
Solve the Proposition 13 problem by paying off the difference when you sell - mhb
https://ideas.4brad.com/solve-proposition-13-problem-paying-difference-when-you-sell
======
hedora
Treating prop 13 tax discounts as debt would further discourage people from
selling (never sell, because you have incurred infinite debt).

It really should be eliminated for all but a family’s primary residence, and
it really should reset at inheritance, or when commercial property changes
hands.

That’d fix a big percentage of the problem, at least in the bay area, and it
wouldn’t tax anyone out of their home.

Getting rid of the incentive for rental properties should immediately flood
the market with no-longer-profitable investment homes.

I don’t see it increasing rent much, since rent levels are already above what
most markets could bear.

~~~
ScottBurson
> Treating prop 13 tax discounts as debt would further discourage people from
> selling (never sell, because you have incurred infinite debt).

This is a common reaction to the author's suggestion (one I have made in
comments here on HN several times), but it's wrong. The only way the tax debt
gets to be large is if property values go up for a long time. If that happens,
the gain on the sale is easily sufficient to pay off the lien.

Remember that Prop. 13 allows a property owner's tax bill to increase by 2%
annually. In the scenario where there's a sudden jump in property values
followed by a long plateau, the payments will eventually catch up to the
assessment. If we stipulate that the tax bill may increase by 2% annually as
long as there is an outstanding balance (even if a sharp drop in property
values reduces the assessment), then I don't think you can come up with a
scenario where the lien value is excessive. Try it, with actual numbers;
you'll see it's not so easy.

(Oh, we do also have to assume that the interest rate is reasonable. I would
be inclined to leave it at zero, given that this proposal is already going to
be extremely difficult to sell the public on.)

~~~
kd5bjo
If there's another real estate crash, property values could fall below the
accumulated property tax debt, leaving people who thought they owned their
home outright underwater and unable to sell.

~~~
ScottBurson
As I said, you should try working out a scenario with actual numbers. The lien
balance will just never get that large.

Prop. 13 limited the tax rate to 1%. So to see how much the lien can increase
by in a single year, you take 1% of the amount the property value increased,
less 2% of the previous year's tax bill.

Let's take, by way of example, a scenario where values have been flat (so the
payment has been equal to the assessment, so there's no lien yet) and then
jump 10% in a year. What happens? Let's say V is the property's value before
the 10% jump. The assessment, after the jump, is for 1.1% of V; the tax bill
is for 1.02% of V, creating a lien for 0.08% of V.

If values plateau again, in the following year, the assessment will again be
for 1.1% of V, but the bill will be about 1.04%, adding about 0.06% to the
lien. It will take 5 years for the bill to catch up with the assessment, at
which point the lien will total about 0.2% of V.

0.2% is just not a scary number; compare it to the 6% that an agent typically
charges to sell the property. Even in a crash, it's just not going to make the
difference between making it possible or impossible to sell.

The _only_ scenario under which the lien value grows to a significant number
is the one in which property values go up a lot for a long time (as they have,
in the SF Bay area, for the last 20 or 30 years). In that case, it would take
a hell of a crash to bring values down to where some properties would be worth
less than their liens. A 20% drop wouldn't do it; it would take something more
like an 80% crash.

An 80% crash is not going to happen. But if it makes you feel better, I would
be willing to accept a provision that says that if the amount of the lien at
the time the property is sold exceeds 50% of the gain on the sale, the
difference is forgiven. (No refund is offered if the property is sold at a
loss.)

------
boulos
The author’s fundamental argument is in this sentence:

> Taxation should not be so different among the same people.

but he never chooses to define “same” (in the article it’s his neighbor, but I
don’t believe he strictly meant local/adjacent).

The usual definition in progressive tax circles is that “same” means similar
percentile of either wealth or income. That is, there is no preference for
seniority, location, etc. but only overall wealth or income.

Prop 13 _clearly_ was motivated/sold on the basis of income, particularly
retirees. As others have asked: if you suddenly have a multimillion dollar
home, why not get a reverse mortgage? The historical answer is that those were
rare and unusual in 1978. Today, that’s a perfectly fine answer. I
(personally) see no reason to argue that a grandmother “deserves” to have
effectively free property tax and be able to gift her property to her
children. Nobody would argue that for her checking account, so why is it so
for her home?

I’m all in favor of means-tested taxes, including property tax. The easiest
first step is on the commercial side (Prop C and Prop D both attempted to grab
a bit here), and you can exclude truly small business owners in the same
manner (gross receipts). But tossing the whole thing out would be a huge step
forward for California. There’s no need to do this debt thing, just reset and
phase-in (or even grandfather-in, but as other folks have noted, this will
make the sale of property even more rare).

------
beojan
Why are property taxes even connected to property values? Does it get more
expensive to supply public services when property values go up?

A flat tax per square foot would make more sense, perhaps with a rate ray
varies based on locality.

~~~
FuriouslyAdrift
Land value taxation is about the only method of taxation that is fair and
reasonable...

[https://en.m.wikipedia.org/wiki/Land_value_tax](https://en.m.wikipedia.org/wiki/Land_value_tax)

~~~
beojan
Land _value_ taxation makes even less sense for funding local public services.
You could build a 500 unit high rise apartment block on a piece of land and
pay the same tax as if you had built 10 houses on it.

For schools and policing and the like a poll tax is fair, but regressive. A
local income tax on the other hand would rise as the cost of public services
rose (since labor is a significant portion of that cost) without being
regressive. That would still suffer from richer municipalities collecting more
tax and hence having better schools etc. though this could be alleviated with
larger (and hence more diverse) municipalities.

~~~
TheCoelacanth
Land value and property taxes are fair if you look at it from the perspective
of value received from local services rather than cost to provide local
services. A lot of the value of a property comes from how good the schools
are, how effectively policed the area is, how good the transportation
infrastructure is, etc. It's only fair that the community be able to capture
some of the value that it is creating.

~~~
beojan
Unfortunately, this just leads to areas that are well-run already (generally
rich ones) getting more and more funding, and areas that are already poorly
run (generally poor ones) having to work with even more restricted funding.

With a property tax system, it would be impossible to rehabilitate a
municipality where property prices have dropped to ~0 (e.g. parts of the North
of England, and Detroit).

------
Gibbon1
OP is on the right track here. A property tax reform should include.

Getting rid of the Prop 13 exemption for commercial property.

Freezing or deferring property taxes for retired home owners.

Supplemental rent support for retired long term renters.

Ten year phase in period.

~~~
boulos
What about billionaire retirees? If you replace retired with “means tested”
this makes more sense. But simply preferring people due to age is a mistake.

Edit: Billionaire was a bit extreme... how about high-net worth? Say $5M+? San
Francisco has plenty, and it’s a sufficient enough population that we should
be attempting to garner more tax receipts. The same is true of the mental
health income tax thing above $1M/yr.

~~~
lopmotr
You can't simply call such a complicated thing a "mistake". You're suggesting
encouraging people not save too much for retirement. Why discriminate against
people who are careful to prepare for their future and give free money to
those who prefer instant gratification? Billionaires may own many houses and
be more heavily penalized. They're also very few so it's no great loss to miss
out on their small property taxes.

~~~
boulos
Means testing can be either income or wealth. Some countries prefer one over
the other (the US prefers income, while the UK prefers wealth), and they have
their upsides and downsides.

I’ll note that most tax progressives don’t consider “billionaires own many
houses” as being “more heavily penalized”. A progressive tax results in a
higher _rate_ not just a higher amount. Other proposals here of “only one
first home”, are a good example of making property tax progressive.

Note: I added an edit to my original comment, since billionaire was
distracting. If you move this down to high net worth individuals, it is a
significant group of people in California.

------
ebiggs
The Prop 13 problem is easy to solve technically, if you see the problem as
described in this piece... but that's not the problem that needs to be solved.
The real problem is California's referendum system that allows such populist
lunacy to pass at all.

~~~
ScottBurson
I'm not sure what you're proposing, but my own preference (as a California
voter) would be for initiative constitutional amendments to require a 60%
supermajority. Initiative statutes, which can be modified after passage by the
legislature, I'm still fine with passing on a bare majority.

~~~
ebiggs
Unfortunately, Prop 13 passed with 62% :(

------
cameldrv
The math is pretty simple, and this should be implemented tomorrow. If we look
at SF, based on Case-Schiller, there has been 5.7x appreciation since 1987. If
you bought for $200k, your house is now worth $1.14 million, and you have paid
$84k in tax total. Under this plan, you could still pay the $84k total over 31
years, and then if you sell for a cool $940k profit, you owe about $116k in
deferred taxes, assuming 4% interest.

------
duxup
I know they do something like this in a distant way in some places in
Minnesota when improvements are made by the city or county that suddenly
increase the value of the property. So if they put in water, sewer, and a nice
road along your formerly rural large property that now begs to be developed
into more suburban stuff, you can actually defer payment until you sell or
develop your now very valuable property.

The advantage there is there was a huge jump in value so the value is likely
to remain... hopefully.

This proposal could result in taxes that are never paid and maybe the property
isn't worth that much actually and then the tax payers have to pay because the
gov banked on it.

Also encouraging people to NOT sell seems a bit artificial and could have side
effects...

------
ScottBurson
This is how Prop. 13 should have worked to begin with (along with applying
only to owner-occupied residences, not to rental or commercial property).
Seniors on fixed incomes still get to stay in their homes, but localities
aren't starved of funds.

The political barrier to making a change like this now seems insurmountable,
but that just means that those of us who favor it need to keep talking about
it. Eventually, perhaps, the message will get out.

------
ajkjk
It seems like people whose properties are worth much more than their incomes
should be able to reverse-mortgage their property to pay the taxes. Why does
that not work?

~~~
emeraldd
At the end of it you lose the property, which means there's nothing to pass
on. Also, there's the potential that the person in question is young enough
that the situation could cost them their home before they are ready to leave
it.

------
burfog
Proposition 13 exists because cities refused to control their spending. Solve
that problem before asking to water down or eliminate proposition 13.

For example, the total value of the city budget could be expressed in dollars
per resident, and this could be prevented from increasing without a vote by
the residents. The property tax rate then varies as required to exactly
satisfy the city budget.

------
pkaye
Why not go further and tax other forms of wealth. Maybe a 1% wealth tax on
everything beyond some minimum amount (say $50k/person.)

------
cryptonector
Or just... repeal it. At least partially (for properties you don't homestead
on).

------
gedy
California has enormous tax revenues and Prop 13 is not a problem. If the
state gov't cared, they could distribute income tax revenue to local gov'ts
based on population, etc. if they cared about inequality.

------
pascalxus
their on the right track. But, why not just lower the tax to say 0.5% from 1%,
and then make it apply to everyone at their Current home value. That would be
fairest.

------
thatfrenchguy
Or maybe instead of based on market price, make the property taxes based on
the size / features of the house ?

~~~
thaumasiotes
That has good and bad points. Two really obvious ones:

\- A flat tax defined by features would erode away with inflation, unlike a
tax on market price.

\- Feature taxes seriously affect the features that houses express. The
English window tax raised money and suppressed windows, with noticeable health
effects on the people who got to live in darkened houses.

------
xivzgrev
I hope the interest can't compound on the interest. That would become a messy
situation indeed.

------
masonic
This just turns property taxes into another form of longer-term secured debt
for which _taxpayers_ are ultimately on the hook if the owner defaults (which
happened a lot in 2008-12).

~~~
YokoZar
This is a secured debt, the state can collect it from the sale value.

The tax is on property value, so if the house sells for too little the tax
wasn't owed to begin with.

~~~
emeraldd
Isn't a property tax an on going thing? Unless I'm misunderstanding, this
proposal could easily lead to a situation where a home is worth significantly
less than the taxes due on it. All that has to happen is for the person who
presently ones the house to live there long enough for the taxes and
associated interest to accrue to that point. In effect, if you stay in a house
long enough, this proposal results in the tax authority effectively owning the
property even though you've paid your taxes the whole time.

~~~
YokoZar
Property taxes in California are at most 1% of the assessed value. If your
property immediately doubled in value, you'd have to be in it 200 years before
being underwater on it from taxes.

If we let that debt accrue interest the timeline becomes much shorter, of
course, but presumably the property appreciates at a related interest rate.

------
CodeWriter23
Any Proposition (aka ballot initiative) in California can only be modified or
repealed through the ballot initiative process.

~~~
CodeWriter23
For the Constitutionally-challenged:

CA Constitution Article II, Section 10, Paragraph C

"The Legislature may amend or repeal an initiative statute by another statute
that becomes effective only when approved by the electors unless the
initiative statute permits amendment or repeal without the electors’
approval."

[https://leginfo.legislature.ca.gov/faces/codes_displaySectio...](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CONS&sectionNum=SEC.%2010.&article=II)

------
gscott
Without Prop 13 everyone would have a huge tax bill not only those just buying
a house but also those who have owned their house for 30 years. There would no
way way to live in California. To suggest that the Government is going to
reset the tax for everyone to a fair and just amount is fantasy.

A 2% increase a year seems fine to me which is the way it is now, inflation.

~~~
hedora
Prop 13 is basically a pyramid scheme, and your position on the pyramid
depends on when you bought.

Repealing it would decrease taxes for young households and/or better fund
schools and infrastructure, but it would tax the people that voted for prop 13
off their land.

One way to think about it is that there is a finite amount of housing, and the
demand is set by salaries. Prop 13 doesn’t change either side of this
equation.

If you buy today, Prop 13 will lower your property taxes years from now, but
it will also drastically increase your mortgage payments.

So, it is ultimately a transfer of wealth from government programs to the
banking industry.

------
jcoffland
The taxes themselves have to go down. Currently it's difficult to find a
decent house in the Bay Area for less than $1m. That means you pay $1k/mo in
taxes. With out prop 13 that can go up arbitrarily. Soon only tech employees
will be able to afford to live here. Maybe that's just what the Silicon Valley
companies who are so adamant about repealing prop 13 want but even they will
find it difficult when the service industry people are gone or living in
ghetto block flats. I don't buy the argument that property values will drop of
prop 13 is repealed.

~~~
ScottBurson
Prop. 13 discourages cities from permitting residential construction, because
commercial construction will bring them more tax revenue. While it's certainly
not the only factor that has led to the Bay Area housing shortage, it's
arguably a significant one.

This article is 4 years old and mostly focused on San Francisco, but it still
has a lot of good background: [https://techcrunch.com/2014/04/14/sf-
housing/](https://techcrunch.com/2014/04/14/sf-housing/)

~~~
jcoffland
Commercial construction can be held by a holding company indefinitely and
avoid reassessment. It does not follow that cities should prefer commercial
construction because of prop 13.

~~~
Gibbon1
> It does not follow that cities should prefer commercial construction because
> of prop 13.

Two words: Sales taxes.

