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Solve the Proposition 13 problem by paying off the difference when you sell (4brad.com)
51 points by mhb on June 9, 2018 | hide | past | favorite | 60 comments

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.

> 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.)

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.

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.)

Would you also remove rent control in San Francisco then? (Rent control was added after Prop 13 on the argument that landlords should pass through their fixed price benefits).

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.

Counterintuitively, (at least as implemented in most of the bay area) rent control increases the cost of rentals on the market by reducing supply (since it allows people that pay way below market to stay in housing that would otherwise be available for someone else).

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.

> rent control increases the cost of rentals on the market by reducing supply (since it allows people that pay way below market to stay in housing that would otherwise be available for someone else)

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[0] analysis).

[0] https://en.wikipedia.org/wiki/Discounted_cash_flow

Discouraging new construction? If you are referring to San Francisco that is not correct. Here rent control only applies to building built before 1979.


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).

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.

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


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.

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.

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).

Assuming this lot is located in a high-rent, heavily regulated area like SF or NY, why would you assume that a lot zoned for SFR would be assessed at the same rate as MFR, and especially high-rise development?

That's not a pure LVT anymore is it? Nevertheless my point stands that if you build a larger development on the same land you would put a greater strain on public services without contributing more.

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.

Yes that is why it is doomed. Do you really think those that write the laws want to pay tax?

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.

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.

That's such an exception that it doesn't make sense to regulate specifically.

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.

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.

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.

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.

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.

Unfortunately, Prop 13 passed with 62% :(

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.

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...

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.

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?

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.

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.

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

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

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.

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.

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

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.

This ends up being easily gamed. If you tax based on “rooms”, you end up with gigantic open floor plans (single room). If you tax on square footage, you find a way to count it as mostly outside / lawn area. Market value is the closest thing to “you can afford it”.

You're headed in the wrong direction. The better way is to tax only the value of the land: https://en.wikipedia.org/wiki/Land_value_tax

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

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).

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.

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.

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.

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

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."


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.

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.

"If there wasn't $thingthatmakesowningpropertycheaper housing would be completely unaffordable!" says the person who doesn't seem to consider that part of the reason prices are so high is that government subsidy they get. As it goes with mortgage deductions and guarantees, so it goes with property tax reductions.

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.

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/

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.

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

Two words: Sales taxes.

Proposition 13 provides an incredibly strong incentive not to sell property you own. This drives up prices in two ways. First, it reduces supply, since fewer people will be willing to take the property-tax hit of selling their existing property and buying something else. Second, it causes people who do sell to ask a higher price, in compensation for the tax benefit they're giving up by selling.

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.

House prices are not determined solely by the seller's feeling of what they ought to get. Demand matters. Assuming demand is either constant or increasing, thus the current problem, then supply must go up for prices to go down. Supply can be increased in two ways. First, by building more houses and second by people leaving the area. Prop 13 only reduces supply if it discourages people from leaving the area. If people move within the same area then supply stays the same. So, are you saying that you want to repeal prop 13 to drive people out of the Bay so that others can move in?

Something that decreases the willingness of sellers to sell will increase the price. That is basic supply and demand.

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.

House prices are not determined solely by the seller's feeling of what they ought to get.

Lucky for me I didn't make that claim, then!

You did say:

> 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.

You inserted the word "solely", which is utterly unsupported by what I said, and seems pretty clear evidence of your intent not to engage with what I actually said. So I'm not going to bother trying to explain to you.

Wow, that got combative quickly. I think if you could have heard my tone you wouldn't have been offended.

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