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Wednesday, September 30, 2009

California's Proposition 13

According to California's "Proposition 13", property taxes are capped to 1% of the assessed value. The assessed value cannot increase by more than 2% per year. If the property is sold, then the assessed value is increased to the current market value.

If you perform improvements on your house, such as adding an extra room, then it may be re-assessed at the current market value.

(I was wondering about one point. Does the cap apply only to residential property, or also to property owned by a corporation? If it applies to corporations, then it's a really great deal for insiders. If an individual owns property, he must change the title when he dies. If a corporation owns property, it can be owned indefinitely. Ownership of the corporation will change, but the property is still owned by the corporation. According to this page, corporations in California get the same property tax advantage as individuals.)

True inflation is 10%-30% per year or more. Proposition 13 means that your property taxes rise by less than true inflation, because the increase is capped at 2%. If you own a house and stay there long enough, then eventually your property tax burden becomes negligible. The value of the tax owed is eroded via inflation.

In NYC, there is no provision to pass binding laws via direct ratification, as in California. In NYC, the voters approved a "term limits" measure, but the city council was able to overturn the law by a simple majority vote. That loophole was exploited by Bloomberg so he could run for a third term. City council members currently serving their second term also benefit from that law.

In NYC, there is a cap on the amount that your property taxes can be raised in a single year. However, that law can be changed at any time. Also, the cap is much closer to true inflation than California's cap. The only thing preventing a huge hike in property taxes is that there'd be a massive public outcry if they went up too fast.

Rising property taxes is one of the negative spirals of urban decay. To raise money, the parasites increase property taxes. This lowers property values. Then, property tax rates must be raised even more. At some point, property tax rates are so high that people are better off abandoning their land, instead of paying extortionate property taxes. The local government is technically bankrupt. It doesn't pay for someone to buy the foreclosed land, because they'll still owe a tremendous property tax burden.

Due to Proposition 13, people in California pay less in property taxes. However, they pay higher sales taxes and income taxes. Unless you're working as an agorist, you don't benefit much from Proposition 13. You pay less in property taxes, but pay higher other taxes.

One interesting side-effect of Proposition 13 is that California's government has been using "eminent domain" to seize land and build more expensive housing or commercial buildings.

One defect of Proposition 13 is that it increases friction in the real estate market. If you've been living in a house for 20 years, then you're getting a pretty good deal on property taxes. The incentive is for you to not move, because you can't sell the property tax advantage to someone else. When the house changes ownership, the property tax assessed value is marked-to-market.

Another defect of Proposition 13 is that it discriminates against older people. If you're 20 years old, it would be very lucrative to buy a house and live there for 40+ years. If you're 50 years old, then there isn't as much advantage to buying a house, because your life expectancy is less.

Another defect of Proposition 13 is that, even though you get a good deal on property taxes, Proposition 13 causes the price of a house to be increased. The value of the property tax dodge is partially included in the cost of the house. You still will benefit if you stay in the house long enough.

The US Supreme Court has affirmed Proposition 13. However, if California is forced into bankruptcy, then that could change. Due to the recession/depression, California's income from sales taxes and income taxes has sharply decreased. Some pro-State trolls blame "Proposition 13" for California's budget crisis, but the overall state of the economy is a bigger factor. There is no guarantee that the Supreme Court won't change its mind and overturn Proposition 13. There is no guarantee that a mainstream media PR campaign would cause Proposition 13 to be repealed.

Since taxation is theft, any law that restricts State taxation power is a good one. However, California's proposition 13 has some undesirable qualities. It discriminates against new homeowners in favor of older homeowners. It provides a disincentive for people to move. Corporations get the same tax perk as individuals.

California's Proposition 13 law makes it seem attractive to move to California. However, that is by itself insufficient reason to move. Besides, the State is going to collapse in another 20 years. After that, I won't owe property taxes anymore, no matter where I live!


theftthroughinflation said...

There are tons of schemes that can be used to rob more tax money from citizens. In Montreal in 2001 the city became envious of possible revenue they could steal from the surrounding suburbs . Long story short (the situation was also aggravated by french-english issues) a few years later there was a vote and many of the suburbs de-merged back into seperate municipalities. Most stayed part of the megacity and those that broke-off still have to pay for various services directly with the mega-city like they did under the origional merger. Lesson learned: even when the state looses it still wins!

Kid Electric said...

"Another defect of Proposition 13 is that it discriminates against older people. If you're 20 years old, it would be very lucrative to buy a house and live there for 40+ years. If you're 50 years old, then there isn't as much advantage to buying a house, because your life expectancy is less."

CORRECTION: If you're 20 years old and HAVE A TIME MACHINE TO GO BACK TO 1977, then it would be very lucrative to buy a house.

You DO realize that Prop 13 only applies for houses purchased prior to 1978, right? This means that the law actually discriminates against YOUNGER people while benefiting the OLDER BABY-BOOMERS who bought homes and passed this law in the 70s.

Perhaps you were saying what would happen if a Prop-13-style law were to be enacted right now... but the fact of the matter is that, in the long run, it benefits one group of people (who tend to be the oldest -- BUT they can even pass on those benefits to their kids, creating an entire dynasty of unduly privileged class not pulling their weight when it comes to funding public services that they, themselves, benefit from -- such as education)

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