Bingo. Prop 13 is the elephant in the room that is not mentioned. All discussions of CA property markets have this giant red flag in them. It very much distorts the free markets.
Not to argue in favor of all aspects of Prop 13, but the alternative of just letting valuations for property taxes float with the market means that a lot of people who own houses and have lived in them for a long time get forced out of their communities by increasing taxes. Which I don't see as generally a good thing.
The largest non-primary residence sector is the residential property for rent. Considering that any tax increase very quickly finds its way into a rent increase, what's the rationale for punishing renters?
It's almost a double whammy for someone who wants to buy a house, but can't afford the current prices or was outbid by a cash buyer going over asking price. Cheer up as we've incorporated the price increase into your rent.
> The largest non-primary residence sector is the residential property for rent. Considering that any tax increase very quickly finds its way into a rent increase, what's the rationale for punishing renters?
Assuming we're talking free markets, then the rent should already be set at the maximum price the market will bear. (If not the landlord is leaving money on the table.) Increasing property taxes is to depress the price of real estate. A simple property tax could also discourage new investment, while a land value tax incentivizes owners to maximize the value of their holdings.
> The largest non-primary residence sector is the residential property for rent. Considering that any tax increase very quickly finds its way into a rent increase, what's the rationale for punishing renters?
So, treat primary residences as primary residences, whether or not they are the primary residence of the property owner. For multi-unit rental properties, the total value of the property is divided among units proportionately to the rent charged for each unit to assess this.
Is your primary goal here to extract more revenue from timeshare owners and people who own a pied-à-terre? Don't those constitute negligible portion of California real estate market (as opposed to some places like Hawaii, where absentee ownership is significant and property taxes on timeshare / second home owners are very high)?
While it's probably not a bad idea, I don't see it moving the needle much.
> Is your primary goal here to extract more revenue from timeshare owners and people who own a pied-à-terre?
I'm discussing ways to achieve the goal upthread of insulating people from property tax uncertainty on their primary residence.
I would expect that the larger purpose of that is to allow full-value taxation on all other real property; of which non-primary-residence residential property is a subset (and a fairly small subset, at that.)
Remember that Prop 13 applies to all real property, not just residential property.
This happens to renters when the market rate rises. If you can't afford to live somewhere, you go live somewhere else. This applies to everything else governed by a market, why shouldn't it apply to property taxes?
Prop 13 is a blatant wealth transfer between people who are new to the area (mostly the young) to the people who were originally here (mostly the old).
> This applies to everything else governed by a market, why shouldn't it apply to property taxes?
Taxes aren't governed by a market; the same rules don't apply. Arguments against government protectionism in markets don't also apply to protection against the actions of the government itself.
That said, proposition 13 doesn't seem like a good implementation of this. There's no good reason for a sudden increase upon sale; that breaks the ability to buy a home. There should be a hard cap on property taxes that doesn't change on sale.
Why should taxes get to increase without bound or control on existing property? Once you've paid off your home, you should not have an ever-growing expense to keep it.
(You shouldn't have an expense to keep it at all, but that's a separate argument.)
Property taxes are based on property values, which are governed by a market.
My view is that property taxes fund the very things that make a particular neighborhood desirable, like good schools, roads, parks, and other local services. Your property's value is what it is because of these things, and you shouldn't be able to reap these benefits without paying taxes proportional to the value you've captured.
> My view is that property taxes fund the very things that make a particular neighborhood desirable, like good schools, roads, parks, and other local services.
In California, that's less true than it might otherwise be, given the prop 13 limits on both assessments and tax rates. Lots of those things are funded by sales tax revenue, income tax revenue (primarily state income tax funding local programs), development fees, and other revenue sources other than property tax.
They typically mostly fund schools, which long-time home owners generally aren't even using. One of the whole reasons to buy property is to have some long-term residential stability, which doesn't happen if property taxes can increase rapidly. If I'm holding onto my home, I've only captured value in a theoretical sense. I don't have any cash to pay for the increased property taxes until I sell.
> My view is that property taxes fund the very things that make a particular neighborhood desirable, like good schools, roads, parks, and other local services.
I think you're arguing that richer neighborhoods should have nicer schools, roads and parks. Granted, SF is an exception here, but that's precisely how things work elsewhere in California.
And if richer neighborhoods don't get that, California made annexations pretty easy, which is why you see those tiny municipalities in the vicinity of Los Angeles, San Diego, Anaheim, etc.
I'm arguing that richer neighborhoods DO have nicer schools, roads, and parks. Prop 13 says you may live in such valuable neighborhood while not paying taxes in proportion to that value, merely because you happened to buy a long time ago.
I an questioning how big of a problem that is empirically.
One can't really arbitrage that effectively.
Municipalities can't run consistent deficits, so the new schools, roads and parks will be built after a wave of newcomers buys properties, locking in higher prices and higher tax base.
In case there are no such newcomers (i.e. everybody is maximizing their Prop 13 benefit by not selling), the municipality just sticks to the last year's budget with a 2% increase permitted by Prop 13. But in that case new schools, parks and roads that make the neighborhood better don't appear either.
> This applies to everything else governed by a market, why shouldn't it apply to property taxes?
Does it apply to anything else you own? If 2004 Honda Civics suddenly got really popular and I already owned one, I wouldn't suddenly be priced out. Or if I own gold or stocks, and the price goes up, that doesn't affect me at all unless I sell.
> If 2004 Honda Civics suddenly got really popular and I already owned one, I wouldn't suddenly be priced out.
In California, since the state has ad valorem taxation on vehicles (the vehicle license fee, which is 1.15% of the market value of the vehicle) which does not have prop. 13 style limits, you, in fact, could be priced out of your 2004 Honda Civic if the market price suddenly and radically increased.
Oregon solved this problem differently: there's a hard annual cap on property tax increases period, which doesn't change when the property changes hands.
That prevents people from being taxed out of their home, without creating a situation that makes it hard for people to buy new homes.
The Oregon system started out with good intentions but ended up being devilishly complicated to understand and unfair to many people. It's probably a great case study in the long-term unintended consequences of laws intended to control real estate taxes.
The Deschutes (Oregon) County Tax Assessor's office made a really good video explaining how three almost identical houses in the same location can have completely different tax bills:
In addition to what the video says, I wanted to point out that the 3% hard annual cap you mention is only on the property's Maximum Assessed Value, which is only one of the many inputs into the computation for a property's tax bill. For example, one thing that can cause taxes to go up more than 3% are general bonds approved by voter measure.
Portland Commissioner Steve Novick also wrote a really good article about all of the problems with Oregon's tax system and made some recommendations:
Our property taxes are still actually pretty low -- around 1%. My sister just bought a house in Ohio for 20% what our Bay Area house host, but their taxes are more than half as much as ours. In fact, their taxes are half their mortgage while ours are practically negligible.
I mean schools need funded somehow.. many states fund them almost all through property taxes.
A lot of places I have lived capped property tax at 2% of market value. In Ohio are their taxes significantly higher than 2% of property value? I wonder if they have tax missing somewhere else, like no local income tax or something... Ohio doesn't strike me as a high tax zone.
Taxation distorts the free market. Prop 13 is not an elephant in the room, everyone knows about it and it's a hot topic of public discussion even long after it was passed.
