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.
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.)
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.)
I would replace today’s rent control (based on building date) with a means-tested rent subsidy, and similarly replace Prop 13 with a means-tested property tax subsidy. This is what a lot of places do (e.g., several counties in New York state) and you don’t end up with the distortions or arbitrary cutoffs.
So, getting rid of rent control is kind of independent of the prop 13 thing.
Both would depress the costs of the available units at the expense of long-time residents.
More importantly (when it comes to increasing the cost of rentals), rent control discourages new construction by reducing it's profitability (easy to see with a discounted cash flow analysis).
> 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).
A flat tax per square foot would make more sense, perhaps with a rate ray varies based on locality.
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.
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).
Now you probably want to encourage building more housing on the same land to alleviate the lack of housing (which is why an LVT is so often proposed) but local taxation first and foremost has to fund local public services, or there really is no point. You can additionally penalize leaving land undeveloped, but that should be a secondary tax (or penalty) on top of a basic one that scales with the cost of providing those services, not the primary source of funding for local government.
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.
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.
In California Prop 13 is thought of in the general public as specifically saving retirees (or "grannies" in the vernacular) from having to give up tiger home. This is not at all what Prop 13 is about, of course, but aligning the populace's sentiment with the law would be better than the populace thinking it helps just retirees, billionaire or not, instead of what it actually does, which is concentrate capital in the hands of those who already have capital, without regard to how they effectively use that capital.
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.
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...
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.
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.
- 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.
The tax is on property value, so if the house sells for too little the tax wasn't owed to begin with.
If we let that debt accrue interest the timeline becomes much shorter, of course, but presumably the property appreciates at a related interest rate.
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."
A 2% increase a year seems fine to me which is the way it is now, inflation.
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.
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/
Two words: Sales taxes.
Ending, or strongly reducing, the tax benefit for holding property would knock out both of these factors. If there's no massive tax penalty for selling, people will be more willing to sell, and if selling doesn't cost you a huge tax benefit, you don't feel as much need to inflate the price as compensation.
When the supply of property increases, prices will go down. And when people no longer feel a need to ask inflated prices to make up for lost tax benefits, prices will go down.
Additionally, the shock of the initial implementation and its effects would probably also have the additional effect of causing a smaller-scale 2008-style housing market crash, since many people currently rely on the "prices always go up, and always go up by a lot" model. This would initially be extremely harsh on people who paid $1m+ for small houses in not-particularly-great parts of the bay, and would certainly put them underwater on their mortgages, but any real solution to the bay area's housing crisis is going to involve that on some scale.
If a retired couple downsizes from a three bedroom house to a one bedroom apartment because their kids have grown up, that frees up housing for someone else to use. Prop 13 discourages them from doing that because the property taxes on a one bedroom apartment at a 2018 assessment can easily be many times higher than the property taxes on a three bedroom house at a 1970 assessment+2%/year.
Lucky for me I didn't make that claim, then!
> Second, it causes people who do sell to ask a higher price, in compensation for the tax benefit they're giving up by selling.
To me this implies that the seller can increase the sale price if they think they deserve more money.