The Jury Talks Back

9/20/2009

Fixing California: Property Taxes

Filed under: Uncategorized — Kevin M @ 2:11 pm

There are three big problems in the California tax system: very high sales taxes, “soak the rich” income taxes and a broken property tax system. Taking the most contentious item first, Prop 13 and the property tax:

We are told by those-that-rule that we need to split business property off from residential property to even things out. This would be a mistake. As nearly anyone who owns or runs a small business will tell you, the business property tax burden does not fall on fat cat real-estate owners, but on those that lease from them. It is often passed along directly as a line-item addition to their rent, but it is figured into the rent in any regards. Furniture, fixtures, equipment and other business property are also taxed directly by the state. The road to recovery in California requires making things better for small business, not worse. Bad idea.

The idea of Prop 13 was to limit taxes to realized values. Instead of taxing people on the paper value of their property, it would only be re-assessed when the value was realized in a sale. Otherwise only a nominal appreciation value would be assessed. This kept people on fixed incomes from being taxed out of their homes because of paper profits. It also allowed buyers some confidence in planning their finances and discouraged short-term real-estate speculation.

Unfortunately, Prop 13 allowed some realized gains to escape property taxation. Rather than sell a house to capture appreciation, people started borrowing against the unrealized paper value. Lines of credit allowed them to escape both taxes on sale profits and increased property taxes on a new purchase. These credit lines also decreased mortgage security since more mortgages now were leveraged to the edge, and have been a major contributor to the foreclosure crisis.

So, I would suggest that it would be stabilizing and fairer to treat the sum of all loans taken out on a property as a voluntary reappraisal for property tax purposes. I would suggest that this be phased in, or delayed, so that it not collapse the housing recovery, but this loophole in Prop 13 is increasingly unfair and dangerous and should be addressed. And yes, it would hit me, too.

If it was desired to make this revenue neutral, a small business exemption on non-real property could be instituted.

Fixing California: A challenge

Filed under: Uncategorized — Kevin M @ 1:40 pm

I have a challenge for my fellow posters here, and even for those on the main site: Name one or two reforms that 1) are practical, 2) can take effect quickly, and 3) would have measurable effect in getting California out of its fiscal mess.

We see many of the usual suspects (e.g. the L.A. Times) repeating bad ideas like a Constitutional Convention, or restricting the Initiative, or making tax increases easier. What do we have to offer besides “No!”? If that’s all we have, even a bad plan will beat no plan.


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