4 ms·

This series of articles raises good questions, but for a series on how homeownership is the “biggest economic policy mistake,” I wish they would have spent more

by yonran 7y ago

This series of articles raises good questions, but for a series on how homeownership is the “biggest economic policy mistake,” I wish they would have spent more time on taxation. Adjusting the property tax (or equivalently rent and imputed rent income tax) rate allows the government to capture an arbitrarily high fraction of the rental value and capital gains of the property. It can be set anywhere from fully allodial (0 property tax) to fully social (tax on 100% of rental value). Homeownership wouldn’t a problem if homeowners had no privileges on the land rent. In California, we had an average property tax rate of about 2% before Proposition 13 cut it in half in 1978, encouraging homeowners to restrict supply and reap all the capital gains. So when comparing jurisdictions, I think it is also important to note what the taxes on the property are.

neilparikh 7y ago
To add some more context, the effective property tax rate in California is ~0.7%. Unsurprisingly, the lowest effective property tax rates are in the richest cities, while the highest are in the poorest. For example, Palo Alto has an effective property tax rate of ~0.4%.
- chii 7y ago
  what's an "effective tax rate"? isn't it the same in the same state?
  - yonran 7y ago
    The property tax bill is calculated as rate × assessed value. In almost every other state, the assessed value is directly proportional to the current fair market value, but in California, Proposition 13 lowered the legal tax rate and also changed the assessed value to be the price that you (or your ancestors thanks to Proposition 58 and 193) originally acquired the property, adjusted for inflation. What this means is that some people pay outdated property taxes that are a fraction of what their new neighbors are paying, while they benefit from receiving market-rate rents or benefit from modern amenities (schools and jobs). The effective tax rate is the property tax amount divided by the fair market value, which allows us to compare fair market tax burdens given the unfair property assessments: https://www.trulia.com/research/prop-13/ https://www.trulia.com/research/prop-13/. To my point above, property taxes are intertwined with the debate about homeownership because Proposition 13’s low property tax rate increases wealth inequality (since landowners instead of governments capture the value of increased rents), increases wealth inequality (since governments are forced to increase regressive sales taxes and fees instead of property tax), increases wealth inequality (since the US income tax often does not capture increases in imputed rent and capital gains), disincentivizes cities from zoning for more housing (since the property taxes from new housing no longer pays for the infrastructure costs), and encourages NIMBYism (since homeowners have to purchase the land at a high price and then become extremely risk-averse). In addition, Proposition 13’s unfair asssesed value system further encourages NIMBYism (since landlords and homeowners get to benefit from displacing the poor without having to pay any higher property taxes) and encourages long-term property speculation without investment (since long-term property owners have low holding costs despite being in expensive locations). In another state, where homeowners have to pay taxes for the privilege of excluding others, homeownership would not be harmful to society.
    - dragonwriter 7y ago
      > in California, Proposition 13 lowered the legal tax rate and also changed the assessed value to be the price that you (or your ancestors thanks to Proposition 58 and 193) originally acquired the property, adjusted for inflation. No, it didn't. It's the lower of the actual fair market value or the value at time of qualifying event (mostly purchase and other non-exempt transfer, but certain improvements also are included at their full value) plus 2%/year. The actual rate of inflation is not a factor.
      - yonran 7y ago
        Yes, there are several details that I did not mention (Proposition 8 reductions, appraisal of improvements, base year value transfers, etc.) > The actual rate of inflation is not a factor. Incorrect. The change in base year value is less than or equal to inflation. Proposition 13 allowed annual adjustments to the base year value by “the inflationary rate not to exceed 2 percent” (California Constitution XIII A http://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CONS&division=&title=&part=&chapter=&article=XIII%20A http://leginfo.legislature.ca.gov/faces/codes_displayText.xh...), which the legislature implemented as the lesser of “the California Consumer Price Index for all items” and 2% (RTC 51 http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=51. http://leginfo.legislature.ca.gov/faces/codes_displaySection...). See the most recent letter to assessors for the actual numbers (https://www.boe.ca.gov/proptaxes/pdf/lta19050.pdf https://www.boe.ca.gov/proptaxes/pdf/lta19050.pdf). But I take your point that I should have said “adjusted by up to 2% per year” instead of “adjusted for inflation” above, since it usually isn’t fully adjusted for inflation.

by yonran 7y ago

neilparikh 7y ago

To add some more context, the effective property tax rate in California is ~0.7%. Unsurprisingly, the lowest effective property tax rates are in the richest cities, while the highest are in the poorest. For example, Palo Alto has an effective property tax rate of ~0.4%.

chii 7y ago
what's an "effective tax rate"? isn't it the same in the same state?
- yonran 7y ago
  The property tax bill is calculated as rate × assessed value. In almost every other state, the assessed value is directly proportional to the current fair market value, but in California, Proposition 13 lowered the legal tax rate and also changed the assessed value to be the price that you (or your ancestors thanks to Proposition 58 and 193) originally acquired the property, adjusted for inflation. What this means is that some people pay outdated property taxes that are a fraction of what their new neighbors are paying, while they benefit from receiving market-rate rents or benefit from modern amenities (schools and jobs). The effective tax rate is the property tax amount divided by the fair market value, which allows us to compare fair market tax burdens given the unfair property assessments: https://www.trulia.com/research/prop-13/ https://www.trulia.com/research/prop-13/. To my point above, property taxes are intertwined with the debate about homeownership because Proposition 13’s low property tax rate increases wealth inequality (since landowners instead of governments capture the value of increased rents), increases wealth inequality (since governments are forced to increase regressive sales taxes and fees instead of property tax), increases wealth inequality (since the US income tax often does not capture increases in imputed rent and capital gains), disincentivizes cities from zoning for more housing (since the property taxes from new housing no longer pays for the infrastructure costs), and encourages NIMBYism (since homeowners have to purchase the land at a high price and then become extremely risk-averse). In addition, Proposition 13’s unfair asssesed value system further encourages NIMBYism (since landlords and homeowners get to benefit from displacing the poor without having to pay any higher property taxes) and encourages long-term property speculation without investment (since long-term property owners have low holding costs despite being in expensive locations). In another state, where homeowners have to pay taxes for the privilege of excluding others, homeownership would not be harmful to society.
  - dragonwriter 7y ago
    > in California, Proposition 13 lowered the legal tax rate and also changed the assessed value to be the price that you (or your ancestors thanks to Proposition 58 and 193) originally acquired the property, adjusted for inflation. No, it didn't. It's the lower of the actual fair market value or the value at time of qualifying event (mostly purchase and other non-exempt transfer, but certain improvements also are included at their full value) plus 2%/year. The actual rate of inflation is not a factor.
    - yonran 7y ago
      Yes, there are several details that I did not mention (Proposition 8 reductions, appraisal of improvements, base year value transfers, etc.) > The actual rate of inflation is not a factor. Incorrect. The change in base year value is less than or equal to inflation. Proposition 13 allowed annual adjustments to the base year value by “the inflationary rate not to exceed 2 percent” (California Constitution XIII A http://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CONS&division=&title=&part=&chapter=&article=XIII%20A http://leginfo.legislature.ca.gov/faces/codes_displayText.xh...), which the legislature implemented as the lesser of “the California Consumer Price Index for all items” and 2% (RTC 51 http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=51. http://leginfo.legislature.ca.gov/faces/codes_displaySection...). See the most recent letter to assessors for the actual numbers (https://www.boe.ca.gov/proptaxes/pdf/lta19050.pdf https://www.boe.ca.gov/proptaxes/pdf/lta19050.pdf). But I take your point that I should have said “adjusted by up to 2% per year” instead of “adjusted for inflation” above, since it usually isn’t fully adjusted for inflation.