Oct252016
It’s time to reform Proposition 13
VOTERS WARM TO THE IDEA OF REFORMING PROPOSITION 13, BUT LARGE FINANCIAL INTERESTS WOULD VIGOROUSLY OPPOSE ANY ATTEMPTS TO CURTAIL THEIR SUBSIDY.
California legislators face limits on their ability to tax real estate due to Proposition 13, which limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. Ostensibly implemented to prevent government profligacy during periods of rising real estate values, the measure devolved into a tax-shifting mechanism that greatly benefits owners of commercial real estate. California legislators found other taxes to increase revenue.
Proposition 13 tends to limit move-up trading because trade-up owners must endure higher property tax bills, sometimes dramatically higher. There are basis transfers and ways around this problem for certain people who qualify, but California homeowners tend to stay in their homes, trapped by the tax savings. This Wikipedia article discusses the impact of Proposition 13.
California’s Ballot Initiative System
Realistically, the only way to reform Proposition 13 is by ballot initiative. It’s very unlikely legislators would have the courage to reform the law, assuming they saw reason to do so. According to Wikipedia:
Laws already adopted by the state legislature may be vetoed by means of a referendum. To qualify a referendum for inclusion on the ballot, a referendum petition must have been signed by at least five per cent of the number of voters in the previous gubernatorial election. This is also known as a “petition referendum” or “people’s veto”.
People could vote to amend Proposition 13, but it would be an uphill battle. Some time ago, I spoke with a political consultant who specializes in ballot initiatives. He stated flatly that it’s very difficult to pass a ballot initiative if moneyed interests are on the “no.”
Any attempt to reform Proposition 13 would have big-money opponents. Who would you guess? Homeowners wanting to preserve a good deal? Nope. The big money on the “no” would be commercial properties owners and their various organizations — and they will spend whatever it takes to convince homeowners to vote with them to kill any reforms.
The California Ballot Measure That Inspired a Tax Revolt
By CLYDE HABERMAN OCT. 16, 2016
Proposition 13 was an assault on the property-tax structure in California…. In 1978, they approved this ballot initiative by nearly 2 to 1, setting in motion a continuing debate over whether they had acted with beneficent wisdom or with heedless foolishness. Owners of real estate quickly saw their property tax bills slashed. But they, and millions of others, also found themselves burdened with assorted new fees and levies to compensate for lost state and local government revenues.
Many fiscal conservatives actually thought this would decrease the size of the California State government. A clear example of wishful thinking. …
In California, the birthplace of many American trends, politicians in both major parties have long regarded Proposition 13 as they would a subway line’s third rail: You touch it, you die.
Which they probably would, at least politically. Approving residential housing is almost as toxic to local politicians as proposing Proposition 13 reform is to State politicos.
The 1978 vote shapes the latest offering from Retro Report, a series of video documentaries exploring major news stories of the past and the long shadows they cast. …
His words echoed those of Howard Jarvis, a pugnacious businessman who was a principal architect of Proposition 13, formally called the People’s Initiative to Limit Property Taxation. Jarvis … drew inspiration from another Howard: Beale, the mad newscaster in the 1976 film “Network,” who was immortalized by his signature line: “I’m as mad as hell, and I’m not going to take this anymore!”
Soon after Proposition 13 passed, Jarvis shrugged off concerns about forfeited revenue. “The bureaucrats have just squandered it,” he said. Sound familiar? …
Fans of small government revel in glib answers like Jarvis’s, but California legislators found ways around the problem including Mello Roos taxes, development impact fees, an assortment of other fees, and higher income taxes.
His crusade took shape in an era of double-digit inflation throughout the country, and escalating real estate valuations in California. As property assessments soared, so did the taxes on them, at rates too rapid for many homeowners to absorb. The state was primed for a “mad as hell” moment.
Proposition 13 rolled back property values to their 1975 levels, and imposed a 2 percent limit on yearly increases in assessments. The tax on property could not exceed 1 percent of the value. In addition, any attempts to raise many types of taxes were cramped by a new requirement of approval by a two-thirds majority, be it in the State Legislature or at the local level.
Right away, property-tax revenues plummeted nearly 60 percent. The state — led then, as now, by Gov. Jerry Brown— helped keep cities and counties afloat by diverting about $5 billion from a surplus it had accumulated.
At the time it was passed, Proposition 13 was the right thing to do. Jarvis was probably right that bureaucrats would have squandered the money, and our already large California State budget would have gotten much, much larger. Much of the increase probably would have gone to transfer payments.
Unfortunately, a reaction to the time of political extreme resulted in legislation that today merely serves to prevent wealthy commercial property owners from paying a fair share of state taxes.
Over the long haul, fallout from the proposition landed broadly. Property taxes, estimated now at $55 billion a year statewide, declined as a share of government revenue. Hotel, utility, sales and other taxes were increased to take up the slack. As cities and counties struggled to raise revenue on their own, a good deal of power shifted from them to Sacramento, the state capital.
Inevitably, there were winners and losers. Wealthier property owners greatly benefited. So did those owning their homes for decades, given the relatively small annual increases in their assessments. Better to have bought a house in 1975 than, say, in 2015. It is not uncommon in California for an older couple’s tax bill to be appreciably lower than that of a young family living next door in a house that is nearly identical but newly purchased at a steep price. Critics deplore the inequity. On the other hand, older people on fixed incomes are insulated from tax increases they might find punishing.
There are many hands. On one hand, Proposition 13 led local governments to lay off employees and defer essential maintenance. On the other, it impelled them to become more efficient. On one hand, it protected older people from possibly being driven from their homes. On the other, it reduced the turnover of properties, making it harder for young couples to find a nest of their own. On one hand, the proposition’s opponents say it has shrunk the share of property-tax collections paid by businesses, and shifted the burden to homeowners. …
It’s not just what opponents “say.” It’s a fact. Proposition 13 benefits owners of commercial properties at the expense of everyone else. Because property taxes are held at 1970s levels on commercial properties, the net operating income is higher than it othewise would be. This in turn prompts buyers to pay more to own the property and inflates its value. Proposition 13 is a hidden tax subsidy that increases the income and wealth of commercial property owners.
What Californians (and others) have also learned is that you get what you pay for. People want their roads repaired, streetlights installed and schools kept open. All of them cost money. And that means taxes. San Jose, Calif., is an example of how a decline in property tax collections can pinch badly, as a February article in The Atlantic showed. Because the city lacks a thriving commercial district, it is hard-pressed to generate sales tax revenue.
One of the bogus objections commercial real estate owners spout is that higher taxes on them will ultimately cost consumers more money. It’s a lie. The free market for goods and services determines how much consumers will pay for anything; businesses can’t pass their costs on to consumers. Businesses may decide not to operate, but none will pass costs on to consumers.
When Proposition 13 was passed, one of the main selling points was to prevent property taxes from rising so people on fixed incomes wouldn’t be forced to sell because they couldn’t afford their property tax bills. However, Proposition 13 was modified by Proposition 8 to allow property taxes to rise after a price crash so state and local governments wouldn’t be locked into low tax revenues from reassessments during the crash.
Whether by accident or by design, Proposition 8 negates one of the primary selling points of proposition 13, and as lenders work to reflate the housing bubble, California homeowners, including those vulnerable residents on fixed incomes — fixed incomes greatly reduced by the federal reserve’s zero interest rate policy — the most vulnerable residents may be forced to sell — or worse yet, face foreclosure as they must chose between paying taxes and paying their mortgages.
The only thing that’s certain is that homeowners will face higher property tax bills. Will that force seniors to sell or into foreclosure? Back in the 1970s, this fear was enough to prompt the passage of Proposition 13. The lobbyists and campaign managers who want to preserve the benefits for commercial property owners will undoubtedly lie to scare the hell out of seniors to keep the special benefit that hurts everyone except commercial property owners.
Start by TAXING UBER – & Airbud = As they pay nothing that I know of ?
Next start a Statewide Tax all 25-Million & up Commerical & Industrial Bldg
& You got a GREAT Case otherwise = Buzz – off.
If they merely required a reassessment on all transfers of ownership of a greater than 5% interest in any property, the problem with taxing commercial properly would go away. Right now, all commercial centers are put into entities and people buy and sell the entity without actually selling the property. The result is the same, but it avoids triggering a reassessment. If any transfer of more than a 5% ownership stake triggered the reassessment, it wouldn’t cause problems for REITs where small shareholders come and go, but it would catch any major transfers, which is what’s needed. That’s not a huge change to Proposition 13, and it would be much harder for the commercial real estate lobby to suggest the State is taxing old people out of their homes.
I’ve heard anecdotal stories that commercial properties avoid reassessment through transfer of the entity, but how common is this? You seem to peg the declining proportion of taxes paid by commercial owners solely on Prop 13, but there could be other causes, such as the proportion of new development that has been devoted to residential vs. commercial over the past 30 years.
If you’ll notice on all 5 of the charts, the proportion paid by commercial owners was ALREADY declining PRIOR to Prop 13, and the trend seems to have merely continued since that time. This looks like a case of correlation without causation.
Sincerely,
Mellow Ruse
The vast majority of commercial real estate sales are entity sales. Only new developments, smaller properties, and foreclosures sell as actual property sales triggering a Proposition 13 reassessment.
Prior to Prop 13, the relationship between commercial real estate tax revenues and residential property tax revenues was fairly stable. Some areas went up and some went down depending on the nature of new development in the area. The big divergence didn’t start until Proposition 13 was passed, and since then, it’s been very one-sided.
Some of the best evidence for causation is the fact that commercial property owners are the primary opponents of Prop 13 reform. They know the additional tax revenue will come from them. If they had been paying taxes at the same rate as residential, they wouldn’t be so opposed to reform.
Some Improvements Hurt Property Values
When it’s chilly outside, some swimmers head indoors to personal pools that are sheltered from the elements and heated for comfort. Owners say the pools keep the kids entertained and offer a place for year-round exercise. But real-estate experts warn that indoor pools add little to property values and may be difficult to sell down the road.
“It’s a highly personalized amenity that requires a lot of maintenance,” said New York-based appraiser Jonathan Miller. “That’s not for everybody, but the ones that have it would swear by it.”
In the U.S., only about 500 to 600 luxury-home listings—or about 0.7%—include indoor pools, mostly in more seasonal areas like New York, New Jersey, Michigan, Connecticut, Colorado and Illinois, said Javier Vivas, manager of economic research at Realtor.com. Properties priced over $1 million were asking only 4% more per square foot than homes without a pool whatsoever and 2% less than homes with outdoor pools, according to data from Realtor.com.
Rent-to-Own Homes: A Win-Win for Landlords, a Risk for Struggling Tenants
COLUMBIA, S.C. — Alex Szkaradek is a landlord who seems to have the best of both worlds.
Mr. Szkaradek, 36, collects rent, but he never has to pay for repairs on any of the more than 5,500 homes — many of them rundown — that his firm manages across the country.
The firm, Vision Property Management, blurs the line between what it means to be a renter and a homeowner. These companies do not offer regular leases or mortgages — they offer “rent to own” contracts on homes that require tenants to make all repairs, no matter how big or small.
Mr. Szkaradek says Vision, a leader in the fast-growing market, is bringing the dream of homeownership to Americans who lack good credit or are too poor to qualify for mortgages.
In many communities, housing prices have recovered from the financial crisis. At the bottom end, however, banks have all but stopped making loans for homes worth less than $100,000, leaving millions of people with few options.
But these rent-to-own agreements reside in a gray area of the law. An examination by The New York Times of contracts and court filings, as well as interviews with housing lawyers and more than a dozen of Vision’s customers across the country, found that these deals are risky, lack consumer protections and may not be enforceable in some states.
Most tenants walk away with nothing, having sunk money for rent and repairs into homes they had once hoped to own. Others faced surprise evictions, having signed a contract that did not disclose what repairs were needed, yet set a deadline for making sure the home was up to local housing code. As different tenants move in and out of the same property over the course of years, many homes fall further into disrepair.
At the bottom end, however, banks have all but stopped making loans for homes worth less than $100,000, leaving millions of people with few options.
This is not true at all. Many lenders have a minimum below $100k. When I was mortgage shopping for one of my rentals, I believe it was US Bank that told me they had no minimum. The loan officer joked you could get a 30 year mortgage for $10,000. Of course, the QM rule has a threshold for fees (3-5%) that makes it tougher to do smaller loan amounts, but you can get around that by refunding the borrower with negative points (i.e. a higher interest rate in exchange for lower upfront costs).
To some extent, banks stopped making loans under $100,000 because so few houses are available for sale under that price. Plus, as you noted, it’s hard for a lender to make any money on loans that small. The article suggests this is a formal bank policy, but that would be tantamount to redlining, and I doubt lenders would get away with that.
It’s Better to Buy Than to Rent, and It Probably Always Will Be
Or at least until mortgage rates triple.
Is it better to buy or rent your home?
This is a somewhat silly personal finance trope that assumes a reader is a) living under a bridge and b) has a suitcase full of enough cash to afford a down payment. The reality is that most homeowners start out as renters, and the decision to buy is more likely to be driven by personal circumstances1 than by the relative value of rental and for-sale housing.
But relative value is fun, and the comparison makes a useful point about the advantages to home ownership baked into the U.S. tax code. Here, courtesy of a new report from Trulia, is a chart that shows whether it’s better to buy or rent in each of the 100 largest U.S. metros:
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/i9lC_PJgXQjQ/v2/-1x-1.png
The conclusion: On a bang-for-your-buck basis, it’s better to buy in all of them.
[Big surprise: a realtor article says it’s better to buy a home.]
Tip: RE is ONLY liquid on the way up.
It’s easy to sell real estate in a rally. During a bust, not so much. 😥
Las Vegas Top Ten-X’s List Of Fall’s “Hottest” Single-Family Markets
Las Vegas
Las Vegas continues to gain steam in 2016, with seasonally adjusted home prices now upward of $225,000 after 18 consecutive quarterly gains. Sales are 15 percent higher than a year ago, now at an all-time high of 5.9 percent—above its prior peak. Employment is at an all-time high as well, up 2.9 percent from a year ago after nine consecutive monthly gains. The leisure/hospitality sector is getting back on track, most recently up 1.7 percent while the white hot construction sector boasts double-digit, year-over-year growth. Population growth has been on the upswing since 2010, at a healthy 2.2 percent in 2015 with no sign of slowing.
“The US economy continues to expand in the face of multiple headwinds, including uncertainty in global markets and the upcoming US election,” said Ten-X Chief Economist Peter Muoio. “While inventory and affordability continue to put a damper on sales growth, solid underlying demand should keep sales at a high level and continue driving the housing market. A firm labor market, wage growth, low unemployment and low mortgage rates remain supportive for homebuyers.”
Kansas Ends Bad Economic News by Not Reporting It
How do you respond when you implement every policy you want, and it’s a total failure?
“What’s measured, improves.”
So said management legend and author Peter F. Drucker about the value of using metrics to define specific objectives within an organization.
Drucker is no longer with us; if he were, he might want to have a few words with Republican Governor Sam Brownback of Kansas. Brownback, despite promising to measure the results of a “real life experiment” in cutting taxes, has decided to cancel a quarterly report on the status of the state’s economy.
Although Brownback’s spokeswoman said “a lot of people were confused by the report,” no one has been fooled. The problem was that the reports didn’t match the governor’s predictions for the state’s soon-to-be-booming economy. Local news media, including the Topeka Capital-Journal and the Kansas City Star, flagged the abandonment of the reports as evidence not only of policy failure, but as an attempt to hide that fact from the public.
A quick refresher: In 2010, Brownback, a U.S. senator, ran for governor on an economic platform created by the American Legislative Exchange Council, a conservative group that specializes in promoting draft legislation. He promised to slash taxes on business owners and lower personal income tax rates, unleashing an economic renaissance in Kansas.
In May 2012, he signed the bill into law. It initially lowered the top personal tax rate to 4.9 percent (it’s now 4.6 percent) from 6.45 percent, but most importantly, it eliminated income tax on profits for owners of limited liability companies, subchapter S corporations and sole proprietorships.
Give Brownback credit for passing the exact legislation he had promised.
The results, however, haven’t been very encouraging. Indeed, since the tax cuts were passed, almost nothing has gone as promised in Kansas. Revenue plunged and the state resorted to pulling money out of its rainy-day fund to plug the holes. A number of critical services, including for road maintenance and schools, were cut. The business climate has been poor, and the economy has lagged behind neighboring states as well as the rest of the country.
Why hasn’t this worked out? As we have discussed before, the failure of the Kansas tax cuts to do what was promised is a simple combination of state budget math and human psychology.
The math is simple: Tax cuts tend to reduce revenue, in Kansas’ case much more than expected. To change people’s behavior requires more substantial incentives than changing things by a few percentage points. The reduced revenue led to spending cuts that lowered quality of life. In response, rising numbers of people and companies have left the state.
Yes it’s the tax cuts not the oil, gas, and agricultural bust which has placed west and central Kansas into recession.
Welcome to the new site, Woody.
The results of the Kansas experiment will be hotly debated for many years. There were undoubtedly outside factors that contributed to the problems with the Kansas economy, but this could have been one of those moments where the Kansas economy shined in spite of the problems with those industries. Instead, the economy tanked rather than experiencing the robust growth that would supposedly be unleashed by enacting all the programs Brownback wanted.
Democrats will cite Kansas as a failed experiment that undermines every idea of Conservatism. Conservatives will point to exogenous shocks, and they will argue conditions would have been worse without their policies in place.
IMO, the Conservatives have the tougher argument because the calamity occurred after their policies were enacted. If the timing had been different, if the policies were enacted at the bottom of a recession, then they could claim credit for the recovery, but that isn’t how it played out.
Obviously, there is a partisan agenda behind these stories as tax-and-spend liberals want to see Kansas’ policies fail. If Brownback’s reforms were reported as a success it would mean the spread of widespread tax cuts and big government would truly be dead, putting an end to their socialist Utopian dream.
So what exactly about the Kansas economy has tanked? The unemployment rate touched 3.7% earlier this year and they have had RECORD business formations each of the last 3-4 years since the tax cuts were implemented (source: Forbes).
Now compare Kansas to California:
Liberals like to compare and contrast Kansas’ woes with the good fortunes of California, whose Governor Jerry Brown enacted a whopping 13.3 percent top tax rate to deal with the budget crisis bequeathed to him by the spectacularly inept back to back administrations of Gray Davis and Arnold Schwarzenegger. California, buoyed by the tech industry, has indeed enjoyed resurgent growth. But consider some of the basic economic indicators for each state:
Unemployment rate: California’s is 5.5 percent; Kansas’ is 4.1 percent.
Poverty rate: California’s is 15.7 percent; Kansas’ is 13.6 percent.
School rankings: California schools are ranked 40th; Kansas schools come in 20th.
2014 expenditure per public school student according to Governing magazine: California — $9595; Kansas — $9972
Median household income: California – $61,489; Kansas — $51,872
Median home price according to Zillow: California –$466,900; Kansas — $120,800
So California’s top tax rate is three times greater than that of Kansas, more of its citizens are impoverished, its schools are much worse, and a house in California costs four times what a house in Kansas costs. Which state is the success story here? Whose citizens are getting the better deal from their state?
http://dailycaller.com/2016/09/08/a-kind-word-or-two-for-kansas/
Interesting how people can always find data to support their conclusions. This political war will be fought in newspapers and blogs for years to come.
Ultimately, it’s the voters who will decide.
If Kansas really is a basket case, then voters should kick the Republicans out of office and replace them with Democrats who will increase taxes and spending. If Kansas isn’t doing poorly after all, then the Republicans should strengthen their majorities, and Brownback should win his next election in a landslide.
The rest is just spin.