Semi-Daily Journal

And yet, someday, somebody will have to say the horrific truth: "Prop 13 was a mistake and a Very Bad Thing for the state."

One can only hope.

If lowering property taxes isn't the right way to make living in California reasonably affordable, then what is?

Alan K. Henderson writes:
> If lowering property taxes isn't the right way to make
> living in California reasonably affordable, then what is?

Since when did Proposition 13 lower property taxes? Prop13 only mandates a maximum rate of increase in those taxes, but only if the property is not sold in the mean time. So one thing that Proposition 13 does is severely distort the fairness of all property taxes, since it created a new class of landed gentry (who owned property early, ideally before the passage date) who pay property taxes at rates that can easily be 1/10 of that of their neighbors in identical housing. And that's just the beginning...

But however much propostion 13 annoys me, I'm not sure I can really blame it for the cost of living in the state. In a free-ish market, the cost of buying into life in California is and always has been whatever people are willing to pay. A place like North Dakota could probably abolish all taxes and still have population loss issues (even holding services constant by means of magic). People still like to live in California, so it is expensive. But if things get bad enough, at some point the price will have to go down. And I don't see how that will be good news for the state.

I think Prop. 13 gets blamed for way too much. What's wrong with an institutional mechanism that puts a brake on the natural tendency of democracies to overspend? When you look at some of the programs in the California budget, you have to thank any and all deities for Proposition 13, or God knows what you'd have.

Even as that Paul Krugman flap demonstrated, California's real dollar spending rose 13.4% per capita through the 90s. So it's not like 13 starves the state of cash.

The problem with 13 can be seen in the differences with Massachusetts version. In Mass., while a town's property tax increases are capped, The town can adjust assesments and rates as long as the leave the total collection within the limits. This reduces the silliness of identical homes having wildly different rates. It is also possible that undesireable parts of a town can see their taxes drop, as some other section of town becomes more desireable.

The drawback is that a particular's homeowners taxes are not as strongly limited.

Were property taxes to rise significantly at this point it would put much pressure on middle class homeowners who are happy in their homes but have seen the values of their homes increase sharply the past 4 years.

Warren Buffett can allocate assets as a genius, as an economic policy advisor there may be limits. My grandmother has an expensive home in which she has lived for 40 years and in which she wishes to continue to live, but Grandma has a modest income. We would not be at all happy to see a property tax increase for her, no matter how much her home may be worth.

To remain off topic, one problem with the proposition system is that there is no formal process by which "unintended consequences" can be examined. The legislative committee system, while far from perfect, is aimed at avoiding such things as having similar properties in the same neighborhood burdened with quite different property taxes. In like manner, it probably was not the intention of them what proposed a system for voting elected officials out of office have well over a hundred candidates on the ballot to take the elected officials place, with a strong chance that the ousted official will have garnered more support in his losing round of voting the winner garners in round two. However much one may dislike the outcome of the legislative process, at least the process can produce results that reflect the best thinking of experienced individuals. The proposition system doesn't involve a multi-step process, in which big mistakes can be identified and dealt with.

Cruz Bustamante!!!

I think that the problem with California Republicans is that they are obsessively trying to resurrect Ronald Reagan-- but, for lots of reasons, it's just not going to happen...

"If lowering property taxes isn't the right way to make living in California reasonably affordable, then what is?"

We've had fifty years of urban policy designed, in part, to maintain and increase the value of single-family houses, with various jurisdictions within urban areas all competing to raise property values. It has worked just fine. Like social security, this is nearly impossible to change and so is probably not going to change until people are absolutely desperate. Maybe in another five years or so.

"If lowering property taxes isn't the right way to make living in California reasonably affordable, then what is?"

Prop 13 has been in effect for 20 years with no serious talk of repeal. What has it done to make housing affordable?

We bought our California bay area home from someone who had owned the house for 40 years and enjoyed
Prop 13 from inception. In a market where many sellers have not accrued enormous Prop 13 savings, do you think that this seller lowered their asking price below market to reflect their 20 years of savings? Hope that it took you less than 1 second to figure no.

New owners benefit from the Prop 13 annual cap on property reassessment, but for anyone with kids, that cap is
peanuts if they decide the public schools have gone too far downhill.

Prop 13 is just a mess for anyone other than corporate property owners.

Bill "tripling" Simon was born on third base and thinks he's hitting a home run.

The Republicans get their own Nader. Actually, they're getting at least two.

Sigh. Folks, there's other reasons why it's expensive to live in the major California cities. The big one is simply that California cities are well off, many people bring home good salaries, and the prices of necessities track those salaries. (This doesn't help if you're in the second tier of the income distribution.)

Beyond that, though, the scarcity of housing created by the land-use policies I mentioned is a big factor.

"Prop 13 has been in effect for 20 years with no serious talk of repeal. What has it done to make housing affordable?"

What possible economic incentive can ANY policy provide to make housing greatly more affordable?

I'll exaggerate the problem for illustration.

Suppose a Wozniak-like innovator comes up with a whole new concept in putting together an elegant collection of cheap, off-the-shelf parts, easy to maintain and expand, and easy to imitate -- except in the housing market instead of the electronics market. Suppose a livable 1000 sg ft bungalow or cabin could be put together on site; networked, plumbed, and electrified, all for about $12000 at retail. And shortly the knock-off artist start getting into the biz and price wars break out and the cabins go for $4000 while bigger better "Bungalow-2010" -- twice the size for half the price" start appearing for $6000.

What would that do to the invested property values of every taxpaying, voting, homeowner
in our culture? I mean, maybe a typical debtor owes $70K on the mortgage for a $100K, 2000 sq ft property and pays say $4000 a year in taxes. What keeps him in that property and paying that tax if a much cheaper option is available. What incentive does he have NOT to default on the mortgage and start over on a lower-priced (more affordable) house?

In such a case, it would seem the tax assessor would have to DRASTICALLY refigure the whole game. A tax rate based on the square footage of the domicile rather than the "fair-market" value, maybe -- whether the house is fifty years old or brand new, you pay $2 a square foot. (This doesn't incentivize the mortgage debtor not to default, it only addresses the cash flow of taxpayers...)

Some people believe the auto-makers and oil companies conspire to keep "100 mile-per-gallon carburator technology" off the market. Were I inclined to conspiracy theories, I would be much more inclinded to suspect that mortgage lenders, gov't tax collectors and the current-era homebuilders collude to bury new high-tech affordable housing technology into the deepest, darkest, X-files, "lost ark of the covenant" vault-of-secrets.

But that's just me, being a layman.

So, a question for you professional economists. Given a societal desire for "more affordable housing", (which we acknowledge may be a counter-factual proposition) what policies should a municipality enact to incentivize such developments?

Aside from Prop 13 (of which I'm a slightly-guilty-feeling beneficiary), Brad's original post highlights the importance of feedback loops, virtuous or vicious, in political dynamics. California Republicans, sliding far far down a slippery slope of extremism, are caught in a cycle that I am happy to call virtuous, busy eating their young on the way to weird-cult status. [I knew they were headed in that direction on election night 1992, when the crowd at the California Republican headquarters were shown on TV carrying pre-printed "Impeach Clinton" signs....before the man had even been inaugurated!] Meanwhile, national Democrats (DLC and Dean, anyone?) are risking a similar vicious cycle that Tom DeLay would love to see putting them in the same place the California Republicans are.

Do political managers nowadays (or political scientists) analyze these feedback loops and the overall importance of recursive dynamics in political change?

Pouncer, over the years, a number of architects, including Frank Lloyd Wright have agreed with you; this was the origin of Wright's "Usonian" houses. But none of these schemes made a bit of difference to housing costs. In fact, the new designs usually became even more expensive than the originals. Reason being, the cost of building the house has almost nothing to do with the price paid for the house and property. Example: the cost of building in inland rural California is pretty close to the cost of building in urban California, but the price paid is very different.

It's the location of the site that makes the difference. The value of an urban or suburban "dwelling unit" usually depends mostly on what it's near--work, neighborhood, schools, and so on. What it can be near is determined, basically, by density restrictions which are, indeed, supported by "mortgage lenders, gov't tax collectors and the current-era homebuilders." But build more closely in California suburbs--even to, say, the moderate levels of San Francisco neighborhoods? There'd probably be a revolution.

As it is, things are changing with, ah, all deliberate speed.

"Even as that Paul Krugman flap demonstrated, California's real dollar spending rose 13.4% per capita through the 90s."

And per-capita income went up, what, 13%?