8 ms·

> The locality would receive a lien on the difference, that lien not becoming due until the property is sold I'm not clear how that would help. That seems like

by dpark 10y ago

> The locality would receive a lien on the difference, that lien not becoming due until the property is sold I'm not clear how that would help. That seems like an extremely strong incentive to never sell. Yes, the county might theoretically get more tax revenue this way, but mostly it seems like a way to convince every sane homeowner that selling is a terrible idea and you're better off renting forever or selling to a family member. This is already true, but it would be especially so if the county handed you a $100k tax bill when you sold. I don't think we want to see homeowners unable to sell because the tax burden is too high.

ScottBurson 10y ago
No, this wouldn't happen except in vanishingly rare circumstances. A lien is generated only when property values rise faster than the Prop. 13 formula. For a large balance to accumulate, the property value has to have grown much faster than 2% annually for a long time. If it does that, the sale price of the property will be far above the purchase price. Even if it does that and then the market takes a huge dive right before the owner wants to sell, the sale price will probably still be well above the purchase price. If the property value merely takes a big jump in the first year and doesn't change thereafter, the annual payment will eventually catch up to it (a 2% annual increase is still exponential growth!). If you want to add a clause that says that the collected tax will never exceed the difference between the sale price and the original purchase price, I'm okay with that. But I'll bet it will practically never be needed.
- dpark 10y ago
  > A lien is generated only when property values rise faster than the Prop. 13 formula. So basically all the time. > Even if it does that and then the market takes a huge dive right before the owner wants to sell, the sale price will probably still be well above the purchase price. Three important words: Home Equity Loan. How many people in the bay area have taken equity out of their homes for renovations, medical bills, etc? I'd wager a lot. Throwing a big tax lien against their houses could easily put many of them effectively underwater. > If you want to add a clause that says that the collected tax will never exceed the difference between the sale price and the original purchase price, I'm okay with that. But I'll bet it will practically never be needed. You think that will make it attractive to sell? Any equity you've built is gone. All the payments you've made have evaporated. Everything you hoped to get out of the house is owed to the state. This leaves you with a choice to rent the house until you die, realizing a significant input stream, or selling and literally ending up with nothing. Who's going to sell?
  - ScottBurson 10y ago
    > Three important words: Home Equity Loan A tax lien is a public record. Banks will subtract the amount of outstanding liens against the property (even if not yet due) from its estimated value before deciding how much to loan against it. Yes, the amount will be smaller than it was. > Everything you hoped to get out of the house is owed to the state. You need to look at some actual numbers. Let's say the original purchase price is $X. Let's say that the property appreciates 10% per year for 3 years, and then in the fourth year, the market tanks. What happens? At the 1% tax rate mandated by Prop. 13 [see below], the total tax due for the first three years is 3.3% of X. The total tax paid is 3.06% of X, leaving a lien on .24% of X. Okay, then the market tanks. If it tanks 10%, the property is still worth 1.197X -- the owner has almost a 20% gain; the .24% is hardly noticeable. If the market tanks 20%, the owner still has a 6.4% gain; the tax lien is still less than 4% of the gain. The market has to tank a full 25% -- a massive collapse, well into recession territory -- to wipe out the owner's gain completely and make that .24% start to hurt a little. Okay, now let's try a scenario where the 10% appreciation continues for 10 years. The total tax is 15.9% of X. The total amount paid is 10.9% of X, leaving a lien on 5%. But in the tenth year, before the market tanks, the property value has more than doubled to 2.59X! Even if the market crashed an unimaginable 50%, the tax would still be a small fraction of the owner's gain. Now, about the tax rate. It's true that in my original post I suggested that tax rates could be set by the locality instead of being capped at the 1% limit Prop. 13 imposed. The replies to the effect that that's unrealistic are probably right; as a political matter, that limit probably can't be raised. But just as a thought experiment, if we imagine that the tax rate is 2% rather than 1%, it doesn't change the outcome very much. Play with more scenarios if you like. If you can come up with one that shows a problem, I'd love to see it.
    - dpark 10y ago
      > A tax lien is a public record. Banks will subtract the amount of outstanding liens against the property (even if not yet due) from its estimated value before deciding how much to loan against it. Yes, the amount will be smaller than it was. Fair enough, though lots of people have ended up underwater because the banks gave them larger HELOCs than was wise. None of this makes your proposal good, though. At best it magnifies the biggest problem with Prop 13, namely that it encourages owners to hold indefinitely (either as a primary or rental residence) rather than lose the tax benefits. Making a sale suddenly incur an additional massive tax burden will not encourage market liquidity. Nor will it encourage new housing construction in any meaningful way. > You need to look at some actual numbers. You need to look at what I was replying to. This was in response to your proposal that the maximum tax lien be capped at the difference between purchase and sale price. You were literally discussing the situation where the owner will walk away with zero dollars (negative, actually, due to closing costs).
jlebar 10y ago
I am no friend of Prop 13, but this is spot-on. It goes to show how hard it is to get the "right" economic incentives, and particular how f*ing insane it is to do this by ballot initiative.
nradov 10y ago
The liens would be assets. Municipalities could generate immediate cash by issuing bonds backed by bundles of those liens.
- psranga 10y ago
  What could possibly go wrong with securitizing interest streams? :)
  - nradov 10y ago
    There's nothing wrong with securitizing interest streams in general. There was only a problem with bundles of residential mortgages because the issuers and underwriters committed fraud. Fraud is extremely rare in municipal bonds.
twblalock 10y ago
I go even further than you in my objection. This makes the current problem worse. Many homeowners are already unable to sell because they will have to buy another home, which will come with dramatically increased property taxes if they have owned their current home for as little as five years. This is because the base assessment under Prop 13 is refreshed by a sale, and house prices have doubled in the past five years in the Bay Area. (In the past 30-40 years, home values have increased almost 10X.) They can only avoid this if they move out of the area to somewhere cheaper, or choose to become renters. A tax lien on the value of the property on top of that would make things even worse. We should be encouraging more liquidity in the market, not less.
- ScottBurson 10y ago
  The way to bring prices down is by expanding supply. Do we at least agree on that?
  - twblalock 10y ago
    Yes.
  - dpark 10y ago
    I agree the Bay needs to expand supply. But I think your premise is flawed. You say that commercial is prioritized over residential because it generates greater tax revenue. This may be true (edit: it's not), but new home construction generates greater tax revenue than existing homes thanks to prop 13. And yet, existing homes are prioritized over new homes as well. The issue is less that city councils need incentives to build new housing and more that the NIMBYs do. Large chunks of the population decry the high cost of housing and then vote against more. No one actually wants to see their home values drop and no one wants to see the rate of appreciation slow. You won't fix any of this by adding tax liens against these people. Also they'll just vote down your proposal. Edit: Actually, commercial construction isn't generating more tax revenue, because commercial properties also receive prop 13 protections. Residential properties supposedly generate 72% of tax revenues. http://www.evolve-ca.org/prop-13-facts/ http://www.evolve-ca.org/prop-13-facts/ Edit 2: General property taxes produced 6.5 times as much revenue for SF as sales taxes in 2015. Property taxes on vehicles alone (which is not included the the general property taxes) accounted for more revenue than sales taxes. It's utterly untrue that commercial real estate generates more revenue than residential. https://data.sfgov.org/City-Management-and-Ethics/Spending-And-Revenue/bpnb-jwfb/data#column-menu https://data.sfgov.org/City-Management-and-Ethics/Spending-A...

by dpark 10y ago

ScottBurson 10y ago

No, this wouldn't happen except in vanishingly rare circumstances. A lien is generated only when property values rise faster than the Prop. 13 formula. For a large balance to accumulate, the property value has to have grown much faster than 2% annually for a long time. If it does that, the sale price of the property will be far above the purchase price. Even if it does that and then the market takes a huge dive right before the owner wants to sell, the sale price will probably still be well above the purchase price. If the property value merely takes a big jump in the first year and doesn't change thereafter, the annual payment will eventually catch up to it (a 2% annual increase is still exponential growth!). If you want to add a clause that says that the collected tax will never exceed the difference between the sale price and the original purchase price, I'm okay with that. But I'll bet it will practically never be needed.

dpark 10y ago
> A lien is generated only when property values rise faster than the Prop. 13 formula. So basically all the time. > Even if it does that and then the market takes a huge dive right before the owner wants to sell, the sale price will probably still be well above the purchase price. Three important words: Home Equity Loan. How many people in the bay area have taken equity out of their homes for renovations, medical bills, etc? I'd wager a lot. Throwing a big tax lien against their houses could easily put many of them effectively underwater. > If you want to add a clause that says that the collected tax will never exceed the difference between the sale price and the original purchase price, I'm okay with that. But I'll bet it will practically never be needed. You think that will make it attractive to sell? Any equity you've built is gone. All the payments you've made have evaporated. Everything you hoped to get out of the house is owed to the state. This leaves you with a choice to rent the house until you die, realizing a significant input stream, or selling and literally ending up with nothing. Who's going to sell?
- ScottBurson 10y ago
  > Three important words: Home Equity Loan A tax lien is a public record. Banks will subtract the amount of outstanding liens against the property (even if not yet due) from its estimated value before deciding how much to loan against it. Yes, the amount will be smaller than it was. > Everything you hoped to get out of the house is owed to the state. You need to look at some actual numbers. Let's say the original purchase price is $X. Let's say that the property appreciates 10% per year for 3 years, and then in the fourth year, the market tanks. What happens? At the 1% tax rate mandated by Prop. 13 [see below], the total tax due for the first three years is 3.3% of X. The total tax paid is 3.06% of X, leaving a lien on .24% of X. Okay, then the market tanks. If it tanks 10%, the property is still worth 1.197X -- the owner has almost a 20% gain; the .24% is hardly noticeable. If the market tanks 20%, the owner still has a 6.4% gain; the tax lien is still less than 4% of the gain. The market has to tank a full 25% -- a massive collapse, well into recession territory -- to wipe out the owner's gain completely and make that .24% start to hurt a little. Okay, now let's try a scenario where the 10% appreciation continues for 10 years. The total tax is 15.9% of X. The total amount paid is 10.9% of X, leaving a lien on 5%. But in the tenth year, before the market tanks, the property value has more than doubled to 2.59X! Even if the market crashed an unimaginable 50%, the tax would still be a small fraction of the owner's gain. Now, about the tax rate. It's true that in my original post I suggested that tax rates could be set by the locality instead of being capped at the 1% limit Prop. 13 imposed. The replies to the effect that that's unrealistic are probably right; as a political matter, that limit probably can't be raised. But just as a thought experiment, if we imagine that the tax rate is 2% rather than 1%, it doesn't change the outcome very much. Play with more scenarios if you like. If you can come up with one that shows a problem, I'd love to see it.
  - dpark 10y ago
    > A tax lien is a public record. Banks will subtract the amount of outstanding liens against the property (even if not yet due) from its estimated value before deciding how much to loan against it. Yes, the amount will be smaller than it was. Fair enough, though lots of people have ended up underwater because the banks gave them larger HELOCs than was wise. None of this makes your proposal good, though. At best it magnifies the biggest problem with Prop 13, namely that it encourages owners to hold indefinitely (either as a primary or rental residence) rather than lose the tax benefits. Making a sale suddenly incur an additional massive tax burden will not encourage market liquidity. Nor will it encourage new housing construction in any meaningful way. > You need to look at some actual numbers. You need to look at what I was replying to. This was in response to your proposal that the maximum tax lien be capped at the difference between purchase and sale price. You were literally discussing the situation where the owner will walk away with zero dollars (negative, actually, due to closing costs).

jlebar 10y ago

I am no friend of Prop 13, but this is spot-on. It goes to show how hard it is to get the "right" economic incentives, and particular how f*ing insane it is to do this by ballot initiative.

nradov 10y ago

The liens would be assets. Municipalities could generate immediate cash by issuing bonds backed by bundles of those liens.

psranga 10y ago
What could possibly go wrong with securitizing interest streams? :)
- nradov 10y ago
  There's nothing wrong with securitizing interest streams in general. There was only a problem with bundles of residential mortgages because the issuers and underwriters committed fraud. Fraud is extremely rare in municipal bonds.

twblalock 10y ago

I go even further than you in my objection. This makes the current problem worse. Many homeowners are already unable to sell because they will have to buy another home, which will come with dramatically increased property taxes if they have owned their current home for as little as five years. This is because the base assessment under Prop 13 is refreshed by a sale, and house prices have doubled in the past five years in the Bay Area. (In the past 30-40 years, home values have increased almost 10X.) They can only avoid this if they move out of the area to somewhere cheaper, or choose to become renters. A tax lien on the value of the property on top of that would make things even worse. We should be encouraging more liquidity in the market, not less.

ScottBurson 10y ago
The way to bring prices down is by expanding supply. Do we at least agree on that?
- twblalock 10y ago
  Yes.
- dpark 10y ago
  I agree the Bay needs to expand supply. But I think your premise is flawed. You say that commercial is prioritized over residential because it generates greater tax revenue. This may be true (edit: it's not), but new home construction generates greater tax revenue than existing homes thanks to prop 13. And yet, existing homes are prioritized over new homes as well. The issue is less that city councils need incentives to build new housing and more that the NIMBYs do. Large chunks of the population decry the high cost of housing and then vote against more. No one actually wants to see their home values drop and no one wants to see the rate of appreciation slow. You won't fix any of this by adding tax liens against these people. Also they'll just vote down your proposal. Edit: Actually, commercial construction isn't generating more tax revenue, because commercial properties also receive prop 13 protections. Residential properties supposedly generate 72% of tax revenues. http://www.evolve-ca.org/prop-13-facts/ http://www.evolve-ca.org/prop-13-facts/ Edit 2: General property taxes produced 6.5 times as much revenue for SF as sales taxes in 2015. Property taxes on vehicles alone (which is not included the the general property taxes) accounted for more revenue than sales taxes. It's utterly untrue that commercial real estate generates more revenue than residential. https://data.sfgov.org/City-Management-and-Ethics/Spending-And-Revenue/bpnb-jwfb/data#column-menu https://data.sfgov.org/City-Management-and-Ethics/Spending-A...