s all about one’s point-of-view. The newcomers think the natives are pushing up prices, while the natives believe all the newcomers are pushing up prices (and the native’s children can not afford to live in their native communities because of it).
CA Renter, we all know the real California is in the tank and its certainly not caused by Prop. 13. However, it is now politically incorrect to identify the problem by name. No one in government dares to address it for fear of being voted out of office by a loud, vocal, foreign flag wielding, entitlement-demanding, non-taxpaying landslide of non-English speaking constituents. From what I understand, New Jersey schools are excellent and are not burdened (at the present time) to provide bilingual translation in the classroom.
@Desert Realtor,
Have you ever been to New Jersey? I can assure that merely bilingual education is the least of their problems.
The bottom line is that no one wants to pay taxes they don’t currently have to pay, which is quite understandable. I’m just of the mind that certain groups shouldn’t benefit more than others. Subsidies like Prop 13 and the mortgage interest deduction don’t make any economic sense but make great political sense.
Sadly, the correct answer is to not have the government waste our money and lower taxes across the board, but government is inefficient, so it is what it is.
To all you anti-13 folks who believe taxes should be based on market price: what if the same principle were applied to income tax.
“Last year the median annual income for your ZIP code increased by 21%, therefore your income tax will increase correspondingly, regardless of your individual actual income.”
I believe taxing assets that are not income-producing is fundamentally wrong, serves no economic purpose, and is simply a government money grab.
Longterm SoCal residents have no clue what they’ve got, or how damned cheaply they’ve acquired it.
Prop 13 belongs in history’s trash heap with Reaganomics, cocaine nose jobs, and other stupid 1970’s “solutions.”
Well, for what it’s worth, my Hawaiian friends tell me it’s 10 times worse there. You have a fantastically beautiful landscape, a relatively poor native population, plenty of very rich people (both Americans and Japanese) who want to live there, and almost literally no more places left to be displaced to. SoCal has some problems along these lines but I’m glad it’s not as bad here!
California’s total tax burden is on the order of 10 to 20% higher than most other states. That’s $300 to $600 dollars per capita per year.
Given that housing costs in California are 2 to 3 times higher than in other states, taxes are a smaller issue than housing prices.
Given that the government has to collect taxes, the question is where it gets it from.
1. Property taxes
2. Income taxes
3. Fees and licenses
4. Business taxes
California has higher income taxes and fees and lower property taxes than other states. Why are we favoring the landed class and economic rents over income and businesses? Prop 13 is the answer.
California is like old Europe where land is power. Prop 13 instills the kind of aristocracy and rent-seeking behaviors that stultifies economic growth and deters young families from locating here (or staying here).
CA renter said
UCGal,
From what I understand from your post, you **bought** from your living parent. Aren’t you paying property taxes based on the price **you paid** instead of the price they paid? Then you would not be getting the Prop 13 protection I’m talking about when a parent passes away.
I bought from a living parent. But there are forms you can file to get the parent’s (or grandparent’s) tax rate. It prevented my father, who was downsizing at the time, from transfering his prop 13 rate to his new, less expensive purchase. You can only do one of the two. (Senior citizen sellers, 55 and older, can transfer their tax rate, one time, to a lesser cost house.)
As I’ve mentioned – my particular block is full of middle aged “kids” who grew up on the block and have bought from their parents when the parents were downsizing. There are at least 4 of us. (There was a fifth – but that was the short sale on our block.)
All I can say is that I rented in Clairemont for 5 yrs and in less than a 0.5 mile radius, there were 5 empty houses . . . talked to 2 of the owners, and they said they were paying less than $1200 or so a year in taxes on those houses . . they owed them outright, and for a mere $100 or so a month, they kept these things off of both the rental market and sales market. If taxes on the houses were reasonable, these and many others throughout Cali would be in the markets, which could have a subtantial impact. For example, one moron paid over 600k for a 1000sf FIXER in Clairemont. Got taken to the cleaners.
I am not a Prop 13 fan as a potential homeowner, but now as a homeowner, am not complaining. That’s the crux of the problem, no?
If we removed Prop 13 protection for investment properties (which I wholeheartedly support, as per my post above), it would definitely help put more homes on the market because LLs would not be able to afford the tax hikes during bubbles, and would put more homes on the market exactly when we need them.
It’s this notion that we should tax **primary residences** based on the prices paid by specuvestor morons with free Monopoly money (or prices paid by new residents from other states/countries) that I have a problem with. I am 100% in support of Prop 13 protection for a primary residence only (with a possible exception for multi-family rental units that are under some kind of rent control — but that’s a whole ‘nother issue).
Reading the comments on Prop 13 reminds me of an article by Economist Hans Hermann Hoppe entitled “Why Bad Men Rule”. He essentially says that essentially in a democracy, it is two wolves and a sheep decide what is for dinner aka (two politicians and a taxpayer) decide who will be plundered. (Absent Prop 13 and the Right to Vote on Taxes Act – Prop 218)
“In distinct contrast, by opening entry into government, anyone is permitted to freely express his desire for others’ property. What formerly was regarded as immoral and accordingly was suppressed is now considered a legitimate sentiment. Everyone may openly covet everyone else’s property in the name of democracy; and everyone may act on this desire for another’s property, provided that he finds entrance into government. Hence, under democracy everyone becomes a threat.
Consequently, under democratic conditions the popular though immoral and anti-social desire for another man’s property is systematically strengthened. Every demand is legitimate if it is proclaimed publicly under the special protection of “freedom of speech.” (Or for “the children” WL) Everything can be said and claimed, and everything is up for grabs. Not even the seemingly most secure private property right is exempt from redistributive demands. Worse, subject to mass elections, those members of society with little or no inhibitions against taking another man’s property, that is, habitual a-moralists who are most talented in assembling majorities from a multitude of morally uninhibited and mutually incompatible popular demands (efficient demagogues) will tend to gain entrance in and rise to the top of government. Hence, a bad situation becomes even worse.
In contrast, the selection of government rulers by means of popular elections makes it nearly impossible that a good or harmless person could ever rise to the top. Prime ministers and presidents are selected for their proven efficiency as morally uninhibited demagogues. Thus, democracy virtually assures that only bad and dangerous men will ever rise to the top of government. Indeed, as a result of free political competition and selection, those who rise will become increasingly bad and dangerous individuals, yet as temporary and interchangeable caretakers they will only rarely be assassinated.
Prop 13 is the wall that protects CA property owners from being taxed to death by Sacramento politicians and the impoverished illegal aliens voting to tax native Californians for freebies. The problem is too much spending; not too little taxation of Californians.
Google “Why Bad Men Rule” if you wish to read the whole article.
Prop 13 was marketed to the 1978 voters as saving grandma’s house but now of course if grandma has died in the 30 years since the house has been given via transfer to her kids who demand community services such as education for their offspring. They are freeloaders! I laugh if I see them selling cupcakes at a bake sale or ask for donations to “the foundation” for our kids education.
But– If grandma is still alive she is wanting “home care” even though she herself has not helped out anyone around her with home care services for years.
Prop 13 is incorrect and honestly immoral. A true society with values sees things going forward. These time capsules are ruining our state.
OK…an outsiders view (Illinois): so what if when a first-time buyer in CA has his/her home assessed to current market values…join the real world because current home owners here in IL do have their homes regularly re-assessed to current market values AND there is no 1% cap such as you enjoy in CA…..
Bottom line: governments have insatiable appetites to spend other peoples money and only limitations such as Prop 13 can limit such spending. The real question that Governments will never answer (because truthfully answering it exposes the fraud they perpetrate on taxpayers) is this: IF Government grew in good times when $ freely flowed, why can’t/don’t/won’t they similarly contract when times are bad and $ is not available?????
Interesting how the smart people generally buy around the same time and the idiots are stuck carrying the full price of governance because they arrived after the boom.
Neither should a person be forced from their home because the place has become to swank for their income.
A fairer approach is a massive value added tax and some better incentives for people to not have children they can’t afford to care for. Every child needs an education, but the rich should pay the cost of educating their children — including elementary school — and the poor should be putting in sweat equity to make up what they aren’t able to pay. In this overcrowded world it is no privilege paying for other peoples children.