California's proposition 13

[yernamehear]

Re: California's proposition 13

As a two time homeowner in California, and with college degrees from two California universities, I have seen this all first hand.

The state is filled with "free lunch" types now. They have fallen into a "socialist" mind set, even if they are apolitical. Everybody has an eye on their pension, disability pay, tax break due to being elderly, "de-regulation of natural gas" (which bankrupted the state's largest utility), and on and on.

They are too big to fail, and if you think the Nebraska Medicaid favor done for the health insurance reform debacle was unfair and costly to other states, wait until California gets finished with its various bailouts.

The other 49 states will be paying for their groovy California lifestyles. :cool:

[SeanO]

Re: California's proposition 13

The other 49 states will be paying for their groovy California lifestyles. :cool:

Yes, and Californian's will probably be happy to start seeing their fair share of fed tax dollars finally coming back. :-)

[jk]

Re: California's proposition 13

just a small comment re hudson's notion of property taxes being held down to allow for higher interest payments to fire mortgage holders: it appears to me that he is pointing accurately at a social/economic phenomenon in the u.s. no one is asserting, however, that this is the ONLY determinant of price. surely location matters. surely bubble overshoot occurred, as well. on a broad scale, our society seems to have chosen to view government as anathema and credit as desirable. if you look at polls, people are quite of afraid of big government. meanwhile wall street is picking their pockets in so many ways. [and, btw, it now appears that wall street owns the government as well.] this is not to say that governments or their employees are necessarily wonderful, but to say that we must be wary of the trade offs.

[Jim Nickerson]

Re: California's proposition 13

From reading some comments by Gregor McDonald, it seems to me that anyway California turns, it is fucked up perhaps irretrievably unless it were to do an immediate about face with regard to reliance on the automobile.

What are the odds that any government in the US is suddenly going to turn and begin to do whatever might be the "right thing." Read the bullet points below and if you think California will do it, give yourself one point for each positive. If you score greater than ZERO, it suggests you are smoking too much dope, used to smoke too much dope, or, if neither of those apply, you are innately an idiot.

From his website dated 11/18/09 http://gregor.us/california/solve-for-california/

Herewith I will re-cap some of the points from my newsletter:


[California should:]

• Build light rail, commuter rail, and high speed rail on an emergency basis, by-passing much of the public review process. Recognize that community concerns about noise, construction, eminent domain, and changes to the status quo are all subordinate concerns to the problem of California’s dysfunctional over-leverage to the automobile.
• Cease all new investment in roads and highways. This shouldn’t be much of a problem in the current situation because it’s unlikely anyone will be developing either commercial or residential real estate on any scale for many years to come. Existing roads, highways, and bridges will have to be repaired and maintained. However, a plan should be formed to remove some of these, especially getting them out of downtown areas. Alot of new studies show, globally, that removing highways from urban areas can be economically revitalizing.
• Drill offshore, and onshore, for oil and devote every penny to the construction and maintenance of new Rail and new Solar and Wind power. There should be a public Energy for Rail agency (and website) that would be a kind of transparency project itself, that would educate Californians –showing them that this was essentially a conversion policy of domestic energy to public transport. Equally, it is no longer rational to avoid the extraction of State oil and gas in the name of the environment, when nothing could be more destructive to the California environment than its present vehicle fleet, which spews out 6000 tons per day of CO2. In fact, any policy which does not attempt to radically dislocate California’s automobile-based transport system now has to be regarded as the most environmentally destructive policy of all.
• Adopt a policy similar to the new resource and economic policy coming out of Brazil. Thus, demand that drilling rigs be built in California ports. Demand that rail cars, electronics for the new rail, and other manufactured goods for the new rail system be built in California. Favor oil companies that make their tax home either in California or at least the United States with drilling and production contracts. California needs to operate much more like a sovereign state, in this regard. The entire focus should be to extract energy, then recycle the wealth into the State in the form of productive capacity (new rail, new manufacturing, new power generation).
• Build out massive new Wind and Solar, again, on an emergency basis and by-pass much of the public review process. The new extraction of California’s oil and gas would have as its single purpose the creation of capital, not energy, with which to fund the transition to a more sustainable energy system. California should also lobby to increase Natural Gas production from the new, NG shale plays.

In the same way that I disagree that the United States can solve either its energy dilemma or make progress on carbon-emissions reduction by focus on the power grid, while continuing to preserve and protect the automobile, I don’t see that California can accomplish much through this route either. Today’s ruling on energy fficiency standards for TVs, for example is part of the state’s laudable record of achievement in electricity demand reduction, but, that has neither solved the state’s over-reliance on power imports, nor is it comforting in the light of Jevon’s Paradox or the Khazzoom-Brookes Postulate–showing that efficiency gains are most often arbitraged away into greater energy demand.
My greatest concern, however, is that recent models which articulate the scale of transition to renewable power are a warning. A warning that the energy required to fund that transition is absolutely massive, in quantity. My call is that the construction fuel for a global buildout of Power Grid 2.0 will be oil. But, the longer we wait the more expensive that oil will become.

[oddlots]

Re: California's proposition 13

Just a thought that might help clear the log-jam here regarding the idea that constraining property taxes can help inflate a real estate bubble...

- If one accepts that jamming interest rates down stokes asset prices (and it's hard to reject this, surely) why oh why would anyone think that constraining property taxes would not have a similar effect by the same mechanism: an increase in the supply of available income to service debt? Both will effectively increase the bid on real estate assets, if only as a side-effect in the case of tax reductions.

It occurs to me that one could object that this might suggest that increasing taxes would reduce asset prices such that we could all be taxed into a mansion so to speak. (I think someone above suggested as much.) Rock Candy Mountain here we come!

But I think this misrepresents the argument.

The key to me is that Hudson's argument assumes that there is a tax burden that must be placed somewhere and addresses itself to the relative merits of placing it on real estate versus labour (income tax), corporations etc and the effect, over time, on the economy as a whole. In other words, it's not a pro-taxation argument, it's a pro better-distributed-taxation argument (and a sure vote getter .)

The point to me is that at least some of the heat in the above argument seems mis-placed: if you enact a law that freezes tax in one segment of the economy and expect this to serve an anti-government, anti-tax agenda without distortion then I think you're being naive.

[c1ue]

Re: California's proposition 13

You've accused me of making assertions with no evidence - seems you are doing the same with your assertion above. And no "Dr Hudson says so" doesn't count. I know Eric has pointed to some of his work, but one thing I love about Eric is that he never says "so and so says so believe him" he points you to the actual data that makes the point and walks you through why its relevant. You haven't.

I have illustrated that sales and income tax revenues are highly volatile.

I have noted that real estate property taxes - both before and after Prop. 13 are much less volatile, in fact have been going up continuously for 80 years until perhaps last year.

Thus point 1) which was that real estate property taxes are a much more stable source of government revenue seems quite clear, yet you continue to ignore this choosing instead to distract via some incoherent anti-tax sound bites. If either of these propositions is false, then either demonstrate so or I will (continue) to assume you must agree with them.

I then summarized Dr. Michael Hudson's work in both his framing of the situation (average household housing cash flow spend) and the impact of real estate property taxes on said cash flow, which in turn impacts mortgage cash flow payments and in turn impacts housing valuations (fourth time).

You again fail to either show how this line of reasoning is false or show some equally reasonable alternative scenario.

From my view it is absolutely clear that you are just arguing for the sake of argument.

You have presented neither alternative evidence, nor a better interpretation of what has been presented (other than assessor's games), nor a critique of the theory nor an alternative theory.

I actually have a long record of asserting that people buy homes based on what they can afford. So I don't disagree with this assertion at all. You just take it way to far, and fail to realize that impact of P13 on prices is minimal compared to what I perceive to be its benefits (earlier stated).

Where is the evidence for your statement? Again a complete failure to provide any sort of theory or evidence.

Your theory that we had a bubble due to low tax rates is laughable. Clearly the bubbles were credit driven, and the most aggressive loans were available in bubble states like CA, and FL because those areas are highly desirable internationally making the securitized packages easier to sell. Pretty hard to convince investors that property in TX never goes down - thus those loans were not nearly as available there.

Your tunnel vision is becoming ever more clear.

I've already noted that bubble loans were equally available all across the US. Maybe not as early or aggressively as in CA, but FL invalidates your thesis just as much as TX does; the ARM pushers starting in Orange County, CA are farther from FL than TX even as the TBTF banks were all across the nation.

Secondly if real estate prices are credit driven - this is EXACTLY what Dr. Hudson notes in his cash flow analogy. (5th time) less taxes means more money for mortgages.

Thirdly prices in Texas definitely DO drop (Houston 2 decades ago), the point is that they went up much less and thus showed much GREATER AFFORDABILITY AND STABILITY IN EXACTLY THE SAME CREDIT AND BUBBLE ENVIRONMENT, which is a proof point for the Hudson theory.

Actually many developments with and without Mello Roos are in the same school districts, and are indistinguishable other than by the tax bill. Knowledgeable Realtors steer clients toward the non Mello Roos areas so those home tend to sell a bit faster and for a bit more, but not enough more to be explained by the difference in effective tax rate alone.

In a court of law, this would be challenged and sustained as hearsay. Everything you've said on this subject is without independent corroboration. Furthermore as I've already noted, the overall rate of property taxes paid in CA clearly shows your Mello Roos example to be the exception, not the rule.

You fail again to distinguish whether the higher property tax rate in this instance is due solely to tax policy as opposed to some other reason like maintaining superior schools or a local golf course or whatever - something I've already noted in the previous post.

In fact an examination of where Mello-Roos originated shows that Mello-Roos isn't having any impact on overall county property tax rates at least thus far:

http://realtytimes.com/rtpages/20090610_melloroos.htm

Q: Where Is Mello-Roos Most Commonly Found? A: In Orange County, CA most cities with new construction will have at least one community with Mello-Roos; however, the southern portion of Orange County is where it is most prevalent. Likely cities might include: Irvine, Mission Viejo, Aliso Viejo, Tustin, Laguna Hills, Rancho Santa Margarita, Coto De Caza, and San Juan Capistrano.

I won't bother searching through all the OC zips, but here is the overall OC property tax data showing Mello-Roos has ZERO impact:

Median real estate property taxes paid for housing units with mortgages in 2008: $3,870 (0.6%)
Median real estate property taxes paid for housing units with no mortgage in 2008: $1,390 (0.3%)

Read more: http://www.city-data.com/county/Orange_County-CA.html#ixzz0cDLRfWEf

Lastly - Mello-Roos is only limited duration. It is intended specifically to address bonds used in the ramp up of a specific development. This is completely unlike the permanent (cross generational) Prop. 13.

http://realtytimes.com/rtpages/20090610_melloroos.htm

Q: How Long Does Mello-Roos Typically Last?
A: The length of the Mello-Roos tax varies from subdivision to subdivision. Fifteen years from the original build date is about average. The payment very rarely extends beyond 30 years or is shorter than 7 years.
Q: How Much Is It Typically? A: Depending on the year of construction, it can range anywhere from $25 to over $300 per month; the actual tax is usually collected annually or semi-annually.

Any other obstructionist examples with inconvenient facts you'd like to bring up?

Perhaps, but if that is the case it hasn't worked with regards to property taxes. Go back to the chart you cited. It clearly shows CA pays as much of their income in property taxes as the other states you cite - almost exactly the same as Texas. So we clearly have not shifted cash flow from property taxes to mortgages. Oops.

If you cannot understand the facts, no one can help you. Does California have one of the highest average property prices in the nation? Yes/No

Does California have one of the lowest property tax rates in the nation? Yes/No

Are California incomes 3.5x that of Texas incomes (as CA property values are 3.5x that of Texas)? Yes/No

Nope, sorry, they absolutely did not have access to the same identical securitized mortgage as I mentioned earlier.

Show me that the access was limited by law or some other factor as opposed to New Century Financial's operations. More yak without links.

Dr. Hudson hasn't asserted anything in this thread, so I'm not sure why you expect me to respond to him. That said I did just respond to the cash flow analysis YOU asserted with claims that it is Hudson's, and quite clearly that cash flow analysis is false.

There is a difference between understanding and choosing not to comprehend. Dr. Michael Hudson as a public resource is something which you COULD learn about, but which you REFUSE to.

Keep in mind that you took issue with two points I contributed long ago...

1. That taxes under P13 do go up.
2. That P13 does help protect homeowners from being forced out of their home by a tax and spend government (which I think is safe to say we have in CA and beyond).

I have never said Prop. 13 restricts taxes from going up. What I've said is Prop. 13 enshrines a subsidy as the limits on property tax increases are far below inflation.

As for protecting homeowners - I've never said it doesn't. What I've said is the protection it offers those who are at the tip of the pyramid is offset by the burden the pyramid imposes on new entrants. Furthermore (like all pyramid schemes) that Prop. 13 benefits those at the tip of the pyramid via subsidized taxes on increased house values while the scheme imposes penalties on the vast majority of participants via higher prices through higher mortgages. That you continue to focus on one is understandable; that you refuse to consider the possibility of the other shows your bias.

All of your ramblings have yet to counter my agreement that perhaps the 2.5% should be changed, but that it should be changed by taxpayers because they want more services, not by government because they want more taxes.

Given that you again choose to view property taxation as a separate issue from overall taxation, this statement makes sense.

Given that government operates on overall revenues but not by buckets, it does not. Trying to change the discussion to 'what do I get for my money' is fun but completely pointless.

Nor have any of your assertions countered my point that P13 really does protect homeowners from being forced from there homes due to government enabled bubbles. Instead you simply countered that you thought that was ok because they got bonars.

From there you can make all the specious claims and ad hominem attacks you want, I'm doing my best to respond to each, but I'm honestly losing sight of what your point is.

What I've asserted several times now indirectly, but clearly must draw out in every detail due to your tunnel vision focus, is that radically increasing housing prices are DUE to the instabilities introduced into the system by overly low taxes.

It is these radically increased prices which drive everything: absolute value tax payments, mortgage payments, volatile government tax revenues, etc etc.

The point again is that in the political populism which yielded Prop. 13 - the fig leaf of keeping seniors in their homes was used to introduce instability into both housing prices and government revenues because FIRE interests benefitted from this process.

Does this mean seniors don't benefit? Certainly they do, but so do all the rentiers.

All those who owned lots of land and/or houses in 1995 or prior now have an enshrined permanent subsidy; the lost government revenue from these individuals is then made up from everybody else while simultaneously even those who benefit from Prop. 13 pay more via higher real estate costs embedded in services, income taxes, retail costs, etc.

Yet even in the senior's case - the benefit is not uniform. Certainly those who bought a house have their housing costs fixed, but what of all the seniors who did not?

They too are now paying for higher housing prices via higher rents.

Even the senior who bought a house still must deal with rising costs: utilities, food, maintenance, etc - all which are impacted by real estate costs in some way.

From this viewpoint the only ones who really net benefit are in fact the rentiers with 2 or more properties; they are the ones who get income to offset their greater expenses.

Lower and more stable property prices would be better for everyone overall.

[Chomsky]

Re: California's proposition 13

Since you want details, lets assume we move CA from its .61 effective rate to Texas' high 1.76 effective rate (quoting the chart you cited). Property taxes on the median priced CA home ($261k), go from $1592 to $4393, which equals $41k at a 6% interest rate). Given that the CA bubble peaked at a median of $550k, tax rate was clearly a nearly meaningless factor in the bubble. It also hardly explains the difference in prices between CA and TX.

Not sure I read you correctly, but it seems to me that you missed by a factor of about 10. The monthly cost to service $41k at 6% is about $245. The difference between $4393 and $1592 is $2801 -- more than 10 times that.

Did I misread what you were trying to say?

[SeanO]

Re: California's proposition 13

Not sure I read you correctly, but it seems to me that you missed by a factor of about 10. The monthly cost to service $41k at 6% is about $245. The difference between $4393 and $1592 is $2801 -- more than 10 times that.

Did I misread what you were trying to say?

You are comparing a monthly cost to an annual cost, so yes one should expect a difference of 12x.

[SeanO]

Re: California's proposition 13

From this viewpoint the only ones who really net benefit are in fact the rentiers with 2 or more properties; they are the ones who get income to offset their greater expenses.

Lower and more stable property prices would be better for everyone overall.

c1ue - I'm running out of time on this, and I don't think our point by point debate has been productive for some time as you seem stuck on making specious (well intended but false) claims and ad hominem attacks. From a quick review I'm taking away that your core issues with Prop 13 have nothing to do with my points but instead:

1. You believe repealing P13 would bring about lower housing prices, and lower housing price volatility.

-- To this point I disagree. P13 came about as a reaction to CA's rapid appreciation and overall price volatility. It would never have happened otherwise. See: Prop 13 Background. Note that you've stated as proof that prices were less volatile a claim that property tax revenue is less volatile. Perhaps they are less volatile, but do note another primary reason P13 came about was anger over manipulation of property values by assessors - and clearly tax revenues after P13 have been less volatile due to P13.

2. You believe low property taxes unfairly benefit rentiers.

-- Ok, but this misses the fact that not all property owners are rentiers. Isn't a better way to fix this to tax rents and other REALIZED gains (for example at sale, or cash-out refinance)?

Finally if you take away one point from me, take away this:

1. Property values are extremely arbitrary and easily manipulated by government and FIRE interests regardless of property tax rates. As such I like that P13 provides those who aren't directly benefiting from those changes in value some protection from that manipulation.

[c1ue]

Re: California's proposition 13

c1ue - I'm running out of time on this, and I don't think our point by point debate has been productive for some time as you seem stuck on making specious (well intended but false) claims and ad hominem attacks. From a quick review I'm taking away that your core issues with Prop 13 have nothing to do with my points but instead:

1. You believe repealing P13 would bring about lower housing prices, and lower housing price volatility.

-- To this point I disagree. P13 came about as a reaction to CA's rapid appreciation and overall price volatility. It would never have happened otherwise. See: Prop 13 Background. Note that you've stated as proof that prices were less volatile a claim that property tax revenue is less volatile. Perhaps they are less volatile, but do note another primary reason P13 came about was anger over manipulation of property values by assessors - and clearly tax revenues after P13 have been less volatile due to P13.

The reason Prop. 13 was passed - I have no disagreement about.

You still fail to respond to the point about cash flows as divided between property taxes and mortgages.

Thus again you still seek to focus on the political reasons why Prop. 13 was passed and why it still exists, but fail to discuss the reasons why it might not be (is not, IMO) a good policy overall.

2. You believe low property taxes unfairly benefit rentiers.

-- Ok, but this misses the fact that not all property owners are rentiers. Isn't a better way to fix this to tax rents and other REALIZED gains (for example at sale, or cash-out refinance)?

Rentiers benefit disproportionately, the younger generations and the poor also suffer disproportionately.

Do you dispute that higher property values yield higher rents?

Secondly why tax rents when taxing the properties will do as well? There are far fewer tax loophole games that can be played with direct taxes on property.

Finally if you take away one point from me, take away this:

1. Property values are extremely arbitrary and easily manipulated by government and FIRE interests regardless of property tax rates. As such I like that P13 provides those who aren't directly benefiting from those changes in value some protection from that manipulation.

This is a completely specious argument.

If your view is that assessor policies are so dangerous - why then does it work in so many other states?

Secondly in the era of the Internet, the ability of an assessor to creatively output an unfair assessment is greatly reduced. It no longer requires that much relative specialization in order to understand if your assessment was monkeyed with.

Furthermore assessors are a specific focus - in many cases they are even elected. There is thus a direct feedback loop on their behavior.

Another point: between trusts holding property, Prop. 13, Prop. 58, and Prop. 193, the ability to keep property taxes permanently underadjusted already exists.

Besides the rentier aspects - the 'pay for schools' aspect is also violated: it has been argued that Prop. 13 is good because it limits the property tax payments - which today largely go to local schools - once the owner's children have completed schooling. But this doesn't work if

a) the property is a rental or if
b) the property (and its tax basis) is willed to children or grandchildren or if
c) the property is owned by a trust

Once again, I've presented a lot of information supporting my thesis (via Dr. Michael Hudson) on how policies like Prop. 13 distort real estate property prices.

Your arguments and evidence thus far consist of: Prop. 13 is better than an assessor

[yernamehear]

Re: California's proposition 13

Yes, and Californian's will probably be happy to start seeing their fair share of fed tax dollars finally coming back. :-)

I have not checked into these stats, but I am always skeptical of them. First, during the '80's there was A LOT of money being spent on defense in the state (on contractors/equipment/procurement). I am not sure that shows up, but it might. Also, I would love to know how much "opportunity cost" there has been over the years by mortgage interest write offs from that state, i.e. that the Feds have given back boat loads of mortgage interest tax deductions due to the high mortgages in the state.

The assumptions behind these government stats are always highly suspect.

In addition, if it is true that the state has been a net payer to the Fed budget, it is the ultimate irony. The average citizen there wants to get gubmint freebies. You might have to just trust me on that one.

Twenty years in CA definitely gives you a flavor of the average silliness that passes for "normal" in that place.

[SeanO]

Re: California's proposition 13

I have not checked into these stats, but I am always skeptical of them.

Fair enough, I didn't check either. That said the Governator recently raised it as an issue in his State of the State address.

[SeanO]

Re: California's proposition 13

Property values are extremely arbitrary and easily manipulated by government and FIRE interests regardless of property tax rates.

This is a completely specious argument.

While you continue to make all sorts of assumptions about what I believe or don't, this appears to be where we fundamentally disagree.

Property values reflect what someone is willing to pay. What they are willing to pay, in turn, is based on a) available savings, b) available cash flow for principal, interest, taxes, etc. or typically c) a combination of the two. Since we know the vast majority of real estate is purchased primarily with leverage it seemed quite obvious to me that prices are therefore a function of loan terms and tax rates. As such it seems plainly obvious to me that actual prices are subject to manipulation by government and FIRE interests (even setting aside the issue of assessor manipulation).

Finally note I have't responded to you point on the division of cash flows between taxes and mortgages, because I don't necessarily disagree. To me, however, that is a completely separate issue from the fact that loan terms can be negotiated and locked in at the time of purchase, whereas property taxes could not prior to P13. Given CA's lack of fiscal constraint, and willingness to support FIRE interests, I'm not excited about seeing it repealed without addressing the reasons it passed in the first place. That certainly does not mean I think it has had no negative consequences.

[Mashuri]

Re: California's proposition 13

All this talk about different ways to rob people. It's still robbery. Abolish the tax already.