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.

13 Comments

  1. This would never sell in California, but I think Prop 13 should be abolished altogether. If my next door neighbor sells his house for four times what he paid for it, which just happens to be the same price I paid for mine at around the same time, the value on my home is not “paper” appreciation, it’s very real. If I qualify for a loan on the higher value, it’s just as real whether I choose to take that loan or not. Why should my new neighbor pay more taxes than I do just because I got a better deal than he did when originally buying the property? If anything, the sucker who paid more for the property should be the one getting a break on taxes.

    Barring that, a ban on downward reassessment in excess of the nominal rates applicable to upward reassessments would make sense. Sauce, goose, gander, etc.

    Comment by Xrlq — 9/20/2009 @ 4:20 pm

  2. xrlq–

    If there was some indication that the state would not spend every dime it got, I might agree with you. But part of the reason for Prop 13 was that the state was unable to do that. And still is.

    Comment by Kevin Murphy — 9/20/2009 @ 5:03 pm

  3. How about this, then. Can you name a single county in Cali where property is taxed at a rate significantly lower than 1%? Since leaving California to seek political asylum in the United States, I’ve lived in two such counties in as many states, and pay way less tax on my McMansion that I paid on that little hut I had in the O.C. VA and NC have their own budgetary problems, too, but nowhere near the level of California’s.

    Comment by Xrlq — 9/20/2009 @ 5:27 pm

  4. Meanwhile, in Cali, local governments have to charge everybody 1% to keep from going broke, given that half the people will be charged 1% of a ridiculously low amount.

    Comment by Xrlq — 9/20/2009 @ 5:51 pm

  5. Xrlq,

    The main reason Prop 13 passed was that retired folks were being taxed out of their homes. They had NO intentions of selling, but the tax hungry politicians wanted their blood money.

    Another problem. Do you then also rebate taxes for properties sold for less than their purchase price? I bought an Anaheim home in 1990 and let the bank have it back in 1996 because I couldn’t arrange a short sale the bank would approve of. (They wanted 2 months to make a decision. That wrinkle drove away potential buyers.)

    Comment by PCD — 9/21/2009 @ 4:50 am

  6. xrlq–
    Actually, in many CA counties they take advantage of the added 0.25% allowed for interest on bonds, and then add on assessments and fees. The real number in LA County is about 1.3-1.4% depending on assessment district.

    If they kept a (lower) tax rate cap, and indexed it to the average housing cost, I’d accept removing the assessment fix. I would insist that assessors be elected and that falsifying appraisals be a felony.

    Comment by Kevin Murphy — 9/21/2009 @ 7:53 am

  7. Not sure why I should feel sorrier for retired people than for people who work for a living, or why I should feel especially sorry for people who got a really sweet deal just by buying early, but let’s assume arguendo that taxing people out of their homes is the greatest evil. Why not assess the tax at fair market value, but only require them to pay Prop 13 levels at the time, and take the rest out of the sale price when they eventually sell, bequeath or devise it to someone else?

    Comment by Xrlq — 9/21/2009 @ 6:09 pm

  8. Kevin: my point exactly: the arbitrary ceiling becomes a floor. When living in Cali I naively assumed it was that way everywhere, regardless. I’m happy to say it’s not, but never have learned that if I hadn’t left Prop-13-land.

    Comment by Xrlq — 9/21/2009 @ 6:10 pm

  9. Kevin…County Assessor (at least in L.A.Co) is an elected position.

    Xrlq…A wrinkle in tax-assessment law that most people overlook is that under the Pre-13 system, real property had to be assessed at its’ “highest and best use” level.
    This affected people who had been in their homes for countless years (and generations even) in that if they had a property that was large in acreage, it could (and was during the boom years) reassessed as to what it would be valued as if it was subdivided into small house plots. This forced retired farmers off of their land, and broke up suburban plots that were zoned R-3 (residential/agricultural IIRC) where people had large gardens in the rear, or kept horses (or other animals).
    The way the system worked in practice was that the legislative branch (at whatever level) decided how much they wanted to spend, and then set the tax rate accordingly, with pressure galore on the assessor to keep bumping-up those assessment numbers to support higher revenue streams.
    Prop-13 was the result of a taxpayer base that finally said Enough!, after the Legislature in Sacramento had ignored their pleas for a solution.
    Prop-13 was passed because we didn’t trust the politicians then, and we don’t trust them now (still)!

    Comment by AD - RtR/OS! — 9/22/2009 @ 11:14 am

  10. Boo hoo. People who could have sold their homes at massive profits that provided them with substantial retirement income, instead squat on valuable property while the Proposition took local control of money for education away and gave it to the state.

    We all know that centralizing where education dollars go, rather than having them come from local property tax, is advisable. It’s been a boon for the education system in California, that Sacramento control.

    Comment by Christian — 9/22/2009 @ 2:11 pm

  11. AD–
    The system pre-13 was designed to force farmers off their land in places like the San Fernando Valley and Orange County. The greatly favored developers. As high as the land prices were, they would have been higher if some farmers held out. But with taxes higher than planting costs….

    Comment by Kevin Murphy — 9/22/2009 @ 4:14 pm

  12. Yes, but “highest and best use” is still on the books when it comes to assessing non-residential property, which must be reassessed even when a “significant” amount of company stock changes hands, even if the corporate shell remains intact.
    This is why “land trusts” were created in the early seventies to preserve non-residential properties – think Santa Catalina Island (owned by the Wrigleys), and IIRC the Tejon Ranch (owned by the Chandlers of LAT fame).

    Comment by AD - RtR/OS! — 9/22/2009 @ 5:54 pm

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    The Jury Talks Back » Fixing California: Property Taxes

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