From the latimes.com:
Christopher Thornberg, the founder of Los Angeles-based Beacon Economics said his research has convinced him that Prop 13 has caused more problems than it has solved.
“Nothing is more hypocritical than Prop 13,” Thornberg said in a phone interview this week. “We’ve been told it’s a godsend to homeowners and seniors when it’s really about preserving and expanding the wealth of the old bulls of real estate…People don’t understand how they’re being taken advantage of.”
Before you join the haters flaming Thornberg, he wants you to know that 1) he doesn’t dislike old people; 2) he’s a “middle of the road,” decline-to-state voter, not a “left-leaning nutcase”; 3) he’s a homeowner, so he has skin in the game, and 4) he says that the state needs to rethink its entire tax system, not just Prop 13, to make it broader-based, less cyclical and more equitable to all.
So why does Thornberg think Prop 13 is strangling California?
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Prop 13 is regressive. Those who have owned their properties the longest – and therefore have accumulated the most wealth in the form of home equity – are taxed the least.
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Prop 13 has worsened housing affordability. Because property tax revenue is capped, cities looking to fund public services have an incentive to push retail and industrial development over home building.
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Prop 13 has fueled California’s “business unfriendly” reputation by forcing lawmakers to hike sales taxes, corporate taxes and personal income taxes to make up for the property tax shortfall. Those revenue sources rise and fall with the economy, so they’ve also exacerbated boom-and-bust budgeting in state and local government.
It’s probably safe to say that Thornberg won’t be running for office anytime soon. But he’s not backing down from his criticism of Prop 13. And he said he’s gotten plenty of supportive emails for his outspoken stance.
“People are starting to get it,” Thornberg said. “This needs to change.”
To read Thornberg’s entire essay, click here.
The Times has over 200 comments here:
http://discussions.latimes.com/20/lanews/la-fi-mo-california-economist-says-dump-proposition-13-20120330/10
A sample:
Mr. Thornburg makes a couple of mistakes when enumerating the harmful effects of Prop. 13. First, he states that including commercial property taxes in the cap is BAD for California business. Go figure! Since when is having lower taxes bad for business? Perhaps it is bad for new businesses starting up since they have a competitive disadvantage against those with lower taxes, but that is not the same thing as bad for business overall.
Second, he states that low property taxes here is bad for home construction. Go figure again! What is more conducive to new home demand: high property taxes or low taxes?
One thing he never states is that our tax rate may be capped at a lower level than most states (1%), but homes typically cost at least twice as much here as in most other states. So what’s the difference in state revenue if our rate is half, but the values the rate is figured on are twice or three times as high?
Finally, voters, whether property owners or not, are not stupid. We know that other taxes are very high here to compensate for the low property tax rate. We know that the income tax, for instance, is VERY progressive. Make a little more money and you can pay a LOT more tax. Doesn’t this help make up for the regressivity of the property tax? Anyway, would California’s democrat party monopoly ever slim down our government if it had access to new taxes?
howard jarvis will defend prop 13 with its vast resources.
Prop 13 is one of the primary reasons to buy a house in California, which is otherwise a bad state to own in. We have high unemployment, bad schools, among the worst business climates of any state, high cost of living and the highest sales and (soon) income taxes.
Prop 13 has a major impact on the buy/rent decision. It’s still cheaper to rent than buy in prime neighborhoods. But the guarantee that you’ll have low property taxes in retirement makes it worth buying.
Changing Prop 13 would be breaking a contract with people who have made home-buying decisions based on that promise.
I’d concede that Prop 13 should be undone for commercial buildings, and I’d throw in second homes too.
As a recent puchaser of my home (at the start of the bottom two years ago, but that still means a very expensive home), prop 13 is evil, vile, disgusting, unfair, and ABSOLUTELY NECESSARY.
Why should my property tax bill double because some idiots down the street drove up prices in a bubble?
One of the huge reasons to buy rather than rent is predictability: if my property tax bill could double in a bubble, now rather than a bubble being an entertaining annoyance, it becomes a substantial threat. I had friends out of state see their property tax bill double during the bubble years.
WC Varones is on the mark. So, the appropriate question becomes why is Thornberg calling for the repeal of Prop 13 instead of a simple modification of it to remove mega-commercial from its protections?
I live in the Sacramento area (yeah, thanks for the sympathy) and I just looked up property taxes for houses on my street.
Mine’s the smallest, I bought it in 1987.
My neighbor’s is larger, he bought in 1989.
House across from us is the biggest, bought 2010.
I pay ~$250 less in property taxes than 2010 buyer. (smaller house, slightly bigger lot)
Next door neighbor pays $180 MORE than 2010 buyer. (smaller house, slightly bigger lot)
So then I went and checked by sqft, 2010 buyer pays a little more property taxes than 2008 buyers but ~25% less than 2003-2004 buyers.
I couldn’t find any comps from 2006 when prices hit their peak here.
Gosh darn us old people for not paying our fair share of property taxes!
Prop 13 passed because this danged state kept outspending what it was taking in and turning to homeowners to cover the shortfall since they were a captive taxpayer (don’t pay, lose your house).
By the way, I have a calendar reminder set to challenge my assessment in July. I missed the deadline last year…us old folks can be forgetful. 😉
I forgot to add that you probably won’t see that as much in the coastal areas as you do inland but we got killed on the downside.
“Thornberg calling for the repeal of Prop 13 instead of a simple modification of it to remove mega-commercial from its protections?”
Great question, simple answer.
Thornberg, obviously doesn’t get it.
Extra Credit:
Is Thornberg a renter?
Thornburg was an early and correct doomer, so it wouldn’t surprise me if he’s still a renter.
“Before you join the haters flaming Thornberg, he wants you to know that … 3) he’s a homeowner, so he has skin in the game…”
Prop 13 didn’t cause the bubble. But I am in favor of repealing the handing off of the low tax amount on a real estate transaction.
Putting a cap on any revenue source for the government is a smart move. That includes Prop 13. Better yet, we should be looking for public spending cap as well. Our run away federal deficit and state deficit in many states is simply not sustainable. Disasters await.
We just moved from New York State to San Diego. Among the main reasons – super weather, nice golf courses, and guess waht? Prop. 13!
If you think the taxes are high in CA, go living in New York or New Jersey – out of control spending by the public agencies everywhere and getting a lot worse!
The point is really that the state will spend all revenue and then some. There must be a some check on the revenue side. Prop 13 also serves to buffer the swings associated with property tax revenue.
Although I don’t live in Ca, there is a solution that is done elsewhere in the country for seniors. Allow one to cap the property taxes on a place when you reach 65. It remains at that level until the place is sold or inherited when the taxes go up, no passing of the lower taxes to the next generation, or like in New York the ability to inherit a rent controlled apartment at the same rate. This protects the seniors, but does not make the reduction a possibly perpetual thing.
Instead of capping the taxes, simply provide the option of deferring those taxes from 65 until death, at which time the taxes come due with only the property itself as security.
A couple of other things in 13 I’d love to see tweaked:
1) The tax ought to be based upon the higher of the purchase price OR the outstanding loan(s). If people are going to borrow against paper profits, then they should pay taxes on them, too.
2) CRE reassessments should occur upon changes in the company’s majority ownership, and not just in the ownership of the property itself.
The biggest problem I have with Prop 13 is when the low value is transferred over to the kids. They already inherit an asset at stepped up value, why do they not get reassessed at that value for property tax purposes. I have a relative living in a $15 million house whose property tax is based on a $500,000 value because it has been passed through 3 generations. Isn’t it enough they are receiving a $15 million asset?
Is it fair that I pay $13,000 a year in property taxes while my neighbors pay $1600 a year? The houses have the same value.
Anyone have any stats on the effective property tax rate distribution? It seems like there are a lot of people paying less than 0.2%.
Prop 13 has always been deeply flawed (with some merits), but not as much as some of the absurd comments above. For example “Prop 13 passed because this danged state kept outspending what it was taking in and turning to homeowners to cover the shortfall since they were a captive taxpayer (don’t pay, lose your house).” In reality back in the late 70’s when Prop 13 passed:
1) The state was running a huge surplus (the exact opposite of spending more than it was taking in).
2) Property taxes are local, not at the state level.
3) When Prop 13 passed and made it impossible for local funding of school districts to meet expenses, the state surplus was used to shift state income to local school districts. This permanently ended local control of public school funding.
Yes there are plenty of flaws and merits to Prop 13, but let’s at least not try to rewrite history in discussing it.
Hey Jim, I don’t think the state income tax is particularly progressive, actually. The top tax bracket for 2011 (9.3%) kicks in at only $48k of income if your single, or $96k if your married. So while that’s technically progressive, it also puts a large part of the population in the top bracket.
I’m certainly thankful that I’m not paying more property tax on my recent home purchase, and I think the state is probably already collecting enough tax (and spending it poorly). But I think it’s very unfair how property taxes are distributed, and Prop. 13 should be reformed.
Realized the comment I referenced above isn’t actually Jim’s, he’s just quoting it
So the state is supposed to do more with our money and we’re supposed to do have less?
Why can’t the state rely on a 3% increase per year on their Property Taxes? I haven’t even got 3% in the last 3 years in my job.
But I do understand their point about variable taxes in good/bad years. Increasing properties taxes so that they double in good years would be devastating to many households.
If the purpose of Prop 13 is so people can afford to stay in their home by preventing property taxes from increasing so much homeowners can no longer afford them (especially those on fixed incomes), then a few of the changes suggested above wouldn’t negatively affect homeowners (excluding commercial property from Prop 13 and eliminating the prop tax value to decendants of the homeowners). Another suggestion is to increase the max property tax increase rate from 2% to 3 or 4%. These suggestions would allow Prop 13 to remain relatively intact for homeowners while increasing prop tax revenue to local coffers.
Another suggestion is instead of continuing to milk existing tax sources, government should develop new ones. One example: it is ridiculous that sales tax is not paid on internet sales. There should be one flat rate nationwide (to make it easy for companies to calculate and collect the tax at the time of sale) and it should be paid to each state based on the percent of internet sales generated by their state for the year. But no, they just keep increasing the sales tax for brick and mortar stores (which is easier to do), making more and more people stop buying from them (and driving them out of business) in favorite of internet based companies. And the argument that shipping costs makes up for it is not valid – shipping cost is for the convenience of not driving and it is only fair those sales cover the cost of the infrastructure (roads, phone/internet lines, etc.) necessary to generate those internet sales.
It’s interesting that Jim’s blog comments seems to be anti-repeal – while the Burbed NorCal blog comments were uniformly for repeal.
My point, as a California native of 50 years standing is that the history is conclusive – no matter how much you raise taxes, the California government will simply spend that much and more.
The NorCal folks were screaming because education funding has been hit. Well duh, the political machine running California knows to get more taxes it needs to make the cuts hurt in the most sensitive places.
I would make two changes in Prop 13:
1. When a business is sold, its property taxes should be reassessed. Businesses acquiring other businesses base their negotiated prices on current values, their taxes should be done the same way.
2. Prop 13 should apply to principal residences only (no second third, etc. homes), and inherited properties should retain their existing tax assessments only if the heirs live in them as their principal residences.
The property aspects of prop 13 are bad, but the bigger killer is the 2/3 majority in the legislature to raise other taxes. Meanwhile, spending can be at simple majority.
I never understood the near religious tone people take with Prop 13. I live in DC surburbs now in Virginia. The state isn’t perfect, but servies are good, even the DMV. Yes, my property taxes went up every year during the boom years even though the rate stayed the same. Then, when the market cooled, the assessment flattened or went down. Retired people can get abatements. This is a system that has worked well in many other states for centuries. California’s 4 decade expirement should be taken out and shot.
Very interesting discussion. Too bad we aren’t in charge, we’d get the state in good financial shape pronto!
People who voted for Prop. 13 are starting to feel the unintended consequences. Schools suck so they have to pay for private school or move to pricier neighborhood; fewer police on the streets, crime up – hey, I guess I’m going to have to move to a gated community. My expenses – up. There are many more examples but the bottom line is if we want government by the people, of the people and for the people, the people have to pay. You get what you pay for…
Prop 13 has failed in all the possible ways.
It has not limit in any way the government spending who simply turned to debt and completely dropped the ball on maintaining state assets.
It is forcing old people to stay in their house because they can’t afford to move.
Also it is regressive tax where the wealthiest pay the least.
Good job California!
Prop 13 needs to be repealed, modified, whatever, but why should the newest homeowners have to shoulder the load of taxes, while those who have lived the longest in one location get a substantial reduction, yet they reap the same public service benefits…makes no sense.
Also, prop 13 also props up property values somewhat as it discourages people to move or put their houses on the open market…thus, reducing supply and keeping house prices up. Drop prop 13 and see how many older people decide to stay in their large, property tax intense property, rather than to move someplace else…it happens elsewhere in the country…why not here?
Passing down this benefit? absolutely nuts, the only other tragedy i heard about is public workers in hawaii being able to pass on their pension benefits to their children (not anymore but grandfathered for older employees). Why oh why is this in place? to ensure a property stays in the family? because for no other reason they should get this “tax” reduction? ridiculous. WHO CARES if you have lived there a while…pay your fair share!!
Lastly, for those recent homebuyers…good luck if values go up anymore than they were when they bought…many will never reap the benefits of prop 13…we only continue to suffer the penalties.
Did you notice in the article there was no mention of austerity or cutting state spending? It just talked about increased spending. How many ridiculous state commssions are there? This is another attempt to take money from those people who have earned a good income or have sacrificed to be able to retire after a lifetime of hard work and “redistribute” it. Here is a likely scenario. These “rich” people will leave the state, thus reducing the tax base further. I know I will. ait is already happening. Then what you have left are the lower wage earners and the people on the dole. GOOD LUCK WITH THAT!