Is Prop 13 a regressive tax regime?
- No. Leave Prop 13 be! (81%, 298 Votes)
- Yes. It ought to be reformed. (19%, 70 Votes)
Total Voters: 368
A failing policy
Are California’s communities getting the most they can out of their property taxes? A recent article in The Economist claims real estate is the best and most under-used source of potential tax revenue.
The average wealthy nation raises less than 5% of its total federal and local tax revenue from property taxes. Emerging middle-income economies collect even less — just 2% of total tax revenue comes from property taxes.
17% of all government revenue collected in the U.S. comes from property tax. Although near the top of the property-taxing ranks, this figure is still de minimis when one considers how much of America’s wealth is stored in real estate. Of course, local governments in the U.S. take nearly 70% of total property tax revenue.
Why not tax property more? Despite the volatility of the real estate market, property taxes have proved an incredibly stable source of revenue for local governments. During the financial crisis and Great Recession, U.S. state and local governments saw lesser declines in property taxes than in income and sales tax, which are immediately affected by job loss and a soft economy.
An across-the-board increase in property tax based on present value may also ward off real estate market bubbles. Market rates for property tax bases will render real estate speculation too expensive a game to play.
While there are many reasonable arguments for increasing property taxes, the greatest barrier to reform is political will. Property tax is one of the most visible forms of taxation, especially since homeowners pay them in annual lump sums. With so many real estate related industries motivated to keep home buying attractive, even the most firebrand politician wouldn’t touch such a proposal with a 10-foot pole.
Related article:
“Levying the land” from The Economist
Welcome stranger!
Proposition 13 is the holiest of all of California’s sacred cows. To propose reforming Prop 13 would be political suicide . Well, since we’re not politicians, allow us to once again make the unpopular claim: Prop 13 was bad for California in the 1970s, and it’s still bad for California now.
Prop 13 is a regressive and unequal tax regime. It allows the rich to take and keep a larger percentage of total incomes in California. In 1992, the U.S. Supreme Court upheld the constitutionality of Prop 13, finding that the tax conformed to the doctrine of equal taxation. We strongly believe the court erred in its decision, and history suggests the same. [Nordlinger v. Hahn (1992) 505 US 1]
There is a reason why Prop 13 has been deemed the “Welcome Stranger” law. New members to a community, who are also typically less wealthy than established community members, essentially subsidize community services by paying a disproportionately higher property tax than those sheltered by Prop 13.
Related articles:
Brokerage reminder: Proposition 13 transactions excluded from reassessment
Economic consequences
Consider the vicious cycle this creates in the California real estate market. Rather than encouraging mobility, home sales and the best use of property, Prop 13 rewards those who stay put. And the longer a homeowner owns his or her home, the more encouraged they are to remain there.
This says nothing of the Prop 13’s greater economic impact. It overburdens new homeowners, who are usually young families. This demographic already shoulders the bulk of the tax responsibility, and are most likely to contribute to our consumer economy. But backwards taxation under Prop 13 has them busy funding public education (a future payoff for the community) and paying for the street sweeper.
One of the most popular claims of Prop 13 proponents is that it encourages community stability and longevity. Unfortunately, our economy no longer favors workers who have set down deep roots. Rather, those with the greatest agility and adaptability are rewarded with the most high-paying jobs.
Our present property tax system discourages home sales and keeps homeowners fastened to their property for fear of upgrading their home and upgrading their tax bill. Thus a vast contingent of the labor force is rendered unable to compete in the homeownership game and all the more likely to rent!
Recall that the state and federal governments are the employer of last resort. If revenues fall too low, the state cannot hire workers to provide necessary social services that keep our standard of living in California so high. This is a type of safety net in recessionary times. Creating these jobs sets off a virtuous cycle of employment, consumer spending and most likely, eventual homeownership. Prop 13 keeps this virtuous cycle from getting off the ground, pun intended.
Neighbors and equals
Prop 13 was passed during a moment in our economic history of soaring inflation and an out of control Federal Reserve — now 35 years past. One demographic in particular, homeowners over the age of 55 (who also happen to be the demographic that votes!), was getting hit hard by continually rising property values and property tax reassessments.
Rather than waging war against the boom/bust cycle in the real estate market, homeowners (apartment owners mostly) took it to the tax code. Thus, the demographic divide of inequality has continued to grow ever deeper since the ‘70s.
There are a multitude of legitimate justifications for differences in taxation, including:
- ability to pay;
- the type of property;
- the use of property; and
- whether the taxpayer is an individual or a business entity producing employment.
However it is decidedly arbitrary to determine taxation based on the date a person becomes a property owner. Prop 13 was tailor made to suit a particular demographic, subsidizing their standard of living at the cost of future real estate sales — a result of paying less annually for local services.
It’s quite simple, as property values increase in any given community, the cost to maintain the standard of living increases in turn. Under Prop 13, homeowners are expecting to maintain their standard of living at a continuously cheaper price — paying less for the same things from year to year — as their assets grow and their tax bill remains the same, but for a 2% increase.
As long as a property owner is equally enjoying the benefits of a community, they ought to be paying an equal share. Fair is fair. Right?
The only way to do this is to match property taxes to current fair market value (FMV) for all homeowners in California.
Clarification:
The Public Retirement Packages – $xxx,xxx.00 – referenced in the previous response – are on an Annualized basis – i.e: the high five – six figure ANNUAL Income some of these folks get for their previous public employment.
After deducting the “cost of working” (work related apparel, lunches out, commuting, etc) – many of these public sector retirees actually see a Net Income Increase – when they retire. Nice, eh?
So is it really:
1) the Government doesn’t get enough Revenue?
or,
2) the existing, MASSIVE Resources of Government – are Very Badly Mismanaged.
Public sector employment used to be about PUBLIC SERVICE – not arrogance & HUGE Pay, Benefit & Retirements. (btw – certainly not ALL pubic employees get the “Ritz” $$$ – but too many do).
One Possible Solution:
Limit Public Employee Retirement Maximum Annual Income & Benefits – to some reasonable multiplier of a Social Security Income.
Inadequate Revenue is not the problem – excessive greed is.
Vaya con Dios
tj
imo
Prop 13 is BY FAR the fairest way to establish the Property Tax rate.
Because:
People knew what the PT rate was when they acquired their property – & determined that it reasonable enough to make the acquisition.
Consequence:
Without Prop 13 – many seniors, & others of modest means &/or with limited incomes – will be taxed out of their long time homes & neighborhoods. And why? So politicians, bureaucrats & other public sector employees can live out their lives “in the lap of luxury” with in many cases $xxx,xxx.00 (high five & six figure) retirement packages?
Remember:
No matter HOW MUCH $$$ government gets – it will NEVER be enough – as their spending will ALWAYS exceed any income.
Vaya con Dios
tj
ps. Special Districts, etc – should NOT be allowed to add assessments, fees, etc – exceeding the 2 percent per year increase – to the Property Tax Bill – without a vote of the Rate Payers – some of the abuses in this regard are downright obscene.
Prop 13 was a way to prevent our Politicians from raiding” homeowners pocket book at any time. It was valid then and it is even more valid today! I saw first hand in Chicago that they started with 4 year appraisals, then it went to two years, to today, I think, it’s every year. Reappraisals allow bureaucrats to look at most current sales and to reassess neighboring properties based on those current sales. So in times like today and back in 2005-2006 when assessments went sky rocketing Politicians were just using it as a piggy-bank. Voters in Calif said “nuts to that” and mandated Prop 13, which says Homeowners values would be based on their purchase price and could rise no more then 2% a year. If I hear any Politician even mention over turning and replacing our Prop 13, I would do anything I can to allow homeowners/voters to know their names for the next Election. Protect Homeowners from being priced out of their homes by greedy Pols who want to raise your taxes at every chance they get! Frank Bodnar
I’ve always thought of what a blessing it is for people who inherit prop 13 property, or who can keep their property taxes low during retirement. Then, recently a retired school teacher told me she would have happily paid higher property taxes, even if it forced her to sell her home if it could have saved California schools from massive budget cuts.
It gave me something to think about.
Bryan J. Blumberg says he hates pro. 13. That his property taxes are four times higher than his parents. Bryan doesn’t know much about prop. 13, without it his property taxes would be Eight times higher not four. Prop. 13 only allows property taxes to increase no more than 2 % a year. Perhaps Bryan would like to pay more then 2 % each year. Prices of homes are on the increase this year, and the new onwers pay taxes on what the home sold for, so prop.13 is needed.
Prop 13 was the final revolt to uncontrolled spending by Sacramento. Retired couples worried that they would lose their homes because of the tax burden placed on them by the politicians. When Prop 13 was passed property taxes paid for fire, police and roads. Sales tax was the main support of cities with some property taxes being returned to cities. Now we have thousands of programs for special interest groups that politicians give money to for votes. For years Sacramento has been reducing the amount returned to city and county governments. The solution to the “State” stealing all of the money has come with new subdivisions in the form of CFD’s. Consolidated Financial Districts. Builder’s in Riverside pay for all of their improvements plus they pay additional fees to schools districts and a Transportation Urban Mitigation Fee (TUMF) of $10,000 per home. The CFD’s (usually 1% of assessed valuation) annually goes directly to local fire, police and improvement districts so the “State” can’t steal it! California collect more and more money in taxes every year and still they don’t have enough. They will never have enough. The voters of California continue to send big spending politicians with special interest groups to Sacramento. Lesson: You get the government you voted for! The reason for all of the talk about more taxes is the unfunded pension funds. Detroit, San Bernardino, Stockton and many more want help from the state for their mis-managed cities. The greed of government will kill this beautiful state.
The author misses the real point that needs to be made: measuring the (taxable) value of assets in nominal US Dollars. That’s been a terrible yardstick ever since the Fed was created just 100 years ago, and that’s why Prop 13 arose during the extremely high inflation of the 1970s. Seniors were being penalized simply due to the degradation of the currency, which had nominal property values (and therefore property taxes) rising at double digit rates, while their (mostly “fixed”) incomes were actual decreasing in purchasing power. Unfortunately, Prop 13 only addressed one symptom of the root cause of the problem and is inherently flawed for that reason.
The only way to have “fair” taxes (property or income) is to stop using nominal US Dollars as the measure of asset value. As understated as it is, the BLS CPI could be used to adjust asset valuations to “constant US dollars” (with 1982-84 serving as the baseline, as is done in the BLS tables). This would do away with the need for any other gimmick (such as Prop 13) to address the quandry seniors find themselves in. In many respects, the zirp policy the Fed is currently using is even harder on seniors than the excessive price inflation of the 1970s. And, adding insult to injury, that type of price inflation is undoubtedly just around to corner.
Prop 13 kept me in my old house. My new house has depleted my income due o the higher taxes. Sacramento keeps wanting more $ to spend. they cannot control what they have now and want more, Get it from the renters, they can pay their share of school taxes by tuition fees. Renters do not pay any taxes that support a lot of stuff. Tax them.
I am long retired. On SocSec, which forces choices as to which org to support or to which periodicals to subscribe. I have enjoyed keeping up with CA real estate issues, but cannot afford to belong. It would be great if you had the ability or desire to expand access on a limited basis to some of us. Thank you for the years of superior information output!!
Well I am one of the people who supported proposition 13 in its infancy but tried without success for it to be amended to a flat 1% of property value. It had to be passed that way as far as I was concerned to control governments use of property taxes as it’s own private piggy bank. Want to spend another million just budget it and raise the tax rate, no problem, spending was out of control.
What I fought against within the pro 13 group was having property taxes remain a current base level with slight increases but this is what the pro 13 people felt was necessary to get it passed. Later on of course we had a one neighbor paying a buck in taxes and the next door neighbor paying ten for the same house. I know I avoided selling a few time because of the tax increase that I would be paying to make a move, so the solution was to keep it as a rental like the other investors that loved Prop 13.
So yes I would like to see Prop 13 amended to a 1% limit, as it should have been at the start.
I have hated Proposition 13 ever since I begged may parents to vote against it back in 1978, which was before I was old enough to buy a house.
Today, I live in a house that is not as nice as my parents’ house, but my property taxes are 4 times higher.
It is patently unfair that the older generation has shifted the majority of the bills for the operation of the cities, counties and schools onto the next generation.
Back in 1978, Proposition 13 was supported by the Apartment Owners Association because they tend to own property longer than individuals. So, homeowners are today stuck with higher property taxes than Apartment Owners and Businesses. It worked out exactly as was predicted.
Prop 13 – Good for California? Maybe not if the politicians want to keep on spending like they have a bottomless well of unlimited funds to draw from.
Good for Californians? For sure, it is. Otherwise 1/2 of us would probably be in Arizona or Florida by now. The average Californian doesn’t have anything close to unlimited funds.