patrick.net

I have thought about this a bit myself. Basically, CA is in a real pickle. CA's budget is in the red. This is nothing new, but it seems to be coming to a head, and kicking the can down the road doesn't look like it can be kept-up all that much longer.

So, they need to cut spending and/or raise revenue (taxes). Both of those things are wildly unpopular with enough of the voting base that a discussion of WHETHER they will happen is another topic entirely. But, for the sake of this line of discussion, it is interesting to look at the option of increasing revenue via an increase in property taxes.

As you point out, an increase in property taxes will likely lead to a decrease in property values since most of every extra dollar in taxes paid per month (effectively) is most of a dollar less that can be paid on a mortgage. I say MOST of a dollar because this assumes that the increased property taxes will be deducted from income taxes, and the payer will get some pennies-on-the-dollar back from that, so it isn't a 1:1 exchange between property taxes & mortgage payments.

So, CA can keep Prop 13 in place and continue collecting 1.25% on high-priced RE. Or, they can un-cap the property taxes & collect a higher percentage on cheaper property. On top of that though, I am fairly certain that the removal of Prop 13 and raising property taxes would drive out even more middle class wage earners & businesses. Maybe CA would break-even on property taxes, but they would end up losing more money by driving businesses & individuals out to places with lower overall tax burdens.

There is no easy answer here, and I am sure that our fearless leaders know it. Tax increases need to go hand-in-hand with entitlement spending cuts. Any CA politician that votes for either of those knows that they will never get reelected. Our former governator gave a pretty good interview where he talked about his experiences trying to balance the budget. Everyone that he got to vote yes on a tax increase was unable to get reelected thereafter. The state's problems are as much with the people as the government (or maybe entirely with the people since they choose the government).

- Get rid of the mortgage interest deduction
- Raise property taxes
- Kick out people who stopped paying their mortgage

And then on the damage control side, build a few more homeless shelters. Nothing says screwed up state like a family making 100K/yr living on the street. :)

LAO says

If you raise property taxes, then home values will drop accordingly. Wouldn't the government rather collect 1.25% on a $400K home rather than 2% on a $200K home?

1.25% on a $400K home is $5000 in property taxes collected.
2% on a $200K home is $4000 in property taxes collected.

If property tax rates rose to .75%... that $400K home in california would quickly drop to $250K or below!

Hardly. It's more like $7K/year on $350K versus $5K/year on $400.

Disregarding the tax implications and other ownership costs which make property taxes a smaller fraction of the total and their increase a smaller impact :

30 year FHA loans are available for 4% with 1.15% mortgage insurance. Mortgage and tax with 3.75% down total $2269 / month at 1.25% property tax and $2519 at 2% so a price drop to $360K would get back to the same monthly cash flow.

With no PMI, 4%, and 20% down on a conforming loan the totals are $1944 and 2194 which gets you back to $354K.

This also assumes that housing budgets are fixed although history shows us that people are willing to stretch for houses they'll "grow into" to the point they can't even afford blinds.

LAO says

The double whammy of slightly higher property taxes and slightly higher interest rates would have devastating effects on CA housing.

By "devastating" do you mean making prices approach historical norms and values in other parts of the country?

Why is higher house prices something the government should pursue, even if it could? Lower prices means more affordability, less dependence on capital from outside of the state, and less risk for bank crises.

If they will raise property taxes they will just take money out of the markets for them to spend on the unions, while making housing prohibitively expensive for older folks who live on social security.

No good can come out of it.

Aside from budget deficits, there is another more compelling reason to ditch prop 13 - simple fairness. How is it fair that two neighbors in identical houses can pay wildly different taxes for the same services? I say this as a long time owner in Moraga. On one side of me is a family who bought in 2007 and pays about twice what I pay and on the other is a couple with grown kids who've been there 30 years - I'm guessing their taxes are maybe 1,000/yr if that. Absent prop 13 there is no reason this couple would still live in a 5 bedroom 3000 sf house in Moraga. Of course, the real crime is that businesses like the Chevron refinery pay taxes based on what the land was worth in 1978 - and we all know how badly the oil companies need to save money. Prop 13 is whack and needs to go.

FortWayne says

while making housing prohibitively expensive for older folks who live on social security.

How about an amended prop 13 that only applies to seniors of retirement age (65+)? That was what prop 13 was SUPPOSED to do, although the main backers of it were anything but seniors at the time.

bmwman91 says

FortWayne says

while making housing prohibitively expensive for older folks who live on social security.

How about an amended prop 13 that only applies to seniors of retirement age (65+)? That was what prop 13 was SUPPOSED to do, although the main backers of it were anything but seniors at the time.

Applying to "seniors" could work. Here are some other possibilities:

* Prop 13 shouldn't apply to 2nd houses or rental houses--only "primary residences." Some common-sense rules could crack down on cheaters; for example, if you're pretending to live in a 1-bedroom apartment in Palo Alto just for the schools, you can't claim your house in a different city is your primary residence.

* You shouldn't be eligible if you are not a California resident. Again, some common-sense rules could crack down on cheaters: If you evade California capital gains taxes by claiming you live out of state, then your CA house is clearly not your primary residence and you don't get to take the Prop 13 benefit. If you have any drivers license, it would need to be a CA one. If you have car insurance, it would need to be based in CA. If you own a car that you drive in CA, it would need to be registered in CA. Otherwise, you're not a resident and so no Prop 13 benefit.

* Prop 13 benefit ends when the owner dies. In the case of a spouse, the spouse gets the Prop 13 benefit but based on the time period when the people were married (or when the "couple" co-habitated in that specific house for the first time as proven by tax records, drivers license address, insurance records, etc.). That would dampen any last-minute sham marriages.

* Prop 13 can't be inherited. In the common case, "kids" are already 40+ years old when they inherit their parents' house and they already have their own house. Inheriting Prop 13 benefit is just piling on in the rich-get-richer system.

I think there is an alternate approach that would be even better: Set the total amount of property tax to be collected by the state. (Perhaps, the amount equal to that collected by sales tax, for example.) Then, each homeowner pays the same percentage tax on the "real" value of the property so that the total amount collected is reached. The percentage would be recalculated each year. If CA property values increase by a huge amount in a short amount of time, the percentage tax would be decreased so that the dollars collected remains the same; overall, each homeowner would pay about the same as before the house prices increased. That would solve the problem the original Prop 13 was supposed to solve. The tax system could be phased in over the course of 10 or 20 years. When it was fully phased in, the percentage figure would be, maybe, 0.5% and so wouldn't be as big a burden as the current 1%.

Finally, I'll note that if Prop 13 were abolished immediately with no other mitigating changes, the people who are retired still wouldn't be forced out of their homes if they planned even somewhat well. Around here, retired people aren't required to pay their property taxes at all: they can have the county put a lien on their house for the amount of the tax. When the owner dies, the county can get their back taxes as part of the estate sale. The purpose of Prop 13 was supposed to be to save those people whose property value "unexpectedly" skyrocketed--those very same people are now "unexpectedly" rich (because of the house) and can afford an additional lien on their house every year until they die or move. (Unless, of course, they used their house as an ATM, in which case I'm not shedding too many tears if they have to move.)

The Prop 13 differences can be much greater than was mentioned above by others. My neighbors to the left, right, and across the street pay about 1/3 of what I pay. Just to be clear, that's the three of them _combined_ pay about 1/3 of what I pay. Two of them have larger houses and one has the exact same house.

bmwman91 says

FortWayne says

while making housing prohibitively expensive for older folks who live on social security.

How about an amended prop 13 that only applies to seniors of retirement age (65+)? That was what prop 13 was SUPPOSED to do, although the main backers of it were anything but seniors at the time.

How about a replacement that reads like Colorado's TABOR which doesn't allow state and local governments to collect more taxes this year than they did last year adjusted for inflation and population growth unless approved by the voters ? Perhaps with some sort of phase-in.

That way no one (young, old, natural persons, corporations, immigrants from other states) gets screwed because market manipulations have increased their net worth on paper or they moved during a period of inflated property values (The woman who bought my Boulder home in 2006 is still paying about what I did in real dollars before the housing bubble got out of control)

It's progressive too - when wealthy people scrape off small depreciated buildings so they can live in large new ones they pay a bigger share of the tax total.

Peter94087 says

Here are some other possibilities:

I know you didn't intend for your post to be funny, but I got a few chuckles out of it. First off, prop 13 isn't going anywhere and won't be changed because most voters are smart enough to know that once that box is opened the politicians will go wild. The second item is that with all of your complicated "possiblilities" assume that government is competent and efficient and as most of us know they are not! I feel fortunate if the different counties where I hold property get my property bills correct. I can't even imagine the chaos and screw up when they would have to make all the recommended calculations and record keeping on ages, who's married to who, etc.

My straight-up opinion which I know will never get passed is to align California's property tax system to that of most other states: Your taxes are set at a percentage tied to the home's present value, meaning it goes up and down.

I feel strongly about this because it is a win-win situation for both "sides". The state gets more money as prices go up. Secondly, as in other states, taxes tied to values creates a sort of check-valve system where there is a sort of consequence for rising values, which in turn means it would probably put a damper on out of control price fluctuations. Why is this good for owners? Because as seen by our current bubble pop, the aftermath was far more devastating to owners than had the housing market been more rational.

LAO says

If you raise property taxes, then home values will drop accordingly. Wouldn't the government rather collect 1.25% on a $400K home rather than 2% on a $200K home?

Government doesn't work that way. As home values drop, the property tax % will simply be upped to "make up for" the loss in value of the house, since it really is always about the money.