It fixed the problem (40 years ago)
Many Proposition 13 (Prop. 13) proponents cite the original problem that led to Prop. 13 as their justification for continuing to defend it. California residents were losing their homes in the ’70s due to reassessments, they say, and since Prop. 13 solved that problem it ought to remain intact.
Just because Prop. 13 put a stop to a fundamental flaw of the ’70s-era California real estate market does not make it sacrosanct. Yes, one positive result was that it created predictability in the tax costs of ownership. But it wasn’t until we lived with the consequences of the new law that we began to see its myriad flaws.
The fact is, Prop. 13 has shed its appearance as a white knight for the elderly and middle class and has revealed itself as a means for tax evasion for the wealthy and for property-owning corporations. Worse, it is continuously moving homeownership out of reach for the next generation of potential homebuyers.
Prop. 13 must remain in place to curtail government spending
Most of Prop. 13’s cheerleaders demonize the government, painting it in the light of the greedy taxman, never satisfied with the money its citizens do pay. Once again the ends are supposed to justify the means — in the case of Prop. 13, this just isn’t so.
There is nothing to gain from creating a governmental boogie man who is ultimately starved of its tax feast by the brave souls willing to pass tax reform legislation — this is just a story some people tell. What a responsible real estate industry must do is reassess Prop. 13’s effectiveness at ensuring real estate market stability while also taxing fairly and allowing for enough revenue to cover the social benefits our California communities demand.
When soberly assessed through this lens, as opposed to the heated anti-government rhetoric, Prop. 13 is seen for what it truly is: an outmoded and insufficient means of taxing property.
What ought to be considered more closely is the amount of revenue the state loses every year to Prop. 13 loopholes. Recently Prop. 13’s favorable corporate tax treatment has made headlines.
Billionaire Michael Dell (yes, the computer) agreed to purchase a Los Angeles hotel largely due to a Prop. 13 loophole that allowed him to save $1 million annually on property taxes, according to the Los Angeles Times. The law allows corporate entities to avoid reassessment as long as no one individual takes a majority (more than 49%) ownership share.
Economist Chris Thornberg was quoted in the L.A. Times, saying:
“He didn’t do anything wrong. He’s saying to California: Look, idiots, I just robbed you blind, and it’s your own fault.”
We wholeheartedly share this sentiment.
It really gives one pause and begs the question: who is actually benefiting from this law any longer? Not newcomers, that’s for sure.
California real estate prices were about 20% higher this March than one year prior. Those who bought in 2013 got a property tax increase to the tune of 2%, while their property value appreciated at a rate ten times this increase.
This is a rather dramatic illustration of the inequality in taxation inherent to Prop. 13, and this is only in the short term. Imagine the relative tax benefits of those living in the same home for ten years. Their tax liability is orders of magnitude lower than their new neighbors. Yet, they still benefit from the same social programs and local amenities paid for by the collective property tax.
One reason for our sustained criticism of Prop. 13 is that we are aware of the larger issues affecting the California real estate market. We know, for instance, that California property is currently appreciating at a rate about ten times that of inflation. Wages, on the other hand, remain stagnant and the unemployment rate is stalled at 8%. We know that this law highly promotes the stagnation of home turnover, encouraging families to stay put when our economy rewards those who remain flexible and mobile.
Prop. 13 may have curtailed the outrageous property tax reassessment bonanza of the 1970s in California. But it did so at the expense of every successive generation to come. The current generation of potential homebuyers is faced with enough challenges — funding the majority’s social benefits ought to be the least of them.
Taxing phantom wealth
Taxing property is simply one method of taxing wealth. In order to understand the inequality promoted via the Prop. 13 tax regime, one need only consider that the middle class overwhelmingly holds the majority of their wealth in the form of their real estate.
Of course the wealthy have real estate as well. But, to use a class appropriate term, their wealth portfolios are diversified, including stock and other equity investments that are not as easily taxed as real estate.
It’s also problematic, according to firebrand economist, Thomas Piketty, that we tax property in the U.S. without any respect to debt. In other words, taxation is based on the face value of the property, opposed to the amount of equity the owner actually holds.
Thus two people who own a $500,000 home and bought at the same time will be treated the same during tax time, even if one owner paid cash after liquidating stock and the other person put 3.5% down and has a $480,000 loan balance. These are two very different wealth profiles, taxed the same.
In order to improve the equality of the Prop. 13 tax regime it ought to be reformed to consider:
- total home equity rather than purchase price;
- homeowner income tax bracket;
- ability to pay; and
- use of the property, to eliminate corporate loopholes.
To be frank, we think Prop. 13 should be abandoned altogether and replaced with a law that removes the burden from new homeowners. Home sales volume is slipping and the homeownership rate in California seems on a perpetual decline. Reforming Prop. 13 would be a bold step toward generating significant turnover in the California real estate market — and something agents, builders and the broader California economy need.