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.
Corporate favors
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.
Welcome newcomer
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.
NOT in favor of abolishing or revamping Prop13. At best, it preserves home-ownership for families. At worst, an occasional billionaire figures out how to use it to his advantage. Boo-hoo, without the “loop hole” they take their investment elsewhere, everybody looses. As far as taxes being inequitable for those who’ve lived in a community longer, whose tax payments built those infrastructures and community amenities….. see it in the long run, if you’ve paid for a community pool for a decade or if you just moved into the community who is really being cheated. As far as all the social programs, why are property taxes supposed to take care of them anyway. Property taxes should pay for roads, firefighters, emergency services, local hospitals, building departments and police. If you want school improvements BOND them. Want Pools and Water Parks BOND them. Don’t look to the basic tax structure to pay for those extras! Preserve the long term stability of families by keeping the existing Prop 13 in tact.
I vote in every election and will NEVER vote to get rid of Prop 13
Are you crazy? How do you think seniors who have paid off their homes and are retiring soon will deal with huge prop tax increases?
With all the social security uncertainty we don’t need something else that will be a burden on seniors or the young alike. If your house spiked in value and your income did not, how are you supposed to come up with several thousand more in prop tax every year? I think I am done reading firsttuesday.
The reason First Tuesday continues to bash Prop 13 is already mentioned in the article. Simply put, prop 13 is bad for the real estate industry.
Doesn’t matter if abolishing prop 13 screws you over personally, but it would be good for business.
Call me crazy, but I don’t believe for a second that Philip Welch has handled a billion dollars in transactions. I have NEVER seen a corporate transaction structured to avoid reassessment in a transfer of ownership unless the interests of the underlying parties remain unchanged and only the vehicle itself changes and that should not trigger a reassessment. If Mr. Welch is who he says that he is, then how about providing the specifics of what you do to “abuse Prop. 13!”
What an idiotic position. Californians are already the highest taxed residents of any state and you want to open a new source massive revenue to support their mismanagement? Did it ever occur to you that the politicians are being demonized because they are demons?!!!
Let’s hope that this guy doesn’t become Governor. He wants to tax penalize those of us who have paid down our mortgages and built up equity while giving a tax break to someone who has over extended his borrowing and used his home equity as an ATM.
Jeff Davis did a pretty darn good job of stating the obvious. Unfortunately, the assistant editor, Jeffery, has forgotten life’s basic principle “Life is not fair!”…and who will determine fair? Jeffery and his like minded do-gooders?
Let me add a few thoughts to Jeff Davis’s great retort. Sure my neighbor when he buys his house a few years after mine will pay more property taxes. Then again, he might not depending on what the price of his house was (property does go down in value, I seem to remember). But let’s assume he does pay more in the beginning, he too, supposedly, will be unfairly rewarded because his prop tax will be limited to 1% of assessed value and his assessed value will be limited to 2% annual increases. Who in their right mind would believe that without Prop 13 that would ever happen (remember all those added fees on your tax bill)? More than likely all property owners would be paying considerably more without Prop 13 no matter when they bought their home. So in Jeffery’s world that would be fair because all homeowner’s were getting the same shaft.
Now with respect to corporations or businesses, in most cases these businesses own commercial property which they rent/lease for use by other’s. Lower property taxes mean lower rents, which mean lower costs of operation, which ultimately lowers the cost of products that we all benefit from.
In closing, I’d much rather have my neighbors pay ½ what I pay than some bureaucrat funding a boondoggle train project. Jeffery, get your head straight, government wastes more money than taxpayers should be asked to pay for.
In addition to being a broker, I am a real estate and tax lawyer, and when people ask me what I do, I often answer: “Abuse Prop 13.” The article is 100% accurate in that Prop 13 is an unbelievable loophole to those who know how to manipulate it. I have transferred many hundreds of millions of dollars (probably billions – I have lost count) of large commercial- and investment- grade real estate without reassessment. Under the right circumstance, I can transfer entities without any reassessment of all held property. I make sure every property purchase is structured so that the property will never be reassessed again. I can take the (joke) $1,000,000 parent-child exemption, and easily transfer – pick a number – many tens of millions of dollars of RE without reassessment, all perfectly legal. When I get challenged by other persons “you can’t do that”, I keep a file of newspaper articles of persons bragging about doing exactly that. I even give seminars as to how to do it. The fact of the matter is, in face of any sensible discussion of, and proposed fixes of, Prop 13, the big property owners always parade out Grandma and the specter of her “losing her home to taxes”, and then blame the “liberal media and knuckleheads”, threatening “our way of life” (it is always great to blame liberals if you don’t know what you are otherwise talking about, and there is a ready audience to listen without thought), but that is all a bunch of nonsense and a front by them and their minions (those knowing, and those ignorant and unknowing). In fact it would be EASY to protect Grandma – and, for that matter, all homeowners and small investments – and still pick up appropriate reassessment, and the big property owners are well aware of that reality. There is no question that reasonable limits and controls on property tax would be appropriate, but until California figures out that people like me are out there costing the state billions of dollars of lost — and fully appropriate — tax dollars, we will just keep on doing it, and the bulk of the people in the state can appropriately be labeled “suckers” for once again being led by the nose by big vested interests.
Having just landed in Las Vegas for a much needed vacation reminds me that Nevada is one of many states that have no income tax yet somehow manage pay their bills without going into great debt. I would like Mr Marino to explain why California needs more of our money when we are now the highest taxed state in the nation. Just add up the sales tax, income tax ,property tax, gasoline tax, car registration tax, carbon tax ( yes , they are now taxing the air we breathe ) and other taxes and one can easily see that California doesn’t have a revenue problem.
In order to solve this issue and to be “fair”, I propose that next April 15, if you are a registered democrat your income tax rate will be double the standard rate for your bracket. You are obviously feeling guilty you are not paying enough and this seems like the best way to make it “fair” for everyone and help ease your conscience. You cannot change your party affiliation in order to avoid the additional tax unless it is to republican. It is time for liberals to practice what they preach. If this were to really happen you can bet the GOP would quickly have double the amount of registered voters as democrats. I certainly won’t hold my breath on this one.
I completely agree with Joel and Jeff. The arguments for repealing Prop 13 are the typical liberal views that somehow being responsible or affluent is “evil” and must be taxed to pay for social programs. Stop attacking corporations! Recall that California is already number 50 on the list of states that corporations want to do business in. Frankly, I’m sick and tired of the California liberal politics and the tax, tax, regulate, regulate way of doing business.
Taxing based on equity is absolutely ridiculous; it punishes people for being smart about their money, and the example that the evil rich made a bundle in stocks, so now they have money to put down on real estate and should be taxed higher?? Did they not already have to pay capital gains taxes on those earnings, and now you want to tax them even more??
I am disgusted with this liberal rant. (And, by the way, the reference to “Prop 13 regime” and “anti-government rhetoric” is a typical liberal ‘if you don’t agree with us, you are stupid’ method of attempting to belittle the non-liberals.)
“We’ll, here you go again.” How else can I start? The opponents of Proposition 13 use the same old worn out arguments for its repeal. So billionaire Michael Dell utilizes the law to save a million dollars in taxes and that is why we need to take away the billions saved by ordinary homeowners because prop 13. Many of these people live pay check to paycheck and would otherwise be unable to afford a home. Michael Dell , really? Great comparison!
Next comes my neighbor who bought his house a few years after me and is paying higher taxes because my assessed value is supposedly lower. How unfair! Poor neighbor! I tell him-“Be patient grasshopper! All he needs to do is keep his house a few years and his taxes are now lower than the person that just bought. Now didn’t he just benefit? You bet he did!
Now we come to his solutions. Let’s see; how about taxing the value based on equity? Oh that is definitely fair. I have made it a point to pay down my mortgage so I can retire at 55 with no debt. My neighbor who is the same age uses his house as an ATM and refinances his home to the max and pulls out money and has little debt. According to Mr. Marino, I should pay more in taxes because my debt is lower! So I am responsible with my money and my neighbor is not, so I pay more? Oh, let’s not forget we also base it on ability to pay.What is the government going to do, audit my finances each year before the tax bill is sent?
But remember, it all based on fairness. Again, the same old tired argument. This is a page right out of the progressive liberal play book.
The author has shown his political leanings and has arguments that are weak and unfounded. If you want to compare the sate budget from the 1970′ s to today, you will find a dramatic increase in spending due to the extremely large and generous employee benefit plans and social programs. This has skewed the numbers and show that although revenues have increase at a steady rate, spending has increased even more dramatically. You could confiscate all of the wealth from the people of CA and the democrats in Sacramento would still not have enough money to spend.
I don’t understand why 1st Tuesday’s editorials continue to attack prop 13. It benefits all homeowners across the board – you buy high, you pay more, you buy low you pay less. As mentioned if CA went up 20% over the last year. Why would everyone want to pay 20% more property taxes this year than last (the author included)? I don’t get it. I don’t want my property taxes to increase because the market has.
I still don’t see any benefit and wish that 1st Tuesday would stop creating articles to try to change it, when there are frankly little benefits to agents and consumers by it’s change.
Joel