At Tiny Coconut's house this weekend, a group of us got into a conversation about Prop 13. This is the 1978 proposition that California voters passed into law, rolling back property taxes to 1% of a house's value with a small (2%) increase every year. This way your tax rate is more or less locked in when you buy your house and it makes no difference what the home's current market value might be. Conventional liberal wisdom on this is that it's a very bad thing because it drastically cut California's revenue and has had a ripple effect on services, education, etc. That's what I always heard, what I always believed.
But now? Well. A modest – not fancy, not huge, not anything much special – house in a decent LA neighborhood costs a million dollars, right? The little old lady who lives across the street from that not-a-mansion is probably living on a fixed ungenerous pension. If she suddenly had to fork over one percent of her house's current value, ie: $10,000 a year in property tax, she'd be royally screwed. And what if her house is worth more than that?
One day while my mom was here, we wandered into an open house near Damian's school. Nice house, pleasant neighborhood. Not especially large and not in Beverly Hills or Bel Air, not Brentwood nor Malibu. How much did they want for it? $1,450,000. Yeah. And you know what? I think it's already been sold. For that price, maybe higher. Who knows, maybe there was a bidding war. Property tax on that sucker comes to $15K. A year. All the people who live on that block, people who moved in ten years ago when prices were sane or thirty years ago when they were even saner and this wasn't such a hot neighborhood (though by definition any neighborhood on LA's Westside is hot), they probably pay more like $2k a year. Or 1K. Or $500. Some of them can certainly afford to fork out more. And maybe they should. Because to have that tax amount fixed, in defiance of inflation and higher costs and runaway deficits, that's not such a good idea. It affects our schools and roads and police forces and parks and intervention programs, which are all clearly suffering. But if you were to send everyone a tax bill commensurate with the current value of their homes? You'd see a solid row of foreclosure signs on that block.
It's a terrible conundrum. One that affects me personally. Because our house has more than doubled in value since we moved in. I'm sure I've mentioned this before. It took about two and a half years to double, I think. And since we didn't buy quite soon enough for our pocketbooks, our tax bill is already hefty. I have to breathe deep and bite my lip every time I write the biannual check. But we want to move, right? If we sell our place and move laterally, ie: move to a house with an equivalent value, we'll instantly be paying several thousand dollars more per year for our trouble. Even if we downsize, we're looking at a few thousand dollars more a year. And if we somehow scrape together a larger downpayment and want to move up a bracket? More tax. Big tax. Closing in on five digit numbers. For a modest house in a modest neighborhood. Are we stuck here, trapped by Prop 13? For now, yes. Until we (I) have more income or prices plummet.
I doubt anyone in the 70's imagined that million dollar houses would become the norm around here. And if they did, they might not have taken the leap and imagined that people might not want to stay put in their starter homes forever but still might not actually BE millionaires themselves. I doubt anyone's going to repeal Prop 13 tomorrow, but if they did and instead instituted a more reasonable tax, say a tenth of a percent of your house's current value, that would still line their coffers more and would eliminate that wallop of a surcharge we all face for wanting to move.
Posted by Tamar at October 11, 2004 11:19 PMIt's an interesting conundrum. In Australia - well, in the ACT anyway, but I think it's standard - we only pay property tax on rental properties. And it's way less than that - maybe 1/2 a percent? Even less I think (I'm trying to remember from the couple of years we rented out this house before moving in).
On the other hand, I gather your mortgage repayments are tax deductible, or at least the interest is, is that right? Which here is only the case on - you guessed it - rental properties.
Of course, we do pay rates on residential properties - covering services like garbage pickup and so on. Do you pay that in addition to property tax, or is it covered? That's another maybe 1/2 a percent, maybe less, which does have the same sorts of issues that you raise, for pensioners living in properties they've owned for decades.
Posted by: Kay at October 13, 2004 02:44 AMIf prop 13 were appealed, provision would have to be made by the state to provide zero interest only loans to people on fixed income (or who otherwise could not afford the increase) to cover the annual taxes until a house changes owners.
That poor old woman has $1M in equity in her house. Assuming the increase in property taxes she would pay is $10,000 (it could be less as real estate taxes for many would actually drop!).
On average over say 40 years she would owe the state $40,000 in taxes when her house transfers title. If one of her children assumed ownership, they would effectively assume a $40,000 mortgage to pay the tax debt (plus any inheritance taxes if applicable).
I don't see this as a bad thing. Most rational people would agree that turning elderly people out of their homes to pay taxes is a very bad thing. Using the windfall equity they have built into there homes to pay their "fair share" of california real estate taxes is a good thing.
All in all, prop 13 is the single worst thing that has happened to the California economy in the past century. Individual greed may just keep the proposition alive. I hope not.
Ron