patrick.net

Glen,

I'm fine with AMT for everybody. I'd like a graduated flat tax return that can be filled out in 15 minutes flat. The tax system is a rather wretched system for social engineering and works mostly as a permanent employment program for accountants and tax lawyers. Right now, it's really just the upper middle class getting pinched by the AMT...I'd like to see the wealthy and the uber-wealthy being forced to take income and pay their proper share of income taxes.

It’s not just Prop 13, it’s the whole proposition system of government. Something like 80 or 90% of the state budget is tied up by passed propositions. It doesn’t leave much money for discretionary improvements or efficient expenditure.

I agree. We have successfully tied the hands of our elected representatives with budget carve-outs and term limits. Too much democracy, IMO.

I don’t see that happening. People have been saying that for years about Boston, California, New York - the great sucking sound has never happened. A mild fizz - yes, but that mass exodus will never happen.

eburbed,

Can't speak for Boston or NY (allah has a good link above for LI), but this is flat out wrong for CA. The Great Exodus is already upon us and is bound to accelerate as the local RE-driven economy sputters and then founders:

http://www.usatoday.com/printedition/news/20051222/a_census22.art.htm
http://www.bizjournals.com/sanfrancisco/stories/2003/08/04/daily29.html
http://www.freerepublic.com/focus/f-news/1271057/posts

The ONLY thing keeping CA's population from going negative right now is massive amounts of illegal immigration (est. 1/2 million/year) and high birthrate among said immigrants, who are mostly abject poor and illiterate laborers.

"Only the little people pay taxes" * Leona Helmsley (The Queen of Mean)

-CA’s population from going negative
+CA’s population growth from going negative

astrid,

A graduated flat tax, or a threshold flat tax is definitely preferable to the current mess. But it is not panacea. Flat taxation of income is flawed by:

1. A truly flat tax which does not discriminate on income is "regressive" because the consumption curve is not linear, whereas the tax would be.

2. A threshold flat tax will over time cause price and wage inflation up to the threshold. This phenomenon is well studied for existing tax credits.

3. A progressive flat tax isn't flat, it's progressive. That is no different than the current system, just repackaged.

I support a total elimination of all income, property and arbitrary state taxation and a replacement with a nationally managed use-tax. It is the only philosophically fair system, and still allows the powers that be to "engineer" our society.

I support a total elimination of all income, property and arbitrary state taxation and a replacement with a nationally managed use-tax. It is the only philosophically fair system, and still allows the powers that be to “engineer” our society.

Please elaborate. Is this similar to a national sales tax or European-style VAT?

Randy,

I agree that a graduated progressive tax system (so that the results are not regressive) always has to face the problem of inflation. I think the solution would be to peg the thresholds to the income quintiles (maybe institute two additional brackets for 10%, 5%, and 1% top earners). I think the foundations of the current system is quite fair (though I'd like to characterize capital gain above inflation as regular income), it would just be nice to close ALL the stupid loopholes. Those loopholes distort normal efficient business transactions into bizarre forms just to avoid taxes - I'd be happy to see them gone.

We shouldn’t just trash prop 13 and raise property taxes to 3%. The shock of that would be devastating for CA. I think CA should do what the Fed does: adjust it in small increments over time.

Something like 80 or 90% of the state budget is tied up by passed propositions.

Hey guys, just to let you know - it wasn't evil inept politicians (who are voted for by people) who did this... it was the citizens of California.

We* chose to have this horror brought upon us - and poll after poll shows that we love. And... you can expect more states to have Prop 13 clones.

Prop 13 is the height of the typical taxpayer in America thinking. Lower taxes now! What could possibly go wrong?

I bet that if you poured a cup of water from short wide cup, to a tall skinny one, most people would also tell you that they have more water. :(

(*Not me. I came to california about 22 afterwards.)

The ONLY thing keeping CA’s population from going negative right now is massive amounts of illegal immigration (est. 1/2 million/year) and high birthrate among said immigrants, who are mostly abject poor and illiterate laborers.

I think that's mostly SoCal and inland. It doesn't strike me that the Peninsula has a giant illegal immigraiton problem.

We shouldn’t just trash prop 13 and raise property taxes to 3%. The shock of that would be devastating for CA. I think CA should do what the Fed does: adjust it in small increments over time.

If we bumped property taxes from 1% to 2% over, say, 10 years, I think CA could absorb that shock. Those who own their homes outright would have to learn to be content to be only worth $300K on paper instead of $700K. Other than forcing a bunch of people to stop being delusional, I don’t see a downside.

As a practical matter, any proposed change to Prop 13 is a nonstarter.

My solution is to impose a state-based inheritance tax. This way, anyone who inherits CA property will pay the taxman when their parents die leaving a house with a low Prop 13 basis. Sure, people would move all of their non-real estate assets outside of California, but they won't be able to move their RE.

This will result in a de facto automatic sale of appreciated RE on death, which should loosen up the housing supply. Also, more elderly people would choose to sell their appreciated houses and move to Florida before they die as the result of such a system (in order to avoid the tax). Good riddance. They are a drain on social services anyways. This solution also eliminates Prop 13 dynasties, which I find particularly odious.

And needless to say, average incomes are a LOT higher in the BA than in LA.

I think you're mixing apples and oranges here. You compared San Marino to Cupertino for housing prices, but then you compared the greater LA area to the greater Bay Area.

San Marino may have higher housing prices than Cupertino for equivalent properties (I suspect they're in better shape though)... but look at the incomes:

http://www.muninetguide.com/states/california/municipality/San_Marino.php
San Marino $139,455

http://www.muninetguide.com/states/california/municipality/Cupertino.php
Cupertino $119,391

From what I've gathered, San Marino is the creme de le creme. Maybe San Marino vs Palo Alto (gunn) would be a better comparison.

Well I don’t know about Boston or Cali, but in LI NY, it’s been happening. and is picking up momentum; I will be leaving myself.

They've been saying that since 1992. It's a meme that comes up every few years.

-Recession! Everything sucks, everyone's leaving!
-Boom! Everything is too expensive, everyone's leaving!

It's the nice thing about LI - they beat themselves up with reality. In California:

-Recession! Buyer's market! Quick move in!
-Boom! This time it's different. The rules have changed. Get in while you still can!

Kevin,

Getting any change to Prop 13 or any other part of the Proposition system is pretty much impossible. Even a gradual transition over 20 years will still have people screaming bloody murder. The best we can hope for is to end Prop 13 after a drop dead date, but I wouldn't be hopeful about even that.

SFWoman,

Here's the wikipedia entry:

http://en.wikipedia.org/wiki/Alternative_Minimum_Tax

Basically, it restricts tax deductions for people making above a certain income level and ensures that they pay at least a proportion of income in taxes. The AMT was originally designed for the very rich during a period of high marginal taxes. But inflation has eaten away the value of the original threshold, so many upper-middle class (the BA "middle class) people are getting hit with it as well.

There's a few conspiracy theories about why AMT hasn't been increased. I personally think it's just a combination of neglect and the minimal voting/donation powers of the people hit with AMT. Maybe these people should get together and form a PAC.

This will result in a de facto automatic sale of appreciated RE on death, which should loosen up the housing supply. Also, more elderly people would choose to sell their appreciated houses and move to Florida before they die as the result of such a system (in order to avoid the tax). Good riddance.

Unfortunately your proposal would be shot down by the #1 voting block - the elderly.

It's not surprising that retirement homes and assisted care facilities are often voting stations during election times. :(

If we bumped property taxes from 1% to 2% over, say, 10 years, I think CA could absorb that shock. Those who own their homes outright would have to learn to be content to be only worth $300K on paper instead of $700K. Other than forcing a bunch of people to stop being delusional, I don’t see a downside.

Kevin,

Although I am in complete agreement with this from a rational, economic and philosophical "fairness" POV, I just don't see any way this could possibly happen, given the current mindset of the voting public. Even while the state homedebtorship rate in CA is much lower than the 70% nationally (approx 55%), homedebtors as a group tend to vote a whole lot more than renters. And they tend to vote overwhelmingly against anything --or anyONE-- that would raise their taxes.

IMHO, the only realistic way for Californians to ever be rid of Prop. 13 would be to abolish property taxes altogether. Of course such a proposal would be opposed by the privileged elites that most benefit from it: rich, long-time Boomer landlords and large land-owning corporations. They of course, would not want to share their privileged quasi-tax-free status with the rest of the common rabble, anymore than your rich neighbor likes to see YOU driving up with a brand-new Lexus that looks just like his.

Proponents of abolishing CA property tax could co-opt the Jarvis "anti-tax crusader" theme to great advantage. By appealing to people's self-interest and greed, you might actually stand a chance of getting it on the ballot. Of course course, the aforementioned rich Boomers and corporations will try to flip this populistic theme on its ear and co-opt the traditionally ANTI-Prop. 13 message: eliminating all property taxes will "hurt the children", bankrupt schools, "it's unfair", etc.

Personally, I'd say history has proven that arguments appealing to voters' natural greed and selfishness are far more potent than those appealing to their sense of fair play/altruism, so this should win out in the end --if it's framed and promoted correctly.

I think the good news out of this inheritance tax stuff is that the elderly are living longer and spending more of their money - so there won't be as much inheritance tax avoidance as people are currently predicting.

The bad news is that many of the elderly will become destitute before they're dead and expect us to pay for their meds/orthopedic shoes.

HARM,

The run around that is to float tax rates after a certain drop dead date. It might just be possible to get support for that, once the home prices drop by 1/2.

But overall, CA is messed up. I've said it before and will say again - I'm not gonna buy here until they make some fairly unlikely changes. I still think Canada or Australia are places to go, if you can, while you're young and employable.

SFWoman,

When exactly does the AMT come in and why are so many people are hit by it?

You can find a short-version explanation on Wiki:
http://en.wikipedia.org/wiki/Alternative_minimum_tax

AMT is triggered by income, depending upon and adjusted by an insanely complex set of rules. 15% of households with incomes from 75K-100K pay some AMT.

We were first assaulted by unexpected AMT the year my wife exercised a large number of stock options. Although the net income from these was modest, the amount taxable under AMT was considerable. Many people got stung by this during the dot-com. (We only came out well because we knew enough to retain good but expensive tax advice).

AMT also mainly hammers the near-rich, whereas the true-rich are able to largely avoid (evade in many cases) paying much or any AMT.

AMT can also eat into qualifying home mortgage interest deductions, which many people don't discover until their income has risen after a few years of occupying their multi-million McMansion.

Finally, taxes paid in AMT can get "trapped" there and not offset in later years if the taxpayer falls out of AMT later. AMT income/losses must offset AMT taxes/refunds.

**disclaimer: I am not a taxpert, and most of my info is circa 1999-2002.

Here's a fun thread about Prop 13

http://mb25.scout.com/fuscfansfrm14.showMessage?topicID=718.topic

Subject: OT: God Bless Proposition 13
Example Quote:
God Bless Proposition 13.

God Bless California.

Enjoy!

astrid,

What do you mean by "drop dead date"? Do you mean let tax rates float after you've owned the place for X number of years, or literally after you die (as in, no more Prop. 13 "Dynasty" generational transfers)?

Mass. has lost something like 3% (!) of its native-born populaton since 2000. I did the math yesterday. The state's population growth is due entirely to immigrants.

Some percentage of the Mass. exodus is undoubtedly due to retirees cashing out and moving to warmer climes, but I'm sure a lot of it is due to young families bailing on the state. Some are moving to NH, but I'm sure others are just moving out of the state.

It'll be really interesting to see what happens to public school enrollment in the most overpriced areas in 2007/8/9. The bubble didn't really take off until 2002, so the children born during that time aren't in school yet. But i am guessing that we will see HUGE enrollment declines in the best public school districts at that time.

People without kids have a real incentive to emigrate. When your kids will be heading to school next year, and the only choices you have are between buying a place in a horrific, dangerous ghetto and renting, moving looks extremely attractive.

No, drop dead date was just to characterize the date on which a new tax regime would be instituted. So anything bought before that date would be under the old Prop 13, and anything bought after would be under the less favorable float rate.

Ending the dynasty generational transfers might serve fairness, but it's largely an unnecessary battle. Very few people will actually end up assuming their parents' homes. The temptation to cash out is too great, and the arrangment would only make sense for people who want their parent's homes and if the home has extremely low basis.

I'd be more concerned about fixed corporate owned properties. Corporations are immortal, so they could essentially keep their ridiculously low rates forever. That's probably why you see so many vacant buildings in the BA, the operating costs for a long held property is so low that the owners can tolerate really high vacancy rates.

They’ve been saying that since 1992. It’s a meme that comes up every few years.

It’s the nice thing about LI - they beat themselves up with reality.

I don't know where you are from, but I'm guessing you are either not from LI or you are a hermit that doesn't know anybody.

More than half of my friends have already left to buy in states such as NC, PA, GA, TX, IN even FLA, some are in the process of moving and many of the others who bought are starting to regret it.

The only reason I haven't left yet is because even though some of those other states are cheaper, there is still too much dust in the air and I'm waiting for it to settle. I will wait for the coming recession to bring the fundamentals back where they should be. Until then, I can rent and stay mobile for a while and when I feel the time is right, I'll drop anchor.

eburbed Says:

I don’t see that happening. People have been saying that for years about Boston, California, New York - the great sucking sound has never happened. A mild fizz - yes, but that mass exodus will never happen.

Actually, your statement is not entirely true:

http://www.boston.com/news/local/articles/2006/04/20/bay_state_exodus_2d_only_to_ny/

From the article:

Frey said metropolitan Boston has been losing people since 1990, but in recent years the loss has been occurring at greater rates than at any time since the recession of 1990 and 1991. Today's report found that among large metropolitan areas, Greater Boston trailed only San Francisco and New York City in its rate of loss.

I guess you could say it's somewhere between a mild fizz and a great sucking sound - maybe a slow leaking, hissing sound?

Mr. Vincent,

Personal benefit does not equate to good tax policy. Prop 13 discourages new housing and artificially inflates the value of existing housing stock. It's also oppressive on young families, precisely the sort of people this state should do more to keep. It decreases school funding to an extent. Finally, it encourages the housing market to be illiquid, as would be buyers are barred from entry due to high prices and would be sellers are reluctant to sell because they got such a low tax basis.

If Prop 13 does not exist, houses would be cheaper and more plentiful, and in the long run that good for everybody. A house is a place to live, it's not a lottery ticket for some early buyers to get rich from.

PROP 13 DID NOT CAUSE THIS HOUSING BUBBLE! When prices revert to trend, you renters will love prop 13 after buying your house.

Mr Vincent,

Given that I was (a) not born early enough to have my "tax basis" arbitrarily frozen in time in 1978, and (b) even after prices revert to the mean, I would STILL be paying far more than my birth-Lottery neighbors, I seriously doubt that I will ever grow to love Prop. 13.

The only good thing about Prop. 13 is the tax RATE cap (1.25%), which --it's true-- does apply to all homedebtors. What makes Prop. 13 so horrendously distorting, though, is the "frozen in 1978" price BASIS for the house. This is what results in the infamous "I pay $10,000 for a tract home identical to my neighbor, who only pays only $500" scenarios.

(I am not an economist, but I do seem to have better real estate sense than David Lereah)

He knows what's reallyhappening in real estate, he just chooses to lie.

Many of the BA under 40 crowd are renting or bought marginal property with help from mom and dad. So they still don't have to worry about carrying the full cost of BA ownership. Many haven't started procreating and worrying about schools/childcare. They will give cheaper cities like Austin and Raleigh a closer look once they seriously look into buying to settle down. Something's gotta give, the ineffable BA aura will come off once the young people have to worry about mundane things like good schools and paying for car insurance.

When prices revert to trend, you renters will love prop 13 after buying your house.

Ahhh, "you renters"

How about we refer to you as Mr. Asshole?

Small correction:

-A house is a place to live, it’s not a lottery ticket for some early buyers to get rich from.
+A house should be a place to live, it should not be a lottery ticket for some early buyers to get rich from as things stand today.

In terms of disparity, I can't get over the fact that in Chicago many on the north side will pay 600 to 625k for a three bedroom condo literally next to a three flat for 780k to 850k (3 unit building where you own the entire lot). Some of these 3 flats willl have a nice owners unit of 2 to 3 bedrooms; it may not be quite to the level of the condo, but still a very nice unit. On top of that, with the 3 flat you have 2 renters paying most of the mortgage and taxes. The more I look at real estate the more intrigued I am by all the disparities even in a small area of interest but of course in the larger national context as well!

SFWoman,

NP. Consult your tax attorney/accountant for real advice.

HARM,

I think a national use tax would be politically feasible if it were seriously treated. First the primary problems, as I see it (taken from various reading about this issue for the past decade or so):

1. It won't work if it doesn't replace existing taxes. The EU VAT is a very bad attempt at a use-tax regime because it has just become an additional tax burden layer, not a replacement.

2. It may be impossible to achieve (1) without amending the US Constitution, which means it will never happen unless somehow snuck in while other amendments are occurring. I think that the Supremes would uphold state rights to administer their own commerce within their state if the Fed's tried to either directly or indirectly force states to eliminate all their taxes.

The Benefits:

1. It would be philosophically fair. Taxes are based upon consumption/use, so taxpayers only pay when consuming/using.

2. It would appease social-engineers. I actually don't hate all forms of social engineering; just most. But the powers that be could discourage cigarette smoking, for example, by imposing a high tax on those while encouraging eating carrots by having no or token tax on vegetables.

3. Number (2) above would prevent regression. Assuming the gov't doesn't put .0001% tax on yachts and 72% tax on milk, the system will be progressive. Poor who consume most of their income to survive will keep more money because they'll pay little to no taxes...that is unless they're buying X-boxes and Ice cream. If they are, then that's their choice.

4. People feel better when they do pay taxes because they are doing it as a matter of conspicuous consumption. Kind of like buying a car today. People rarely consider the tax implications of the car purchase -- they buy the car because they have decided to buy a car of a certain type/price, despite the taxes. If they want to pay less tax, they buy a cheaper car or a used car. That psychology will extend to all non-essential consumption/use.

5. Finally, I think it would be palatable because it moves the burden of tax accounting, filing, and compliance to businesses and away from people. Businesses and perma-pro-bus advocates will argue that it will raise prices for everyone because biz will pass on the added costs to consumers. This is fallacy. Biz will have less tax burden in most cases, because they will file/pay no income tax or cap gains tax or (the biggest burden) myriad complicated state taxes. Their tax costs will fall, not rise. This won't stop them from bitching about it, though. And that would actually help politically make the proposition attractive to populist voters.

Who will hate and fight hard against this?

1. Those employed by the various tax agencies, auditors, or preparers.
2. State gov't politicians
3. The very wealthy; they lose a proportional advantage they have in their ability to avoid taxation.
4. The knee-jerk liberal advocates of the poor. They just hate anything that isn't simple "eat the rich" rhetoric.
5. A few businesses that make money off of state-tax arbitrage; namely internet retailers and border-area retailers.

Paul,

Good point. If this bubble goes on for much longer, the flippers will "extract" all the values of the existing housing stock by making all these old 2 or 3 family homes into super pricy condos. I guess this situation makes sense for young people desperate to own with no common sense in their heads.

Then again with the new tax bills coming the two renters probably don't even cover taxes. We have trianual assesments. Most people I know are reporting assessed valuations that more than doubled in 3 years.

I guess it's the flip side of CA. Grandma is getting kicked out onto the street because the house she bought in gritty old Chicago for 50k or 100k is now the hottest neighborhood in the midwest and valued at 1M (I should mention that she gets a larger deduction for being elderly but still..).

Randy,

Honestly, I think the advocates for the poor have more than just a rhetorical dislike for a national VAT. Most of the poor are not paying taxes outside of SSI and Medicare. A national VAT will increase their tax burden.

If the current tax system worked the way it ought to, I'd be against a VAT system, since it'd probably mean lower corporate taxes and more squeeze on marginal income workers. But realistically, the current system is so messed up that the opposite would be true. The corporations would probably end up paying more in taxes and spend less effort structuring their deals based on tax planning. The marginal income people will simply learn to live with less (and they won't feel it as much if everyone around them is also poor or if conspicuous consumption just went out of fashion) and deal with a less complicated tax system. My main concern would be the shock to our consumption based economy - I think the shock will have to come sooner or later, but it's still a scary thing to contemplate.

I'm curious to know what the VAT would cover. I assume it would cover all services, rentals, insurance policies, etc. not directly taxed under the current regime. Enforcement would be a lot easier if everyone goes to a traceable cash card/credit card system.

Astrid,

I think we may be past the extraction point.

Just for fun sometimes I'll walk around the neighborhood on the weekends and go through a couple of the hundreds of open houses. On Sunday, the agent was closing an open which was for two condos in a four unit building in order to get to his next open which was for 4 units out of a 4 unit building. It's empty!

I love renting!

Paul

I guess it’s the flip side of CA. Grandma is getting kicked out onto the street because the house she bought in gritty old Chicago for 50k or 100k is now the hottest neighborhood in the midwest and valued at 1M (I should mention that she gets a larger deduction for being elderly but still..).

God, if I hear another "Grandma is getting kicked out onto the street" urban myth, I think I'm gonna hurl! Paul, this is the same line of crap that was used to sell Prop. 13 to the public back in '78, and is no more true today than it was then.

If said "grandma" on fixed income finds herself truly unable to pay her property tax on that (presumably paid off in full) urban house-ATM now in a "hot neighborhood, she has TONS of options, most notably:

1. Move to a less expensive neighborhod or city, like a lot of retirees do. It not only will lower her taxes, it will probably lower her property insurance and other expenses as well. It will also free up another house close to where JOBS are for young families who might actually NEED it.

2. Pay the property tax by tapping the equity via cash-out refi, HELOC, reverse-mortgage or a zillion other loan products the mortgage finance wizards have cooked up. If the place is paid for and grandma ain't living forever, why not?

Paul,

Then grandma should consider selling and moving elsewhere. There's constant talk of old people being kicked to the curbs when it's the invisible debt strapped or locked out young family who would make best use of those homes.

SFWoman,

The very wealthy seems to shield most of their income and expenditures behind bank lines of credit, corporations and various trusts. Thus, they are often taxed very lightly as it is. With a VAT system, we can at least be sure of some tax capture.

I'm troubled by the VAT discussion. On one hand, I think it's a more rational system that may curb some of this society's excesses (less complicated tax system, encourage saving v. spending, make people responsible for their own purchases). One the other hand, I think the cumulative shock of such a change over would be very large and very unpredictable. I highly doubt it would ever be feasible in this country, though it might work very well for small tightly controlled economies like Singapore or Japan.