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Paying money for land probably stems from feudal arrangements, where land ownership rested in few hands, then ownership was slowly leaked to the masses for a price over many centuries. New World countries appropriated land from the indigenous inhabitants, and then proceeded to parcel it out under much the same arrangements. The centuries-old system of claiming and valuing land title could be called into question.
Henry George, the great American political economist, proposed (more or less) that land should really have no value, but should be taxed according to its use.
If land was free, property bubbles (really land value speculation bubbles) arguably could not occur. Following George, land could be made available for housing, industry, and so on, allocated under planning controls, and taxes levied accordingly. Thus, a house sale price would consist of the labour and materials value of the house, plus some allowance for a land tax. A farm would be taxed on being a farm, a factory a factory, and so on.
Here is a long excerpt from Wikipedia about Henry George:
George lived in California at a time of rapid growth. In particular he had noticed that the construction of railroads in California was pushing up land values and rents as fast or faster than wages were rising.
On a trip to New York City George was struck by the apparent paradox that the poor in that long-established city were much worse off than the poor in less developed California. This paradox supplied the theme and title for his 1879 book Progress and Poverty, which was a huge success, selling over 3 million copies. In it George made the argument that a sizeable portion of the wealth created by social and technological advances in a free market economy is captured by land owners and monopolists via economic rents, and that this concentration of unearned wealth is the root cause of poverty. George considered it a great injustice that private profit was being earned from restricting access to natural resources while productive activity was burdened with heavy taxes, and held that such a system was equivalent to slavery - a concept somewhat similar to wage slavery. The appropriation of oil royalties by magnates of petrol-rich countries may be seen as an equivalent form of rent-seeking activity: since natural resources are given freely by Nature rather than being products of human labor or entrepreneurship, no single individual should be allowed to acquire unearned revenues by monopolizing their commerce. The same holds true about every other mineral and biological raw resource.
I am not suggesting Henry George was always 'right', or that his proposed systems should be adopted wholesale. But should land be free, or valued at a nominally low rate? I suppose I am considering the large planned tracts of suburban residential or commercial land we see daily, not oilfields or goldfields. (Then there is the question of valuing water views...) And I'm more interested in depressing land prices than raising land taxes.
Have at it. There's something here for everyone -- you know who you are. Any mathematical paradoxes put forward will be viewed with the utmost suspicion. Trolls will be tolerated, except when obliterated.
DS
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eburbed,
I had to go look up Prop 60/90. I don't think she's 55 yet (if she is I want her surgeon's name). She's CFO of some venture group, so she has probably looked into the tax things pretty thoroughly. I think she's like I am, not exactly cheap, but not into paying for something that is not good value. She has a beautiful apartment that is too large for her, but has decided it makes financial sense not to downsize.
I don't think Prop 13 is fair, and I am benefiting from it on both of my places. I have a friend in Palo Alto who has about a $60,000 property tax basis on a $2 million house (to those outside the Bay Area - it is a NOT gorgeous ranch house in a 1960s subdivision) because his mom bought it new and transferred it to him. My next door neighbor pays four times what I pay for an identical apartment and identical city services. I really don't see how Prop 13 survives the equal protection clause of the Constitution.
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@SFWoman,
I really don’t see how Prop 13 survives the equal protection clause of the Constitution.
My extensive and profound understanding of Constitutional law tells me that the "F--k you, I got mine" clause supersedes the "equal protection" clause.
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surfer-x's website
My extensive and profound understanding of Constitutional law tells me that the “F–k you, I got mine” clause supersedes the “equal protection” clause.
Mmmmm sweet delicious hate in the winter as fresh as warm mittens.
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As a homeowner, I have benefitted from prop 13. But I also realize that there are certain problems with prop 13 which harming California as a whole, which may come back to harm me, indirectly.
As I said before, in order to get prop 13 amendments passed, you need to get the owners on board. You need to propose something that doesn't harm our interest. You are not going to get ALL owners on board, but you can get SOME.
The biggest problem of prop 13 is forcing one to live in the same house or same neighborhood, especially when the price shoots up ridiculously high. The higher it goes, it more reluctant one is going to move, essentially taking off more supply OFF the market. In a normal market, the higher price will induce higher supply, which will set the market back in balance. In California, it works the opposite way. I was very tempted to sell my residence to bubble-sit, however, unlike Randy H who already upgraded once, and therefore can keep ALL the windfall profit (I assume less than $500K on his second home) on his house, I in fact have made "too much" on my home, which means I will have to pay tax on top of the $500K per couple, and I will have to triple my property tax if I move. So I opted to stay, taking one potential supply of existing home from the market. I am not the only person who went through this thought process, there are other homeowners in the same boat who went through exactly the same process and decided to stay put.
How do we fix it?
For one, I propose resetting prop 13 tax base whenever there is a transaction, including refinancing. Most of the long-time homeowners don't mind this because our home is either paid off, or nearly paid off and we don't use our main residence as ATM. I am all for getting more tax revenue for the county from the ATM home"owners". If someone proposes this amendment, I will endorse it. From a social engineering point of view, we should not encourage people to sit on their fat ass and ATM their home to death anyway. Also, I propose that once you refinanced with equity cash out, when you sell your home, you need to pay capital gains tax from the first $1, not from the $500K, because you are really treating your home as an investment, not as a residence.
Second, instead of prop 60 which allows you to transfer your tax base after you reach 55, I propose that ALL existing homeowners can transfer their existing tax base, if they buy a home of LESS MARKET VALUE of their original home within the next 5 years. This way, you are encouraging more entrepreneurial and risk-taking homeowners to bubble sit. I would love to take my existing prop 13 tax base, sell my home at today's price, and come back to the market in 5 year's time.
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Geez don't you hate it when some new fish stirs up the pond? Very interesting reading though, makes my brain hurt. Anyone planning a 30th anniversary prop13 party? Robert's buying...
HARM, thanks for the link.
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DinOR,
You're too easy going. Must be the rain up there. Me, I don't mind making a few bucks while helping with the federal deficit. Besides, I'd like to see them fall on their swords a bit sooner.
The rules for taking the exemption are pretty clear-cut. Cases like these are good for those rookie auditors wanting to get their feet wet. No need to call them a tax cheat. Just invalidate the exemptions and forward the case to collections. Takes all of 20 minutes.
We have a few clients audited every year. It's always for some relatively trivial amount of money, and usually because they don't believe the client bought Cisco in 2000 for $100 and sold in 03 for $25. They always want a ton of documentation, which we always have, thankfully, and waste a lot of everyone's time. I'd love to see those IRS guys do some productive work.
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eburbed,
not all counties in California honor prop 60 and 90, only some do. Santa Clara county does. However, relatively few seniors are downsizing.
But you see, the reason why lots of seniors are NOT taking advantage of these props to downsize is because of the prop 13 clause which allows their offsprings to inherit the current tax base when they die. The kids of these seniors have all the incentives in the world to keep their parents in their old home, which typically have a much higher market value than the tax assessment base and a much more central location. Also seniors tend to stay close to their doctors whom they've known for many years.
Extending the tax base transfer to the existing home owners regardless of age will be much more effective in encouraging the homeowners to take advantage of price peaks to cash out than the one applied only to seniors. I am in my 30s, and I don't think about passing anything down to my kids yet. People in their 30s and 40s are more willing to move around for profit than people in their 60s and 70s with existing doctor contacts.
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OO,
"I in fact have made “too much” on my home, which means I will have to pay tax on top of the $500K per couple"
You know, if you made any capital improvements to the home, that adds to your basis, thus lessens the gain. I don't recall if things like a new roof count, but if you built a new deck, or had a kitchen renovation, a lot of that can be used to negate the gain. You may still pay tax, but it helps with the pain.
Not tax advice. Contact a tax advisor for more details.
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For one, I propose resetting prop 13 tax base whenever there is a transaction, including refinancing. Most of the long-time homeowners don’t mind this because our home is either paid off, or nearly paid off and we don’t use our main residence as ATM.
If I were a homeowner, that would not make sense to me.
Why would I vote for something that might screw me over if I ever needed it?
Who knows, one day I might need to buy a pair of Harley's and some stickers that say "LOUD PIPES SAVE LIVES". Then I'd need to refi and extract some of the hard earned equity to buy them.
People do think ahead you know...
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SFWoman Says:
> I really don’t see how Prop 13 survives the equal
> protection clause of the Constitution.
Most courts don’t really care about equal protection “or” the Constitution…
I was disappointed when the “conservative” US Supreme court said that it was OK for the University of Michigan to tell Whites and Asians that we may “all be equal” in the US, but they will have to score higher than other students if they want to go to law school at the University of Michigan.
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I really don’t see how Prop 13 survives the equal protection clause of the Constitution.
Someone else thought of that -- short version 8-1 Supreme Court (ouch!):
http://www.caltax.org/research/prop13/prop13.htm
Constitutional Validation
Almost immediately after passage, the California Supreme Court sustained Proposition 13's constitutionality in the Amador case (Amador Valley Joint Union High School District v. State Board of Equalization. September 22, 1978). After a series of legal challenges in the 1980s, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California's acquisition-value system.
The court ruled that an acquisition-value system does not violate the Equal Protection Clause of the U.S. Constitution because it "rationally" furthers a legitimate state interest. The court said, "The state legitimately can conclude that a new owner, at the point of purchasing his property, does not have the same reliance interest warranting protection against higher taxes as does an existing owner who is already saddled with his purchase and does not have the option of deciding not to buy his home if taxes become prohibitively high."
The court also opined that a state has a rational interest in neighborhood preservation, continuity and stability, and that Proposition 13's system of "locking in" lower tax assessments contributed to such preservation.
It's a good point. If you don't like Prop 13, don't buy here.
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Speaking of taxes - NYC is looking at cutting sales tax on clothing. Woot!
Now there's incentive to move there... (of course clothing was always sales tax free in NJ... but Paramus was always too far for me.)
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Is Ben's blog down ?
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eburbed,
not refi for lower points, I don't want to get hosed on that, if one day there's a 0.2% 10 year fixed, I would like to take advantage of that. Refi for equity extraction? Oh I can tell you I won't need it, ever.
People who need equity extraction should not be buying home in the first place. Or alternatively, you can set a limit. Homeowners are allowed one time tax-free equity extraction.
This is a measure that you will get some financially more established homeowners on board. People I know with personal finance squared away would love to see the FBs screwed.
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People who need equity extraction should not be buying home in the first place. Or alternatively, you can set a limit. Homeowners are allowed one time tax-free equity extraction.
This is a measure that you will get some financially more established homeowners on board. People I know with personal finance squared away would love to see the FBs screwed.
Why the hate?
Like anything else, it's a pretty interesting gamble. There are pros and cons.
For many years it's worked out that refi can be a sustainable second income. But sometimes the music stops and then you're screwed.
If you're willing to take that bet, then go for it.
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Different Sean's website
Randy H Says:
Then DS posited some other points, none of which address this very fundamental question, which FAB pointed out:
What *exactly* is the logical difference between owning your land and merely having the right to “use” your land? If I own land that I am prohibited from using, doesn’t that reduce its real value to zero? Conversely, if I have an indefinite lease on land that I am free to use at my discretion, doesn’t it acquire the same value as land I might instead own?
It's actually 3 questions, but I hadn't really read them, to be honest. The point's been made before in another thread (by myself in fact) that 'fee simple' title has become an illusion of allodial title in the public mind. Allodial title is marked partially by the fact that it is impossible to levy taxes on it, as it is owned by the sovereign or state or similar. Anyhow. There is still a common distinction in English residential property title of freehold vs leasehold title, where you buy into a leasehold title that might be limited to 99 years, only to forfeit it to the owner at the end, and often costing as much as freehold. Understandably, this is not very a popular idea with people, but they are a common feature nonetheless. Speedingpullet et al may be able to cast more light on the ins and outs of this form of title, as I haven't needed to consider property transactions like it when living in the UK. The leasehold idea though runs counter to my suggestion to continue to own the rights to land, but to keep the value low somehow, more or less by preventing bidding in the market place, I guess. And leasehold represents a reversion to feudal arrangements.
I suppose I am positing an extrapolation or reversal of the land price bubble by going to the opposite logical extreme of imagining ordinary land to have little or no monetary value ascribed to it. This is following in the footsteps of George, and for much the same reasons. However, after more reflection, although we commonly ascribe location value to land, I am wondering whether there should be a separate 'location' value split out on land in a valuation, rather than rolling it into the so-called 'land value'. e.g. land of 1/4 acre or 1/2 acre anywhere has a reasonably low nominal value because you can build on it (and an infrastructure value if it has services to it). It then has an extra 'location' value, such as being in Beverly Hills, or having water views or prestigious neighbours. The housing boom has seen any house on the coast or near a city go up in location value. The challenge in deflating a bubble is then to deal with the location bubble. (I don't think this is just semantics, but it doesn't point to a solution either.)
Interestingly, so-called 'geolibertarians' are generally influenced by Georgism, but the ideas behind it pre-date Henry George, and can be found in different forms in the writings of John Locke, the French Physiocrats, Thomas Jefferson, Adam Smith, Thomas Paine, James Mill (John Stuart Mill's father), David Ricardo, John Stuart Mill, and Herbert Spencer. However, they also probably did not anticipate the concept of Malibu Beach or water views.
Will these ideas create a society that looks like this?
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Prop 13 is complete bull$hit but it will never get voted down because it’s a ponzi-like scheme that only screws the next greater fool.
What's even more disturbing (but not surprising) is that other states are looking to copy it.
You can't blame them - it's a great idea if you're a homeowner.
And, if you want a Target/BestBuy/Automall ever 5 miles like we have here.
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> Does anyone know what CO is that bad ?
Since I am researching buying in northern Colorado, I have an extreme interest in the answer to this question. In nearby Greeley (a.k.a. the foreclosure capital of the United States), the typical culprits were at work. The tech boom fueled tremendous wage growth, population increases and price spikes in nearby Fort Collins. People in nearby Greeley started getting increasingly exotic loans to participate in all the free money. When tech up here crashed, thousands of people lost their jobs, and the foreclosures started piling up.
In other areas of Colorado, there was a lot of looting the "free money" via HELOCs (gasp!). Apparently you can take 90% of the inflated equity out of your house, right until the price reverts and you're underwater with loans you can't afford.
I do not have a formal analysis of the local foreclosure market and its causes, but I would dearly like to see one. By my estimates (which may be flawed due to RealtyTrac double-counting), the foreclosure rate in Fort Collins, Greeley, Windsor and Loveland appears closer to 0.5% of households, making us one of the worst areas in the state.
http://www.centralvalleybusinesstimes.com/stories/001/?ID=3807
Excerpt from December 12, 2006: For the fourth month in a row, Greeley, Colo., posted the highest foreclosure rate among the nation's 200-plus largest metropolitan areas. The Greeley metro area (Weld County) documented 428 properties entering some stage of foreclosure, an increase of 13 percent from the previous month and a foreclosure rate of one new foreclosure filing for every 155 households -- more than six times the national average.
Now there's something you can be proud of!
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Cause I’m sure that prop 13, and insane RE prices, are pushing many fine citizens out of the Golden State.
I'd think that too... except that morning traffic on 85 has really gotten worse in the last year. :(
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I’d think that too… except that morning traffic on 85 has really gotten worse in the last year.
Where does 85 North ends?
Yep, the exit to Google!
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Yes, but the congestion isn't there - it tends to be clustered at the 280 interchange and the El Camino/237 interchanges.
Are jobs picking back up like crazy in Milpitas/Fremont?
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Levy a ‘number of days in state’ tax, which of course, applies even to newborns, and is inversely proportioned! Longer yer here, the less you pay. Call it the ‘Screw the newbie tax’ (or is it FOBie?).
That's too complicated.
The easiest way is to have a move-in tax. Everyone who moves to California has to pay special "reducing the quality of life" tax. Because - everything was perfect until you moved there.
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It would be more fair to have property tax banding based directly on your decade of birth. Then California would become not only a retirement destination, but a forward-looking state that was subsidizing Boomers with the labors of rich young technology workers and 30-something MBAs making $250K per year (plus bonuses!).
Unfair? Yeah. But at least people would stop selling their overpriced shitbox townhouses out there, and buying ridiculously oversized McMansions here.
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Inflation vs Deflation ?
If anyone has time, I recommend very highly the discussion that happened on Mish's blog.
http://tinyurl.com/yof5ob
This is Mish's reply to the huge amount of replies he got his original post (which is also linked from there). The deflation or inflation debate has been going on for a long time, but it was interesting to see good arguments from both the sides.
Admittedly, I felt more confused and dizzy after reading all that. FWIW, I still don't believe in deflationary collapse a la Japan (and disagree with Mish). We may see some deflation, before ramping up real inflation and no growth. My gut feeling says eventual stagflation in the US.
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HARM,
In the light of the threadjacking meme, your choice of Les Miserables to illustrate this thread is grimly appropriate.
IIRC one of the main underlying causes of the French Revolution was the fact that the tax burden (which was high in 1789, France was still paying off the debts from the 7 Years War) fell disproportionately on the 3rd Estate, which was basically the middle class. The 1st and 2nd Estates (Nobility & Clergy) were both largely exempt from taxation.
Here in Australia, recently modified Superannuation (pension) legislation now offers self-funded retirees over 60 the opportunity to pay no income tax at all. Even though I could be a beneficiary of this within 10 years, I am uneasy about the social implications. I think the potential budgetary impact has been grossly underestimated, given that there's an entire industry out there gaining rewards for reducing their clients' tax.
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From the MSN Money Board, a proud homebuyer shares his succes:
"As I read the postings on this sight, it is clear that the age old saying that "real estate is local" comes to my mind. I'm not a real estate agent, but a partner at a small accounting firm in the San Francisco Bay Area, and would like to tell you about mine and my wife's recent sale and purchase. We purchased a home in a tract development approximately 2 years and 8 months ago and sold it in October 2006. We knew that we wanted to sell quick so we priced it accordingly at value pricing. We next took the proceeds with healthy profit and purchased a home in the best school district in California (highest state test scores and extra curriculum programs offered) in October 2006; we had to bid 130K over asking to get it....the sellers also were pricing the home at value pricing.
I firmly believe that excellent school districts, close proximately to good paying jobs, parks and trails, restaurants and entertainment, etc. will always bring a premium. Even though the market in general may be falling, I feel confident that if we decided to sell our current home in the next couple of years (or next couple of months for that matter), we would make a very healthy profit. The reason....safe, upscale community oriented places like Orinda, CA are becoming so uncommon in this day and age. (at least in the Bay Area). I'm sure those out there that own a like property share my thoughts."
Maybe I'm missing something.....if he paid $130k OVER the valueof the house, couldn't he take that money and pay for his kid's college AND keep his taxes lower?
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I think Les Mis is more the equivalent of a Dickens novel set in late Napoleonic France, post-Revolution. The drivers of the French Revolution were probably many and varied, but food scarcity and high rents in Paris and Lyons in the months prior to the rev'n drove the proletariat to revolt, more than the aspirational middle class. ("Your majesty, the peasants are revolting!” “That’s right, they stink on ice!”) Plus the cost of funding wars, and the fact that the nobility got great tax cuts, hmm, not too dissimilar to today. Plus resentment of royal absolutism, noble privilege and manorialism from the middle class. Somehow the English aristocracy managed to bond better with the people from the top to the bottom and head off revolts...
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I think a Frenchman would object to that description. Victor Hugo is a literary giant in his own right. (I dislike both Dickens and Hugo)
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Even though the market in general may be falling, I feel confident that if we decided to sell our current home in the next couple of years (or next couple of months for that matter), we would make a very healthy profit.
very scary stuff...
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well, yes, a Frenchman would say Dickens' works were like a Hugo novel set in Victorian England... (Dickens was almost a socialist...)
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Doug H,
Thanks for sharing that great example of a housing believer becoming "their own greater fool"! My question is why did he wait for 32 months? This is clearly malfeasance of office and grounds for some much needed marriage AND financial counseling! Why I just know Mrs. DinOR wouldn't stay in a specuvestment home one MINUTE over 24 months! Sheesh.
What is his excuse for leaving this obvious end of the rainbow in JAN '09 going to be? Taxes were too high? Goofy bastard.
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"the sellers also were pricing the home at value pricing"
Huh? Dude, you're kidding, right? Oh well I suppose it doesn't really matter b/c HE didn't pay a 130k over asking, the BANK did! I agree DS, how could someone that could afford to live in such a *prime* area be THAT stupid? Scary indeed.
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just goes to show, you can never go wrong in property. mark my words, young man, you'll thank me one day...
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MtViewRenter,
Oh I've no doubt the service wouldn't find that brand of fraud and deception interesting (rookies or not). The problem is that when you manage assets..... there has to be a certain level of trust. God forbid these cheats (yes cheats) put 2 and 2 together and it got out that you "narc'd" on these scumbags. You can pretty much write off getting referrals. And that's my point. People know this so they can more or less rub your nose in it. It gets so freaking old.
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I'm hardly a literary critic (as evidenced in my posts) but isn't this new movie "Blood and Chocolate" a direct knock-off of Herman Hesse? Kind of like the entire "Matrix" franchise?
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Different Sean's website
Speaking of history, I saw the most amazing interview with the current CIA head with an Oz journalist -- the guy just reinvented history in his spiel, claiming that the US, UK and Oz were at the forefront of fighting for democracy, that that is why they all got into 2 world wars, and so on. I think I can tell when people are lying in these interviews from their faces alone, similar for the editor of the Weekly Standard on, well the Daily Show with Jon Stewart, they start speaking softly with a shifty look in their eyes, as though they hope nobody with even half an education is watching...
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close proximately to good paying jobs
he spells like a real estate agent ;)
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I think PA renter is right.....so many "consumers" are saying the same thing over and over on message boards. What I want to know is whether agents do RealtorSpeak in their everyday life?
.....I took my charming son to his soccer game. The great location, location, location included a panoramic view of the mountains. The sunset was breathtaking as he scored a goal in his tastefully designed uniform. During halftime we took the short walk to the gourmet hotdog stand, complete with updated features including granite countertops. Warm memories filled our hearts as the rainclouds rolled in so we had to HURRY BECAUSE IT WOULD NOT LAST LONG!.......
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DinOR,
That's a very good point. Guess it's the age-old problem of whether you're willing to sacrifice your livelihood for your morals.
Well, at least you have something on them. There is no statute of limitations on fraud.
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Off the coast of England....