This LA Times story about an American family with an annual household income of $45,000 a year. Note that this family has the median household income: half of all American households are poorer. (Los Angeles is a relatively expensive place to live, but it's also a nice place to live: there are compensations.)
The median Hispanic household in America earns $34,000 a year. The median African-American household earns $30,000 a year.
Yahoo! News: By Geoffrey Mohan Times Staff Writer | The scrapbook tucked under the bookshelf in Rudy Basurto's living room isn't full of family portraits — just photos of cabinets. The one with the opaque windowpane doors is the pantry he built for Jamie Lee Curtis. The Mission-style one, in mahogany, is in Bruce Willis' place in Malibu. Basurto is 48 years old. He makes about $20 an hour building cabinets but can't afford to buy a home in his Highland Park neighborhood. He has bartered his labor to put his three teenage children through Catholic school. They're on their own for college.
Basurto's family is far from poor, by the official measure. The federal poverty level for a family of five is $21,959. Last year, Rudy and his wife, Maryellen, together earned more than twice that: $45,000. In many parts of the country, they might be middle class. But in Los Angeles, they are struggling. Like roughly a third of the county's population, they live somewhere between where poverty ends and prosperity begins. The Basurtos cram their children into makeshift bedrooms created in a dining room and a finished porch. They eat dinner on trays in the living room, where their daughter pecks away at a homework assignment on an aged computer.
Every weekday at 6:15 a.m., Maryellen packs her two youngest children into a 17-year-old Subaru GL station wagon that needs a new engine, drives 32 miles round-trip to drop them off at school, then goes to the first of her two part-time jobs. Rudy departs at the same time in his 16-year-old van, driving to the palatial homes of clients on the Palos Verdes Peninsula, in Malibu, in Beverly Hills. He has no health insurance, no pension plan and little savings. The Basurtos' lives are a precarious mix of bargain, barter and hope. Daily, they make choices — home-cooked pasta versus takeout Subway sandwiches, a mortgage versus private-school tuition....
Policymakers still measure progress in the war on poverty using the federal poverty level, despite decades of quarrels over its shortcomings. Developed in the 1960s, the poverty level is based on a food survey from 1955. It tells only how much is too little to live on, not how much is enough to get by on. "What it means is there are a lot more people without an adequate income in California than the federal poverty level would indicate," said Diana Pearce, director of the Center for Women's Welfare at the University of Washington and a pioneer in calculating self-sufficiency. By the federal benchmark, 13% of Californians are poor, according to the Census Bureau (news - web sites). By the self-sufficiency standard, 30% don't make enough to get by....
Lincoln Avenue in Highland Park is dark when Rudy Basurto pulls up after work in his 1988 Ford Aerostar packed with secondhand woodworking tools. A spry and darkly handsome man with a toothy smile and an accent still tinged with the sounds of his native Mexico, he slumps onto a milk crate in the living room. The logo on his sweat-stained dark blue T-shirt is his only reminder of the last employer that offered him benefits. That company went out of business after only a few years.... Rudy is away from home 10 to 12 hours a day. When he's out of work, his job is finding another job. Usually, showing off the Polaroids of his cabinetry lands Basurto work as a crew boss, at $15 an hour or more. He rattles off the clients: Jerry West, Helen Hunt, James Worthy. He's been in all of their houses. Tom Hanks, Brad Pitt, Bruce Willis.
When he crosses those thresholds, Basurto confronts what California has become: a state with a higher rate of both affluence and poverty than the nation as a whole. He reminds himself that the rich are no different inside. "You have to be nice and don't touch anything," he said. "You have to be very trustworthy." When he heads home, Basurto worries about things that seldom trouble his wealthy customers. Will he be able to fix his car if it breaks down? Will he stay healthy enough to work? Will his employer lay him off to cut costs? Cabinet companies fold and downsize often enough that Basurto can tick off job after job. When they fail, his finances suffer. The longest he went without work was three months during the recession of the early 1990s, and it took three years to pay off the credit card bills, Maryellen said....
Through years of colds, flu, bumps and bruises, Maryellen followed word of mouth on cheap clinics until she found the state's Healthy Families program four years ago.
The subsidized health insurance system, which covers nearly 700,000 children statewide, is among the social programs that use a multiple of the federal poverty line (up to 250%) as its benchmark for qualification. The Basurtos paid $14 a month to cover their three children last year and will pay $27 a month this year. Rudy Jr. is about to turn 19 and become ineligible for Healthy Families. Unless he gets a job that comes with benefits, he will be uninsured, like his father. From the start of their marriage, Rudy and Maryellen weighed the equities they could pass on to their children. Education won out over a house....
Over the years, he never made more than $34,000 a year. And there were times the tuition bill rose to $15,000 annually. They couldn't pay it. They worked in exchange for grants.... The family squeezed into a two-bedroom house for nearly a decade before moving next door to a three-bedroom place owned by the same landlord. Their rent stayed at $700. That's far below the going rate — $1,378 — in the neighborhood, according to federal estimates.... California has the fourth-lowest homeownership rate in the nation — 58%, 10 percentage points below the national average. "The middle class is very much trying to find a way to accommodate an enormous shift in property costs nationwide, but particularly on the coasts," said Joel Kotkin, a senior research fellow at Pepperdine University's Davenport Institute. "They're really sort of the abandoned middle class, and nobody is dealing with their issues."...
I think that two things are going on here. First, that America as a country is not yet productive enough to support everybody at the upper middle class standard of living we as a country believe that everybody deserves. (And, perhaps, when we are rich enough our idea of what an upper middle class standard of living is will have changed as well.) Second, there is the California homeownership fact. I'm beginning to think that it is yet another disastrous fallout from Proposition 13, another present to me and my children from those who voted with Howard Jarvis. With property taxes capped, it makes very little sense financially for a local government to approve nearly any increase in housing density: the property tax revenues don't cover the services that increased population density requires. Developers pay initial ransom in order to get sprawl subdivisions started, but once there are voters who don't really want an increase in density, there's no way to assemble a political coalition to make it happen.
And with no way to build up, you build out. And building out means you have to commute by car. And commuting time costs means that housing prices near the center go up and up and up. Thus Angelenos (and Bayareans) pay more and get less housing than people in other parts of the country. (Except for those of us with Berkeley-subsidized mortgages.) <./p>
Posted by DeLong at May 19, 2004 11:14 AM
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As someone who can't afford a home (despite a relatively large DINK household income)...
I think prop 13 has been a necessary evil. Without it, there is very little predictability in property ownership (for either houses or leases), as both inflation and bubbles can drastically increase your cost. Having the property tax bill go from $500/year to $5000+/year in the space of a decade would be a killer for many, especially when it is a tax on paper, rather than real gains.
Who would write a 10 year commercial lease without prop 13?
Additionally, anti-density NIMBYism is not something to blame largley on prop 13, IMO.
New density would be new construction, and therefore market rate on the property tax for all the units. If each unit is assessed at $300k, that's a good $3k/year/unit in property taxes.
Would building 4 units at $300k each, or one unit at $500k be better for the city? Isn't it the case that the largest per-unit cost (schools) is not local money, but pooled-state money for the most part?
NIMBYism and lack of density is a huge problem: the only remotely dense new areas in the East Bay are in the Richmond Marina (a decent area to rent but horrid to own [1]). And I think the lack of density on new construction is a huge problem, increasing the costs and overall reducing the quality of life.
But I don't think its entirely fair to blame it on Prop 13, which would actually reward building some dense NEW housing to replace sparser, older housing, instead of observing that it is the "I'm up, pull the ladder up" behavior that is ye-bog-standard NIMBY pholosophy.
[1] Still too close to the bulk of richmond's ghetto to have a low crime rate, and the school system is painfully bad (if that matters).
It is not a place where one would want to buy however: in a major earthquake, every buliding is going to be red-tagged due to liquifaction. So a renter doesn't need to worry about the liability, but an owner does.
Posted by: Nicholas Weaver on May 19, 2004 11:34 AMIs their children's school 16 miles from their home? Is this normal in LA?
Posted by: Jeremy Osner on May 19, 2004 11:35 AMNo, it's not normal. But they want their children to get a better-than-public-school education.
Posted by: Brad DeLong on May 19, 2004 11:38 AMI think that we also have to give a little bit of blame to the great grand pooh-bah of bubble blowers, Mr. Alan Greenspan. Back in 1996, when property costs in Cali were reasonable, or about 2/5 of what they are now, nobody was writing these kind of articles. Given 8 years of speculative asset price bubbles, going from first stocks then to housing, and you can see the result.
As long as there is something close to migration, and as long as the rest of the world (especially Mexico) lag the U.S. economically, I think it's implausible to think that most people in the country can achieve an upper-middle-class type of lifestyle. Approaching that standard, the U.S. would attract lots of poor migrants - beneficial in the long-term, but in the short-term putting pressure on wages and keeping the average standard-of-living low.
Posted by: Andrew Boucher on May 19, 2004 12:06 PMis that really true that in 1996 this kind of a reality didn't exist much in LA? Seems like it had to be endemic back then, though less bad.
BTW, most of the Bay Area is much more dense than LA. The traffic is not nearly as bad. The Bay Area is much more like most moderately dysfunctional yet tolerable suburbs in the NE where I came from. LA is a different creature, a few critical degrees worse in sprawlness and Q of L unless you stay in a self contained burg like Santa Monica.
The man's story is heartbreaking. It's the untold story, the real "forgotten" middle class. What the heck is this guy doing wrong? Could he move somewhere else and really do better? How could he obtain the information by which he could make such a choice (if it is indeed possible?)
Posted by: Hypocrisy Fumigator on May 19, 2004 12:11 PMProp 13 is not about individuals. Anyone who has a ludicrous paper gain he can't cover is mythological. Granny isn't losing her house. It's about commercial property. Since 10-year leases predate Prop 13, your one advantage would seem to be empirically denied.
No, the main effect of Prop 13 is to decrease the tax burden on commercial property owners and increase it on individuals, specifically on new purchasers. It belongs in the realm of social policy more than economic policy. My preference tends to be the opposite of yours, but thereon I am happy to disagree. To the extent you're not yourself a commercial property owner, your policy preference happens to be shooting those like you about the feet, but be that as it may -- I'm not here to tell you what you like.
I dislike it, though, I can tell you that.
One problem is that the cost of living generally increases as you get older-- a household composed of 30-year olds with an income of $45K/year is probably doing fine, one with 50-year olds and an income of $45K/year is not.
Posted by: Matt on May 19, 2004 12:19 PMMatt,
How do you figure that ?
Oh, children. 50-year olds are more likely to have children, and more likely to have teenaged/college aged children.
Posted by: Barry on May 19, 2004 12:34 PM"America as a country is not yet productive enough to support everybody at the upper middle class standard of living we as a country believe that everybody deserves. (And, perhaps, when we are rich enough our idea of what an upper middle class standard of living is will have changed as well.)"
This is simply facing relative utility. There will always be a poorest half of the population. Striving for improvement will have a side effect of some improvements in absolute utility, but destroy rich opportunities for increased leasure.
Shopping isn't always that great.
Posted by: Mats on May 19, 2004 12:46 PMFrom a planning POV, Prop 13 is a disaster. Municipalities have to fund growth projects by chasing after retail sales taxes.
Drive I-80 out of the Bay Area to Tahoe. See all the f'n auto malls? See all the godawful retail crap buildings? Cities need that blight to pay their way.
D
Posted by: Dano on May 19, 2004 12:48 PMyou can solve the property-tax granny problem really easily, just let over 65 or over 70 or something homeowners accumulate property taxes owed as payable at the time of sale of the house. Structure it as a lien on the property.
When local property taxes are set by local government people will vote out councils that are not adjusting rates appropriately, us Californians get up in arms about property taxes pretty quick. small c conservative types should support the local government autonomy in taxes/services, if they had any ideological consistency.
Posted by: CalDem on May 19, 2004 12:52 PMBarry,
a household of 30yr old parents with children
having a lower cost of living than a household of 50yr old parents with (presumably older, possibly more) children,
I'd buy that, but that isn't quite the argument that Matt made.
"No, it's not normal. But they want their children to get a better-than-public-school education."
Forgive my Canadian obliviousness, but doesn't that mean not that they are especially short of money, but that they suffer from (or think they suffer from) a poor public school private school tuition per year? I mean, it mentioned up to FIFTEEN THOUSAND dollars of private school tuition in one year. These people aren't within light-years of having the typical spending patterns of somebody grossing 40k/year. I have a lot of disagreements with US social policy but "fails to make private school affordable for everyone" is most certainly not among them.
Brad, you neglected the more obvious way in which this scenario is a function of Prop 13: public school would be a much more attractive option if Prop 13 hadn't eviscerated the California schools system.
Posted by: Tom Hilton on May 19, 2004 01:14 PMI'd bet that all sorts of cost-of-living numbers tend to increase as a cohort gets older-- E.g., the apartments and houses that I've lived in have gotten larger, I'm buying 'better' furniture, more expensive cars, bigger toys.. etc.
Posted by: Matt on May 19, 2004 01:30 PM"But they want their children to get a better-than-public-school education."
Bull. Catholic schools have almost exactly the same test scores as public schools. The difference is they are religious schools. (I happen to be working on a Commonweal Institute report on the subject of the school privatization movement, who is behind it, and their tactics.)
The thing that stands out in this story is how much better their lives would be if they sent their kids to public schools. We could be arguing about how to make public schools better and how that would improve their lives, just as a sane health insurance policy would. But if they choose to send their kids to private schools then why are we reading about how tough their lives are?
Posted by: Dave Johnson on May 19, 2004 01:33 PMIt occurs to me that personal income in the U.S. is 9500 billion dollars. The population is 290 million people. If personal income per four-person family were distributed equally to every four-person family, and the whole U.S. population consisted of four-person families, then it would be about $131,000 per family. Still, it seems to me it'd be pretty good if the median American family achieved, oh, half of that. It doesn't strike me as an excessively socialistic idea to think of the median American family getting half the mean American family's income. Is there any way we can get there?
Posted by: Julian Elson on May 19, 2004 01:55 PMPeople are missing the elephant in the room, the increase in income inequality.
While the economy is not necessarily a zero sum game, wages at any given point in time are.
When someone like Michael Eisner gets $550,000,000.00 in a single year, it converts to $4/hour for everyone at his firm (you could also do stock buybacks, increase the dividend, train employees, etc. with that money).
When the top 10% (and even more the top 1%) outpaces the rest of society, they bid up decent housing, and the poor suffer.
That being said, Prop 13 sucks.
Personally, if I were in California, I'd get a measure on the ballot to require that initiative petitions that require specific spending, or limit specific taxes for voter renewal every ten years or so.
Posted by: Matthew Saroff on May 19, 2004 02:01 PMTo Ian and Dave about California public schools:
(This gets us back to Prop 13 and local school funding, again).
In many, less irrational US states, your objections might make sense. But not in California, or at least less so. When I went to California public schools in the 1960s and 1970s, they were excellent (and also well above the median of states in per-capita spending). Now, after 25 years of tax limitation, California public schools are, IIRC, in the bottom 6th percentile in the US, next to states with MUCH lower costs-of-living (which means that the real story is even worse).
California public schools, EXCEPT in wealthy suburban areas, are in terrible shape. Parents are behaving entirely rationally to send their students almost anywhere else (which is a great shame for the state). True, money isn't everything...but without enough of it, it does make a real real difference. True, the state has made up part of the losses in local property taxes...but only part, evidently.
Meanwhile, for those who think Prop 13 is only for commercial real estate: I wonder. You forget that the Prop 13 caps are inheritable. New buyers, commerical or residential, are indeed those who suffer relatively (though their taxes are capped at a pretty moderate 1%.) It may be true, too, that businesses buy property less than individuals and families (though I wonder...is there data? Weighted by cost? Brad?). But there are a lot of people who inherited property with absurdly low property tax rates (I'm guilty). It gives me a substantial disincentive to sell the house I inherited, since if I rolled over the proceeds into another house, my property taxes would increase 10-fold. It also allows me to rent part of it out at a lower rate than otherwise, and to be very picky about my tenant, and it helps me leave my stepmother living there, which would be MUCH more expensive otherwise. It's not all bad...but still, I can't see at all how it is FAIR.
Posted by: PQuincy on May 19, 2004 02:03 PMI'm surprised no one has pointed this out, but you know what would really help them? Vouchers. They are no panacea, a real implementation of vouchers would mean lowering taxes on parents currently sending their kids to private school and raising taxes for everybody else, but in this case its simple justice. If they sent their three kids to public school they would be costing taxpayers 15000. Now they are doing us all a favor by costing taxpayers nothing, but they are getting no compensation for it.
Posted by: roublen vesseau on May 19, 2004 03:40 PMJulian,
Your data reminds me of a late growing suspicion: that we focus on median incomes not because it is a better statistic, but because it hides growing income inequity. What would happen if the mean income were mentioned in every political speech, and the effective CEO tax was required labeling on every product?
"If they sent their three kids to public school they would be costing taxpayers 15000. "
Also bull. The AVERAGE cost per student is not the cost per average student. Public schools have to take in every kind of student and pay for services for them. Disabilities, emotionally disturbed, etc. are very expensive.
Now, if you're talking about vouchers that requred any private school to take ANY student that comes to the door and provide all necessary services for the value of the voucher, that's a different story. I'd be all for that. But, of course, no such thing would ever happen.
Every voucher proposal I've ever seen does little more than give taxpayer cash to parents of kids who are ALREADY IN PRIVATE SCHOOLS ANYWAY, and are usually little more than schemes to get the Catholic vote away from the Democrats, or schemes to reward cronies of The Party.
Posted by: Dave Johnson on May 19, 2004 04:53 PMI graduated from a public high school in Los Angeles in 1978 (in the lower-middle class part of North Hollywood) and I can see now that I was at the tail end of the California public schools system being viable. Correct me if I'm wrong, please, but doesn't Prop. 13 freeze the assessment value of commercial property to the value it had in 1978, i.e. Disney pays taxes on Disneyland based on it's value in 1978, not now? If I got that right, that's a large part of why the tax base in a lot of places has collapsed, the schools being the main target for cuts.
Posted by: Jim on May 19, 2004 05:03 PMVouchers are consistently popular among inner-city residents. There have been visionary liberals, like John Norquist and Kurt Schmoke, who see vouchers as a means of improving public school education through sorely-needed competition. John Kerry flirted with the idea about a decade ago, but retreated in face of intense teacher-union opposition.
Eventually, liberals (such as us) will need to confront our own reactionary politics of the status quo. Not all conservative ideas are bad ones. It would be better to get creative in our problem-solving than merely defend the economic interests of certain interest groups.
Posted by: Walter Hall on May 19, 2004 05:12 PMUmmm, Matt isn't it usually the other way around? Isn't the mean or average income higher, and therefore gives the false impression that people are making more money than they are? The median income means that exactly half the populace makes more and half makes less than this figure, so it's less inflated by one Michael Eisner in a bunch of Mickey Mouse wage workers.
Saying the mean income at Disney is something like $200,000 py sounds impressive but what if you knew that the median income at Disney - and I have no idea what it is - is $45,000 py like the national figure? Well the two numbers just sound very different and the median income is an more honest statement of what the "typical worker" at Disney makes.
Posted by: Oldman on May 19, 2004 05:29 PM"There have been visionary liberals, like John Norquist and Kurt Schmoke, who see vouchers as a means of improving public school education through sorely-needed competition."
I think you mean "ignorant", not "visionary". Look at all those other countries whose school systems trounce the US in testing and so forth. Is it because they have vouchers or extensive private school systems? No. Looking at US private schools, what schools are actually willing and able to accept a big influx of students? Religious schools. Do they have better test scores or other performance than public schools? No. If secular private schools somehow decided to expand dramatically, would they keep their current performance advantage? No, the research I've seen indicates their only statistically significant advantage is the socioeconomic status of the student body. (In other words kids do better when thrust in the midst of a bunch of other kids whose background and parents give them more emphasis on education).
And what's the fuss about property taxes? Every international comparison I've seen indicates that one of the fundamental flaws of the US education system is funding schools through property taxes. It tends to lead to rich schools in rich areas and poor schools in poor areas, leading to inefficiency and inequality. As far as I know, most countries with more successful public school systems than the US use much more state and national funding and less to zero reliance on property taxes.
Therefore I have trouble buying the idea that a reduction in property tax revenues and a switch to state level control is somehow an inevitably horrible thing for the California school system. Sounds like a problem of the absolute level of funding and/or the administration of the system.
Re whether Catholic schools (or private schools) are better than public schools. I'd be interested in seeing per-district data. From what I know in SF, the Catholic schools are hands-down better than the public schools. They're also safer by a long shot.
Last, though I don't know about LA, the way that SF public schools assign students is completely random, changes each time a student moves to a different class of school, and doesn't reflect any preference for keeping siblings together. That means that one could see one's twins go to completely different schools at opposite ends of the city from you and each other, then lose their friends when they change to two completely different middle schools and again when they change to two completely different high schools.
That's worth some cash to correct, since you can send your children to the Catholic school you choose (within the diocese, I think).
Posted by: paperwight on May 19, 2004 06:26 PMI think the Dutch have a semi-voucher system, with non-profit schools receiving support from the state on the basis of students admitted. Then again, while the Dutch primary/secondary school system is better than ours, so are many school systems that DON'T use such decentralized measures.
I think that it might be worth considering a voucher, or at least choice within the public school system, system, just because then you have a chance for a better school/student fit: artier schools for artier students, sciencier schools for sciencier students, humanitiesier (ack!) schools for more humanities-oriented students. It might not make SAT or ACT scores or grades higher, or even students better educated as a whole, but it has a real chance of improving the school experience for many students and making life more fulfilling for them during their school years, and that's certainly worth something.
Oldman, I don't really agree with Matt, but what I think that he's saying is that if a politician says, "average income for a family of four rose from $40,000 to $41,000 this year!" then people will cheer. If he says "average income for a family of four rose from $131,000 to $134,000 this year!" the 80% of his constituents who make less than that will think "damn, I'm poor. I never realized that."
Posted by: Julian Elson on May 19, 2004 06:39 PMNotwitstanding the fact that half the population live below the median income, it is symptomatic of the scarcity of public goods that a family a little above that median has so little access to what all of us below the median had a half century ago. True, land prices are up, but that can't be the whole reason. You can always build smaller houses and put more families on the same land. The reason you can't do that is that the people whose incomes are far above the median are able to buy up that land to make themselves large houses. Oversimplification, but you see the point. The distribution of income has become more unequal in the past half century. That has to translate into inequality in consumption and access to opportunity.
Posted by: Knut Wicksell on May 19, 2004 07:17 PMIt's perplexing how some liberals will hide behind statistics in order to deny people simple freedom of choice. If public schools outperform private schools, those outcomes ought to be apparent to the community. Alas, they usually are not.
The reason there is this ongoing discussion is precisely because many inner city residents will not send their children to public schools. Middle-class professionals who live in cities will, by and large, not send their children to public schools. 52% of public school teachers who live in cities will not send their own children to public schools.
Ideally, if communities were perfectly functional, there would not be a need for alternative schools. I assert that the performance breakdown in schools correlate precisely to the collapse of social norms outside them. One small step to making community functional again is allowing a measure of freedom in school choice.
Posted by: Walter Hall on May 19, 2004 09:56 PM"52% of public school teachers who live in cities will not send their own children to public schools."
Walter, I partially agree with your:
"I assert that the performance breakdown in schools correlate precisely to the collapse of social norms outside them. "
(although you haven't shown a precise correlation), but when you point out that public school teachers won't send their kids to public schools, you fail to acknowledge that maybe perhaps sorta the teachers might be able to assess the quality of education and decide to send their kids elsewhere.
My sister works in the public school system in MI and her kids go to private school for this very reason. It ain't because the public schools are outperforming private schools, let me tell ya.
The market has information. The market allows for a choice. The market is speaking. It is apparent to the community. The lib'rulls haven't bombarded the community with statistics. Rather, the schools aren't edgeamacatin' their kids.
Simple, yet apparently complex.
D
Posted by: Dano on May 20, 2004 01:11 AMIt's not just California and it's not just families with children that are hard hit. I am a single woman, homeowner (no way I could ever afford a house, I bought a one bedroom condo), college graduate, Austin TX, and I have had the same full-time job for more than six years. I have also had the same part-time job for almost eight years -- I can't afford to give it up. I gross more than $32k each year and I do not own a car because I can not afford one. No cable. No $ for clothes or shoes unless everything else has holes in it. I go out very little (and then mostly when someone else pays). After the paycheck comes in I immediately pay half my monthly bills, balance my checkbook, and decide whether to add meat to my grocery list. A lot of people I know in my city are college graduates, my age, with similar work histories and salaries, are in the same boat. None of us expected to still need roommates and second jobs at our age and place in life when we started college 15 years ago.
Posted by: The Goddess on May 20, 2004 06:05 AM(Los Angeles is a relatively expensive place to live, but it's also a nice place to live: there are compensations.)
Exactly the point I make, when these stories come up. When will we see the story about the median income family struggling to get by and make their payment on the two Mercedes in the driveway, and still pay the bills? (it is a relatively expensive form of transport, but nice: there are compensations) Living in an expensive place, or living alone, like Goddess does, are luxuries, not necessities - struggling to get by, when paying for luxury goods, is optional.
He could make at least 25 grand in Iowa, (what, they don't need cabinets there?) send the kids to the decent public schools, and live much less on the edge, but the Basurtos choose not to do that. Why? Those compensations Brad mentioned - their luxury good of choice is California. Goddess's is Austin (which, though inexpensive relative to California, is much more expensive a home than Fort Worth or College Station, TX - I've lived in all three - again, there are compensations), and independence - splitting a two bedroom apartment with a roommate would be much cheaper per person. I see a lot of relatively low income folks in rural or small town Texas who drive nice trucks - that is their luxury of choice.
Note the Basurtos are also not typical "median income" people in other ways- they pay for their own health care - the median person has employer-provided health insurance. Contractors always show a higher income than their actual circumstances, because they cover so many expenses employees get covered by their employer - there are compensations, like independence. They live like a family with maybe 25k income, whose 3 kids are in public schools and one parent has employer-provided insurance, ie pretty close to the poverty line. Any poorer and they couldn't get by on their own? Isn't that what the definition of poverty is?
Posted by: rvman on May 20, 2004 09:05 AMCalifornia’s Prop 13, the perpetual whipping boy for anything that goes wrong in that state. As counter examples, both NYC and Washington DC both have problematic school systems, yet no Prop 13, moreover their per pupil expenditure is high unlike Californa. Many of California’s school districts are very poorly administrated. For example Richmond didn’t know how to balance its checkbook and went bankrupt. The Oakland system was taken over by the state government it was so poorly run. Speaking of Oakland, I have a little insight into why that system is so dysfunctional. I know a teacher who was (falsely) accused of hitting a child. Instead of clearing the matter up quickly, the teacher was put on paid administrative leave. For nearly a year this teacher was paid not to teach while the school administrators did nothing. Finally a small quick hearing resolved the matter. Another teacher spent 5 years on paid leave in a similar situation. New York City also suffers from poor and bloated administration. For example they built a new school in Queens that cost as much as a Class A office building in Manhattan. They pay janitors $100,000. Too bad for them they don’t have a Prop 13 to blame.
Posted by: A. Zarkov on May 20, 2004 09:21 AM"As counter examples, both NYC and Washington DC both have problematic school systems, yet no Prop 13, moreover their per pupil expenditure is high unlike Californa"
You're comparing two very dense city school districts with the state of California?
In regards to what Dano said upthread, and what brad was pointing out in his post, the shift from property taxes to sales taxe to fund municipalities is likely a factor, combined with subsidized individual transporation costs among others, that influences the urban sprawl associated with California.
Posted by: ChrisS on May 20, 2004 09:51 AMrvman wrote, "He could make at least 25 grand in Iowa, (what, they don't need cabinets there?) send the kids to the decent public schools, and live much less on the edge, but the Basurtos choose not to do that. Why? Those compensations Brad mentioned - their luxury good of choice is California."
Depends on whether he can get a job in Iowa, doesn't it? And while I myself am amenable to making job decisions looking at a national market, many people don't for other reasons, like being close to family.
Posted by: liberal on May 20, 2004 09:56 AMKnut Wicksell wrote, "True, land prices are up, but that can't be the whole reason. You can always build smaller houses and put more families on the same land. The reason you can't do that is that the people whose incomes are far above the median are able to buy up that land to make themselves large houses."
It's not an oversimplification. When the State doesn't tax away Ricardian rent on land, land use allocation becomes very inefficient.
Posted by: liberal on May 20, 2004 09:59 AMA. Zarkov wrote, "California’s Prop 13, the perpetual whipping boy for anything that goes wrong in that state. As counter examples, both NYC and Washington DC both have problematic school systems, yet no Prop 13, moreover their per pupil expenditure is high unlike Californa."
But classical economic theory shows that if scarce resources like land are given away by the State, they won't be used efficiently. (The efficient solution is to tax away Ricardian rent, a la Henry George.)
Take New York City, which you mentioned. While rent control undoubtably creates disincentives to build housing, it's probably a much smaller problem than the fact that in NYC, land (that is, the value of unimproved land) is taxed at a much lower rate than improvements like buildings. (That is, the ratio of tax on land to tax on improvements is lower in NYC than in other localities, AFAIK.) This allows landowners to lock up land in inefficient uses (like parking lots, low-rise buildings) without paying for the inefficiency---they can just hold the land (e.g. in a parking lot) and watch the capital value appreciate.
For a good summary of the issues involved, see
"A Geolibertarian FAQ" at
http://members.aol.com/_ht_a/tma68/geo-faq.htm
for a presentation from a libertarian point of view.
I for one predict California will be perpetually screwed up until it abolishes Prop 13.
"Depends on whether he can get a job in Iowa, doesn't it? "
And if he loses that job, if there's enough of a market for him to get another job. Or tofreelance for awhile. Much easier where the population is more dense.
Posted by: dave heasman on May 20, 2004 10:08 AMI know any number of blue collar families whose lives would be enormously enriched by a simple municipal zoning change that would re-establish the legality of 'living over the shop'. A garage mechanic with an apartment upstairs, as still seen in the comic strip "For Better or Worse". (This in the socialistic ideal model nation, Canada, at that.) ONE mortgage, not two.
Same for a cabinet maker -- wouldn't it be better to have a woodworking shop AND apartment than an apartment alone -- or trying to do all of his work out of the back of a truck?
Yet in most places the residential voters have chosen to keep traffic, noise, industrial chemicals and advertising signs far removed from their bedrooms. The zoning essentially doubles the number of lots and buildings required for a blue collar technician to buy or hire in order to conduct trade and raise and family. One house AND one shop. No wonder nobody can afford it.
This is historical idiocy ... But the professional economists blame the TAX systems? Tell me, how big an increase would be required in the tax rate to match the requirement to double your annual expenditure in real estate?
To me this all goes to the same sort of politicians' misperception that everybody has a job with a big corporation that provides a shop, or an office, or a workstation in the assembly area. (As well as health insurance, company car, and an entertainment and advertising expense account.) It's never been completely true, and it's getting less true all the time. Even big companies like IBM offer many employees no office any longer. A laptop and maybe an empty cube for the duration of a temporary assignment at the plant ... Otherwise the employee sets up his desk or other workspace in his OWN space -- a hotel room, a corner of the kitchen, a spare bedroom. Does IBM compensate the worker for the loss of space in the existing kitchen, or the cost of a bigger home with an extra bedroom? Not hardly. It is fair that a guy who makes a living with a laptop CAN work from home, while a guy who makes a living with a welding rig, a wood lathe, or a pneumatic wrench is legally prohibited from doing so? Not in my opinion.
But you pick on the tax code... Great. So, guys, like the old joke about the can opener -- assume away Prop 13. About how high will the taxes be? Specifically, how high are state taxes on a $700 dollar apartment on Lincoln Avenue in Highland Park in 2005 -- absent that evil piece of interference? How much of those taxes with the landlord absorb (in a rent-controlled district, I wonder) and how much will he raise the rent on the already struggling tenant?
Posted by: Pouncer on May 20, 2004 10:57 AMPouncer wrote, "But the professional economists blame the TAX systems? Tell me, how big an increase would be required in the tax rate to match the requirement to double your annual expenditure in real estate?"
You clearly know absolutely nothing about Ricardian rent and land taxes. Sounds like you think the government should give away title to scarce resources like land for next to nothing.
Go to
http://members.aol.com/_ht_a/tma68/geo-faq.htm
to educate yourself.
Pouncer wrote, "How much of those taxes with the landlord absorb (in a rent-controlled district, I wonder) and how much will he raise the rent on the already struggling tenant?"
It's been known since Ricardo that tax on land (economic, Ricardian) rent cannot be passed on to others, except insofar as the cost of the rent itself is passed on.
If government taxed a greater share of Ricardian rent (and a lower share on improvements like buildings), the efficiency of land usage would be vastly increased, and "rent" (as that word is conventionally used) would drop.
Posted by: liberal on May 20, 2004 11:24 AMliberal wrote,
"Take New York City, which you mentioned. While rent control undoubtably creates disincentives to build housing, it's probably a much smaller problem than the fact that in NYC, land (that is, the value of unimproved land) is taxed at a much lower rate than improvements like buildings. (That is, the ratio of tax on land to tax on improvements is lower in NYC than in other localities, AFAIK.) This allows landowners to lock up land in inefficient uses (like parking lots, low-rise buildings) without paying for the inefficiency---they can just hold the land (e.g. in a parking lot) and watch the capital value appreciate."
Weelll.. you're not really right on either count. re: Rent Control, the laws only apply to pre-1974 housing, and do not apply to new housing. (Most new rental buildings are rent-stabilized, however, because the city offers large property tax breaks for residential new construction provided that the new units are rent-stabilized.)
re: Taxes on land, the tax rate on land is the same as it is for improvements. It may be true however that the City tends to under-assess land, since land values fluctuate so much. The reasons why inefficient uses exist, IMO, is not the tax system but rather that the real estate market is inherently inefficient.
As for Prop 13, there is no such thing as a perfectly fair tax system--but California's seems particularly unfair.
Posted by: NYC real estate analyst on May 20, 2004 01:41 PMliberal, that page made no sense at all.
Posted by: Jeff Lawson on May 21, 2004 12:24 AMJeff Lawson wrote, "liberal, that page made no sense at all."
LOL! Now *that's* a substantive post.
Posted by: liberal on May 21, 2004 01:26 AMNYC real estate analyst wrote, "Weelll.. you're not really right on either count. re: Rent Control, the laws only apply to pre-1974 housing..."
Where did I indicate otherwise?
"re: Taxes on land, the tax rate on land is the same as it is for improvements."
But I wrote "*That is*, the *ratio* of tax on land to tax on improvements is lower in NYC than in *other* localities, AFAIK." [emphasis added]
"The reasons why inefficient uses exist, IMO, is not the tax system but rather that the real estate market is inherently inefficient."
That's not what the evidence says---the empirical evidence (as well as centuries of economic theory) says that allowing hoarding of a scarce resource like land will lead to inefficient allocation of that resource.
Posted by: liberal on May 21, 2004 02:06 AM"It's perplexing how some liberals will hide behind statistics in order to deny people simple freedom of choice."
I don't like public transit, so I demand the government buy me a Chevy, to break the government monopoly on transit, and to offer me "choice."
You already have "choice." That's a phony argument.
Posted by: Dave Johnson on May 21, 2004 08:12 AM"liberal":
I'd like to note that Georgian land taxes would be really hard on those groups trying to preserve ecological habitat. Woodlands full of trees are not exactly revenue generators, but are very lucrative if developed (for the wood, and often for development - cut down most of the trees, leave a few big ones, put up houses, and you have "big trees on lot" for your ad.) The Georgian tax only works if all of the "values" are included in the marketplace.
Who's to say parking isn't the highest value use of some bit of land in New York? You certainly pay more per square foot for a parking space than office space. Low rises don't use expensive, high-energy systems to get water to top floors, are easier and cheaper to build, and easier to use for the end-user. Low rises exist in New York cheek by jowl with skyscrapers because not everyone wants 89th floor cubicle with no view. (Note that building a tall building imposes negative externalities in the form of shadows, view impaction, and traffic on all neighbors, tall and short alike.)
Posted by: rvman on May 21, 2004 11:10 AMrvman wrote, "I'd like to note that Georgian land taxes would be really hard on those groups trying to preserve ecological habitat. Woodlands full of trees are not exactly revenue generators, but are very lucrative if developed (for the wood, and often for development - cut down most of the trees, leave a few big ones, put up houses, and you have 'big trees on lot' for your ad.)"
I disagree. First, I don't think extractive timber industries are very profitable. (And in an all-encompassing Georgist system, "land" would refer to *all* scarce natural resources---that's the definition of the term "land" as used in classical economics, IIRC.) Second, while I don't have numbers, my impression is that real estate developers make most of their $$ on an initial cut of the net present value of the future stream of land rent payments. Under a Georgist scheme, these payments would (mostly) not be captured by private parties, so the incentive to develop would be seriously eroded.
"Who's to say parking isn't the highest value use of some bit of land in New York? You certainly pay more per square foot for a parking space than office space."
I didn't mean to imply *parking per se* isn't a good use of land. I clearly meant that open-air *parking lots* are a terribly inefficient use of land. Clearly parking *garages* are a much more efficient way to provide parking.
"Low rises don't use expensive, high-energy systems to get water to top floors, are easier and cheaper to build, and easier to use for the end-user."
You're joking, right? The economic cost of annual Ricardian rent obviously far exceeds the miniscule relative cost of pumping water in a building by two or three orders of magnitude.
Certainly low rises are easier to use and cheaper to build. You're entirely missing the bigger economic picture: land that people want to occupy is in very scarce supply, whereas building materials are in (relatively) more abundant supply. Hence it's far more economically efficient to build high-rises.
Certainly low rises are more user-friendly. I myself like to take frequent walking breaks and wouldn't enjoy long elevator rides to do so. But, as participants in a "market friendly" discussion, one always has to ask: "at what cost"?
I was in NYC a few months ago. At the first subway stop in Brooklyn, most of the buildings appears to be old and 2-3 stories. Given the proximity of the area to Manhatten, I could only marvel at the gross economic inefficiencies at work---high-rise apartments would house an order of magnitude more people.
Posted by: liberal on May 22, 2004 08:27 AM"America as a country is not yet productive enough to support everybody at the upper middle class standard of living we as a country believe that everybody deserves.'
Everyone living on the shores of Lake Wobegon, California?
Posted by: Patrick R. Sullivan on May 22, 2004 09:14 AM"And with no way to build up, you build out. And building out means you have to commute by car."
And oil prices are rising. Come visit us in Portland; we can show you a better way to play this game.
"Rent Control, the laws only apply to pre-1974 housing, and do not apply to new housing."
Analyst, how much post-1974 NYC housing is there outside of Staten Island? Building in the NY metro area is low-density outside of NYC proper (Long Island, NJ, Westchester Co., Connecticut) and subject to the same dynamic that California housing is.
My general take on this is that an elected regional government is required to make policy across the whole urban area, and part of that policy has to be to insist that there be enough housing to accommodate projected occupancy. Reason a regional government is required is that without it, there is the temptation for parts of the region to aggrandize itself at the expense of the rest; Bay Area and SoCal real estate prices are driven by policies (which are even mentioned in the planning texts) which are designed to maintain and increase the value of existing housing investments at the expense of providing adequate housing for the whole regional population.
Posted by: Randolph Fritz on May 22, 2004 01:54 PM“You're comparing two very dense city school districts with the state of California?”
I’m comparing the LA school system with two other urban school systems, both without prop 13. New York State has its own problems with regard to schools. Some districts like White Plains pay their teachers quite well. I don’t know if White Plains has high quality schools. But I disagree with the simple notion that if you spend more on schools, and you must get better schools. Why should the relationship be linear? From what I observe more spending usually creates a larger educational bureaucracy. New York State has more school administrators that the whole of the UK! BTW education for some reason seems to really generate bureaucracy. It’s a sobering thought that Britain ran the Raj with fewer administrators than Stanford uses to run that one University.
A. Zarkov, it's understandable that you have a hard time determining whether or not spending more on schools makes them better --- there are a lot of other variables that often matter more than the money spent per student. So you have to do a lot of work to really understand the causal relationships in educational quality.
Fortunately, a smarter and harder-working fellow than you has already done the research and put it on the Web so you don't have to. One such person's name is John Quiggin; he wrote a paper called Human Capital Theory and Education Policy in Australia: http://www.uq.edu.au/economics/johnquiggin/JournalArticles99/HumanCapitalAustER99.html
You would do well to read and understand it before burdening the rest of us with your uninformed commentary again. The short answer is that there is a lot of evidence that money spent on schools is a good investment in a fairly wide range of circumstances.
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Posted by: Car worldwide on June 18, 2004 03:46 AMyeehh - BRUSSELS, Belgium -- European Union leaders have overcome their differences to agree to the bloc's first constitution and are pushing ahead with their search for a compromise candidate to be the next European Commission president.
Posted by: govard on June 20, 2004 12:57 PMIf you have an interest in the application of the ideas of Henry George to current day issues, check out the conference in Albuquerque in July, 2004. Information is at http://www.progress.org/cgo
To Liberal's point about NYC: the value of a particular building is pretty much constant everywhere. If that building sits in midtown Manhattan, it is probably worth a good deal less than the piece of land it sits on, unless it is a particularly tall building. Land values in NYC can be over $250 million per acre -- quite a bit more than land as close as 45 minutes away -- which runs perhaps $250,000 per acre. Agricultural land, on the other hand, is typically worth $2500 to $10,000 per acre. The difference between an acre of ag land and an acre of midtown Manhattan land is a factor of roughly 100,000!
On the other hand, the range of value from a modest new home (the building only, not the lot) to a luxury new home (ditto) is probably a factor of perhaps 6 or 8 or 10 (say, $40 psf for the modest home, and $400psf for a wildly luxurious one). Adding in size, and calling the luxurious home (10,000 sf) 10 times the size of the modest one (1000 sf), we've now gotten to a range of 1 to 100 on the value of the improvement. If we throw in depreciation (an old cottage, small rooms, obsolete systems and technology) of 90%, we've still got a range of only 1 to 1000 from a modest, old cottage to a luxurious new mansion. Location matters far more than the qualities of the improvement on that site.
Posted by: wyn on July 1, 2004 01:21 PMProposition 13 was and is marketed as protection for the little guy. But if you play with the numbers a bit, you'll get a wholly different sense of it.
If you're handy with a spreadsheet, try this, and you'll see immediately who benefits from Prop 13, and get a sense of (a) how much revenue is missed as a result; (b) the inequities among owners of identical neighboring houses; (c) the costs to each family if the tax revenue suppressed by Prop 13 has to be made up for via income or sales taxes.
Here are the inputs:
1. Assume 3 properties -- give each three columns to start with. The properties are Waterfront 1, Waterfront 2 and mile-back-from-the-beach. (stick these in, say, row 10.)
2. Starting values: W1: $500,000; W2: $500,000; MBFTB $100,000. (The lot sizes are identical and the houses identical; only the locations vary). Stick those values in, say, row 12, and label the row "Year 0".
3. At the top, put in the following fields
Row 2: Appreciation Rate (make a cell for each of the three properties; W1 and W2 will be identical, but MBFTB will be different). Format it as a percentage with two significant digits.
Row 3: Assessment Cap -- make this .02, the rate that Prop 13 mandates; this means that, no matter how much the market value rises, the assessment can only rise 2%.
Row 4: Property tax rate -- make this .01, as in California.
For starters, let's assume that W1 and W2 appreciate at 10% per year and MBFTB appreciates at 5% per year. (That goes in Row 2)
Now, starting in Row 11, apply these factors to the three properties. Column A becomes the Years, starting with Year 0 and going to, say, Year 10. Column B becomes the market value for W1 -- for year 1, the market value in Year 0 times (1+the appreciation rate in Row 2 -- make that a constant). Copy that formula down for the remaining 9 years. Column C becomes the assessed value -- In Year 0, it is the same as the market value. In Year 1, it is (imprecisely) the Year 0 value times 1+assessment cap, or (more precisely) the lesser of that and the market value. Copy this formula down through year 10. Column D becomes the tax revenue -- just column C times .01.
You might also add a column for 1% of Market Value to show what the taxes would be were property taxes merely capped at 1% of Market Value, without the assessment cap.
Repeat these four columns for the second and third properties.
Now, let's say that W2 gets sold in Year 5. Go in and change the Assessed Value for Year 5 for W2 to the Market Value, and watch the taxes pop up. Now
Proposition 13 was and is marketed as protection for the little guy. But if you play with the numbers a bit, you'll get a wholly different sense of it.
If you're handy with a spreadsheet, try this, and you'll see immediately who benefits from Prop 13, and get a sense of (a) how much revenue is missed as a result; (b) the inequities among owners of identical neighboring houses; (c) the costs to each family if the tax revenue suppressed by Prop 13 has to be made up for via income or sales taxes.
Here are the inputs:
1. Assume 3 properties -- give each three columns to start with. The properties are Waterfront 1, Waterfront 2 and mile-back-from-the-beach. (stick these in, say, row 10.)
2. Starting values: W1: $500,000; W2: $500,000; MBFTB $100,000. (The lot sizes are identical and the houses identical; only the locations vary). Stick those values in, say, row 12, and label the row "Year 0".
3. At the top, put in the following fields
Row 2: Appreciation Rate (make a cell for each of the three properties; W1 and W2 will be identical, but MBFTB will be different). Format it as a percentage with two significant digits.
Row 3: Assessment Cap -- make this .02, the rate that Prop 13 mandates; this means that, no matter how much the market value rises, the assessment can only rise 2%.
Row 4: Property tax rate -- make this .01, as in California.
For starters, let's assume that W1 and W2 appreciate at 10% per year and MBFTB appreciates at 5% per year. (That goes in Row 2)
Now, starting in Row 11, apply these factors to the three properties. Column A becomes the Years, starting with Year 0 and going to, say, Year 10. Column B becomes the market value for W1 -- for year 1, the market value in Year 0 times (1+the appreciation rate in Row 2 -- make that a constant). Copy that formula down for the remaining 9 years. Column C becomes the assessed value -- In Year 0, it is the same as the market value. In Year 1, it is (imprecisely) the Year 0 value times 1+assessment cap, or (more precisely) the lesser of that and the market value. Copy this formula down through year 10. Column D becomes the tax revenue -- just column C times .01.
You might also add a column for 1% of Market Value to show what the taxes would be were property taxes merely capped at 1% of Market Value, without the assessment cap.
Repeat these four columns for the second and third properties.
Now, let's say that W2 gets sold in Year 5. Go in and change the Assessed Value for Year 5 for W2 to the Market Value, and watch the taxes pop up for that property.
Consider the lost revenue from W1 and W2, and, to a lesser degree from MBFTB. A promoter of Prop 13 would argue that all three owners receive protection from Prop 13. But who receives the most? The guy who needs it the least -- the one with the most valuable asset, which is quite sufficient to fund his retirement anywhere else. The little guy in the similar house a mile back gets some protection, but not as much.
Now how will the town fund its schools? How will it fund its roads? How will it fund its services? How about a sales tax. Spread the revenue lost due to Prop 13 across the three households, and poor MBFTB gets to pick up 1/3 of the load, via a sales tax, or an income tax. Or a parcel tax, which is another great deal for the folks who own the best sites.
Now let's throw in a fourth player: the guy who rents.
What do good schools, good roads and good services do? They make the properties they serve more desirable. So they sell for more, and rent for more. If we cap property taxes, and shift the tax burden onto sales and income, our renter has to pick up 1/4 of the tax burden, and much of that tax spending serves to prop up property values, so he pays his landlord a higher rent for the privilege of living there. Talk about adding insult to injury! And the landlord's property taxes, of course, are practically frozen, though the rent sure isn't.
And if all that isn't bad enough, consider the potential entrepreneur who has a business idea in mind. What does he need first? A place to conduct business, a desirable location where customers can find him. Land is scarce -- they aren't making any more of it -- and he must buy or rent it at whatever price the market will bear. The high land prices in California discourage him from going into business. So he doesn't create a job for himself or anyone else. Or he does go into business anyway. But he has to compete with the established guy down the street who has owned his property for 25 years and is paying property taxes at a tiny fraction of what Mr. Newbie must pay for identical property. And Mr. Newbie has to pay the owner for the property, too. (The owner may have made the improvements to the property, but they are depreciating, while the land, which he can't claim much credit for having created, is appreciating -- but our system says he deserves the windfall nonetheless.) He doesn't have much left to outfit the building, or to pay his employees, or to purchase inventory or raw materials.
And to be specific, think of the guy who wants to open a hotel. His competitor down the street has a very low cost structure, and pays a low amount of taxes to boot. Will Mr. Newbie take the risk? Quite possibly not. So the rest of us pay his competitor more for the use of his rooms. They call it monopoly.
The alternative? Yes, there is an alternative -- a good one. Instead of the buyer paying the seller a high price for the land (and continuing to pay the bank interest on the borrowed funds until he can pay off his debt) or the renter paying the landlord a high rent which is mostly for the use of the site rather than the value of the building on the site, let the user of the property pay the community for the use of the land and the seller for the title to the building or the temporary use of the building.
The bank won't be happy, and the land speculator won't be happy, but the entrepreneur will be happy, and the person who wants a job will be happy, and the customer will be happy. And the family or individual who needs an affordable place to live will be happy. (He may not have the waterfront property, but do we think it important to subsidize those who would prefer to have waterfront? Most of us would prefer it -- who gets to decide who gets the lucky break and subsidy?)
Who do we want to make happy? A few, or virtually everyone?
What we're doing now isn't working. And what we're doing now isn't fair.
Homeownership rates have declined in California for all age groups except senior citizens since 1978 when Prop 13 was enacted. Enough said?
Posted by: wyn on July 1, 2004 03:50 PMProposition 13 was and is marketed as protection for the little guy. But if you play with the numbers a bit, you'll get a wholly different sense of it.
If you're handy with a spreadsheet, try this, and you'll see immediately who benefits from Prop 13, and get a sense of (a) how much revenue is missed as a result; (b) the inequities among owners of identical neighboring houses; (c) the costs to each family if the tax revenue suppressed by Prop 13 has to be made up for via income or sales taxes.
Here are the inputs:
1. Assume 3 properties -- give each three columns to start with. The properties are Waterfront 1, Waterfront 2 and mile-back-from-the-beach. (stick these in, say, row 10.)
2. Starting values: W1: $500,000; W2: $500,000; MBFTB $100,000. (The lot sizes are identical and the houses identical; only the locations vary). Stick those values in, say, row 12, and label the row "Year 0".
3. At the top, put in the following fields
Row 2: Appreciation Rate (make a cell for each of the three properties; W1 and W2 will be identical, but MBFTB will be different). Format it as a percentage with two significant digits.
Row 3: Assessment Cap -- make this .02, the rate that Prop 13 mandates; this means that, no matter how much the market value rises, the assessment can only rise 2%.
Row 4: Property tax rate -- make this .01, as in California.
Now, let's say that W2 gets sold in Year 5. Go in and change the Assessed Value for Year 5 for W2 to the Market Value, and watch the taxes pop up for that property.
Consider the lost revenue from W1 and W2, and, to a lesser degree from MBFTB. A promoter of Prop 13 would argue that all three owners receive protection from Prop 13. But who receives the most? The guy who needs it the least -- the one with the most valuable asset, which is quite sufficient to fund his retirement anywhere else. The little guy in the similar house a mile back gets some protection, but not as much.
Now how will the town fund its schools? How will it fund its roads? How will it fund its services? How about a sales tax. Spread the revenue lost due to Prop 13 across the three households, and poor MBFTB gets to pick up 1/3 of the load, via a sales tax, or an income tax. Or a parcel tax, which is another great deal for the folks who own the best sites.
Now let's throw in a fourth player: the guy who rents his home from someone else (and maybe a fifth -- his landlord).
What do good schools, good roads and good services do? They make the properties they serve more desirable. So they sell for more, and rent for more. If we cap property taxes, and shift the tax burden onto sales and income, our renter has to pick up 1/4 of the tax burden, and much of that tax spending serves to prop up property values, so he pays his landlord a higher rent for the privilege of living there. Talk about adding insult to injury! And the landlord's property taxes, of course, are practically frozen, though the rent sure isn't.
And if all that isn't bad enough, consider the potential entrepreneur who has a business idea in mind. What does he need first? A place to conduct business, a desirable location where customers can find him. Land is scarce -- they aren't making any more of it -- and he must buy or rent it at whatever price the market will bear. The high land prices in California discourage him from going into business. So he doesn't create a job for himself or anyone else. Or he does go into business anyway. But he has to compete with the established guy down the street who has owned his property for 25 years and is paying property taxes at a tiny fraction of what Mr. Newbie must pay for identical property. And Mr. Newbie has to pay the owner for the property, too. (The owner may have made the improvements to the property, but they are depreciating, while the land, which he can't claim much credit for having created, is appreciating -- but our system says he deserves the windfall nonetheless.) He doesn't have much left to outfit the building, or to pay his employees, or to purchase inventory or raw materials.
And to be specific, think of the guy who wants to open a hotel. His competitor down the street has a very low cost structure, and pays a low amount of taxes to boot. Will Mr. Newbie take the risk? Quite possibly not. So the rest of us pay his competitor more for the use of his rooms. They call it monopoly.
The alternative? Yes, there is an alternative -- a good one. Instead of the buyer paying the seller a high price for the land (and continuing to pay the bank interest on the borrowed funds until he can pay off his debt) or the renter paying the landlord a high rent which is mostly for the use of the site rather than the value of the building on the site, let the user of the property pay the community for the use of the land and the seller for the title to the building or the temporary use of the building.
The bank won't be happy, and the land speculator won't be happy, but the entrepreneur will be happy, and the person who wants a job will be happy, and the customer will be happy. And the family or individual who needs an affordable place to live will be happy. (He may not have the waterfront property, but do we think it important to subsidize those who would prefer to have waterfront? Most of us would prefer it -- who gets to decide who gets the lucky break and subsidy?)
Who do we want to make happy? A few, or virtually everyone?
What we're doing now isn't working. And what we're doing now isn't fair.
Homeownership rates have declined in California for all age groups except senior citizens since 1978 when Prop 13 was enacted. Enough said?
Posted by: wyn on July 1, 2004 06:08 PMAnd if all that isn't bad enough, consider the potential entrepreneur who has a business idea in mind. What does he need first? A place to conduct business, a desirable location where customers can find him. Land is scarce -- they aren't making any more of it -- and he must buy or rent it at whatever price the market will bear. The high land prices in California discourage him from going into business. So he doesn't create a job for himself or anyone else. Or he does go into business anyway. But he has to compete with the established guy down the street who has owned his property for 25 years and is paying property taxes at a tiny fraction of what Mr. Newbie must pay for identical property. And Mr. Newbie has to pay the owner for the property, too. (The owner may have made the improvements to the property, but they are depreciating, while the land, which he can't claim much credit for having created, is appreciating -- but our system says he deserves the windfall nonetheless.) He doesn't have much left to outfit the building, or to pay his employees, or to purchase inventory or raw materials.
And to be specific, think of the guy who wants to open a hotel. His competitor down the street has a very low cost structure, and pays a low amount of taxes to boot. Will Mr. Newbie take the risk? Quite possibly not. So the rest of us pay his competitor more for the use of his rooms. They call it monopoly.
The alternative? Yes, there is an alternative -- a good one. Instead of the buyer paying the seller a high price for the land (and continuing to pay the bank interest on the borrowed funds until he can pay off his debt) or the renter paying the landlord a high rent which is mostly for the use of the site rather than the value of the building on the site, let the user of the property pay the community for the use of the land and the seller for the title to the building or the temporary use of the building.
The bank won't be happy, and the land speculator won't be happy, but the entrepreneur will be happy, and the person who wants a job will be happy, and the customer will be happy. And the family or individual who needs an affordable place to live will be happy. (He may not have the waterfront property, but do we think it important to subsidize those who would prefer to have waterfront? Most of us would prefer it -- who gets to decide who gets the lucky break and subsidy?)
Who do we want to make happy? A few, or virtually everyone?
What we're doing now isn't working. And what we're doing now isn't fair.
Homeownership rates have declined in California for all age groups except senior citizens since 1978 when Prop 13 was enacted. Enough said?
Posted by: wyn on July 1, 2004 06:11 PMmy apologies for the duplication. I thought I was having problems posting, so I broke it into pieces; the whole and the pieces appeared - multiply!
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