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California's problems: RE taxes(27 posts)

California's problems: RE taxesCaptain Morgan
Aug 15, 2003 7:33 AM
Interesting article today in the WSJ about California. Apparently Warren Buffet believes property taxes are too low in California due to a 1978 law (Proposition 13) that places limits on property taxes.

Buffet uses his own homes as an example. In Nebraska, he has a home valued at $500,000, and annual real estate taxes of $14,401. He also has a California home valued at $4 million, and its annual real estate taxes are only $2,264!

This is unbelievable. No wonder the state is so messed up. Its just like California to place caps on revenues but not on expenses.
he's welcome to pay moremohair_chair
Aug 15, 2003 7:49 AM
I don't think you know the whole story, and Buffet is leaving out the very important details. In California, your property taxes start at 1.2% of the purchase price of your house, and can rise no more than 2% per year. That's the rule.

Buffet clearly bought his $4 million house a long time ago, when it wasn't worth $4 million. I seriously doubt his property taxes are only $2,264, unless he bought the house in the 1960s. If Buffet bought that house today, his property taxes would start at $48,000, and next year would be $48,960.

If he feels guilty about his taxes, he can clear his conscience by writing a check for $48,000 every year instead of $2,264. Anyone is welcome to pay more. The state will thank you for it. Otherwise, he can mind his own business.
he's welcome to pay moreTri_Rich
Aug 15, 2003 8:14 AM
You say this but I would guess that if you mailed a check to the IRS, or California's equivalent, and tried to tell them you were voluntarily paying extra tax (not pre-payment for the next year) you would have a very hard time.
he's welcome to pay moremohair_chair
Aug 15, 2003 8:52 AM
The County Assessor collects property taxes, not the IRS or California's version of the IRS, which is the Franchise Tax Board.

I'm sure if Buffett wrote a check for rougly $46,000 over what he owed, they would probably contact him and see if it was a mistake. In the end, they would be happy to accept the overpayment.
System is still flawedCaptain Morgan
Aug 15, 2003 10:07 AM
I wonder how many states base their property taxes on historical cost as opposed to assessed value? The system you describe in California seems unfair, as it rewards older people who may have owned their homes for a longer time, while at the same time penalizing new younger home buyers. But I guess the concept of wealth redistribution is no problem in a liberal state such as California.
Aug 15, 2003 10:38 AM
The system is based on formula. It's predictable. The old system was constant reassessment to raise local taxes. You didn't know what your property taxes were going to be, and sometimes they doubled or tripled in a year. They rarely went down.

Anyone who wants to return to those days is an idiot.

I don't understand how you can say older some home buyers are rewarded and some are penalized. It's the same system. The so-called "reward" comes from buying their homes years ago and paying less for their house as a result. Everything costs more now, so new younger buyers pay more for the same house today. Who's fault is that? Besides, those older buyers who you think are screwing the system were new younger home buyers at one time. Your new younger buyers of today are tomorrow's drain on the system.

Whine all you want about it, but the system is the fairest possible system. I'd love to know how you would "fix" it. Are you going to raise taxes for people who bought their homes years ago? Are you going to lower taxes for new buyers? What about all the idiots who overpaid for their houses during the Internet boom?

Am I supposed to believe that if the county sent Warren Buffet a tax bill next year of $48,000 that he would pay it? There is no way. Warren didn't become a billionaire by giving his money away.

Maybe if you thought of another solution to budget woes than raising taxes you might be on to something. Part of what Prop 13 is supposed to do is force politicians to work with a relatively fixed revenue base. Spend more than that and you are in trouble, and that's what they keep doing. Cut the spending first.

By the way, I ran the numbers on his supposed $4 million house that he pays $2200 in taxes on. Adjusting 2% downward every year until 1976, when Prop 13 was applied, then applying the 1.2% base value, I get a property value of about $113,000. There's no way his property can increase in value $3.8 million without the kind of improvements that would trigger a reassessment and a much larger tax base. His numbers are wrong.
Fixing itCaptain Morgan
Aug 15, 2003 11:09 AM
All I'm saying is that it is unfair for two people to have the exact identical house, and for one to pay a substantially reduced tax bill. Here is a quote from a pro-Prop. 13 web site:

"Prop. 13 made two critical changes in California property taxation. It reduced the tax rate from the average 2.67 percent to one percent. And instead of basing the tax on your home's current value, it based the tax on the price you paid for it."

I believe that the reduction in the average tax rate from 2.67% was a just cause. However, perhaps they should have capped it at a particular percentage for ALL homeowners. If a new homeowner has to pay 1%, then the guy next door should be subject to the SAME payment, if their properties are equal. It would be like me saying: "For all those individuals with incomes of $x now, you will pay taxes on your CURRENT income, even if your income goes up substantially in the future. But for anyone whose income is less than that now, if their income jumps up to $x, then they will pay a much higher tax than those who already make $x."

Also, Prop. 13 did not simply stablize the tax system. When it was approved, it served as a $5 billion tax cut. It gave existing property owners current benefits at the expense of future property owners.

I do acknowledge that the more pressing issues revolve around the state's expenses.
who's the victim?mohair_chair
Aug 15, 2003 12:13 PM
I still don't understand your reasoning. You say it's not fair that one household pays less in taxes than an identical one next door, but you are overlooking that the people paying less taxes also paid a lot less for the house. It's all relative. It's not their fault the house appreciated in value. In most cases, they weren't the primary cause of the appreciation, so why should they get penalized for it? Houses cost more now, but that's not their problem to solve.

And why stop with property taxes? Let's equalize mortgage payments too, so new buyers don't feel like they are paying more. After all, it's the identical house, right? They should pay the same mortgage. A lot of people are whining about this today, but they should remember that at the time the older people bought the house, they probably felt the same way about their neighbors.

Finally, your tax base is not necessarily locked in. Major improvements can easily trigger a reassessment. Sometimes, avoiding the reassessment is comical because of the "one-wall" rule. If you knock down the entire house and rebuild, it's a new house and it will be reassessed, meaning a higher tax base. But if you leave at least one original wall standing, it's a remodel, which is a lot less likely to trigger a reassessment.

The bottom line is that until politicians prove that they can control spending, Californians aren't going to sign off on new taxes or changes to the existing system.
Not to belabor the issue, but one quick pointCaptain Morgan
Aug 15, 2003 12:27 PM
What is the purpose of property taxes? It supposedly supports the local government and infrastructure (and also transfer payments, to give credit to the Right on this Board). Both the person who has owned the house for a long time and the new buyer of an identical house use the infrastructure EQUALLY and should also be responsible for supporting the have-nots in the community EQUALLY.
Not to belabor the issue, but one quick pointmohair_chair
Aug 15, 2003 1:03 PM
So I take this to mean that you want the older people to pay the same taxes as the newer people, which is about the most unfair tax system ever. Many people will no longer be able to own property under a system like that.

This reminds me of Jesse Jackson whining about how the sentence for selling coke was one year but selling crack was seven years (whatever the numbers actually were). He claimed it was a simple black/white issue: whites sell coke, blacks sell crack, ergo blacks get punished more. My reaction was, okay, the penalty for selling coke is now seven years! I'm pretty sure that's not what he wanted.

I think the system is fine. It has been fine for many years now. The only thing that has changed is that California suddenly this year has a defecit. California's problems have little to do with property taxes. California's problems are because crooked companies like Enron rigged markets and screwed California on energy costs, and because idiot politicians believed the dot com boom would last forever and spent money like drunken sailors.

My parents pay a fraction of the property taxes I pay and it doesn't bother me at all. I knew what the numbers were, and I entered into this deal of my own free will. I could care less what my neighbors pay. I could care less what Warren Buffet pays.

I will not get caught up in this "everyone is equal" thing. No, everyone is not equal. My parents bought their house in 1966, while I bought mine in 2001. I paid 14 times what they paid, so right off the bat, we're not equal. If our taxes were equal they would be paying a large percentage of the value of the house, which is hardly fair, especially since both are retired. It might look EQUAL on it's face, but it's incredibly unfair. And thankfully, it's never going to happen.

Infrastructure in California comes from a number of sources, not just property taxes. Income taxes and sales taxes are large contributors.
I have a question...TJeanloz
Aug 15, 2003 1:18 PM
This is the first I've heard of this tax scheme, and I think it's odd, but I'm not sure I know all the details.

Doesn't this cause a large disincentive to move? If your tax is fixed at the point you buy your house, ten years later, you wouldn't want to move to a house of equal value, even if it made a lot of sense to do.

Also, does this only apply to one's primary residence? Or could you buy a house in 1970, and then rather than sell it, offer a 100 year lease on it, so that the tax benefit remains for you?
I have a question...mohair_chair
Aug 15, 2003 1:52 PM
Basically it doesn't matter what the intended use of the property is. I'm no expert on this, but I believe that for personal, business, or investment use, the system is the same. Business might have a different rate, but basically when you buy becomes your tax basis year, and increases rise from that value capped at 2% a year.

Prop 13 started in 1976, so the value of your 1970 house was fixed at the 1976 assessment rate, plus 2% increase every year after. As long as you keep it, your taxes are based on that rate.

Since Prop 13, a number of exceptions and exemptions have been introduced. I don't know them all. Here are a few:

Parent-child transfers can be exempt from reassessment. Also, grandparent-grandchild transfers when the parents are dead. The propery has to be less than $1 million.

For property damaged by disaster or environmental hazard not caused by the owner, or taken by eminent domain, the owner can buy new property and keep their tax basis year.

Some counties allow people over 55, or disabled persons, to transfer their tax basis between counties or within the county when they sell one property and buy another.

Most of these seem reasonable, but I can't help think that there is some unfairness here. It seems to me that if ownership changes, the reassessment should be triggered.
it protects the retired, mainlyDougSloan
Aug 18, 2003 8:35 AM
The scheme essentially protects retired people. How would you like to have purchased a house in 1970 for $50,000, with $500 a year property tax; then retire, expecting to live the rest of your life in that house with a level income, or nearly no income, living off savings, then have proporty values, and taxes, skyrocket? You bought on the basis of what you could afford, the $500 taxes. What if it then goes to $5000 a year? You are put out of your house.

I can't think of any other taxes that go up regardless of income or a sale of property. If you buy, at least your are on notice of what the new tax is. You can make an informed decision of what you can afford. If you must pay higher and higher taxes based upon reassessment in inflationary or appreciating value times, then it is totally out of your control. That may be fundamentally unfair.

This problem is most readily seen in areas having large jumps in value, like parts of California. In San Jose, people who bought a house in the 70's for $40,000 are finding they are worth over half a million.

Raising taxes is the only soluition.czardonic
Aug 15, 2003 11:10 AM
Demand for increases in public spending have not gone down no matter the coersive attempts to tie it to a fixed revenue base. When is this dismal experiment going to be over?
like I said, you are welcome to pay more nmmohair_chair
Aug 15, 2003 12:23 PM
We're all in this together. (nm)czardonic
Aug 15, 2003 12:28 PM
not if you think the <u>only</u> solution is raising taxes nmmohair_chair
Aug 15, 2003 12:40 PM
<i>Our</i> spending dictates that solution. (nm)czardonic
Aug 15, 2003 12:53 PM
If it's <i>Our</i> spending, <i>We</i> need to stop spending nmmohair_chair
Aug 15, 2003 1:08 PM
Exactly. What I am saying is that. . .czardonic
Aug 15, 2003 1:39 PM
. . .cutting taxes and shrinking the revenue base has clearly not cut the demand for spending. It could work that way, but it seems pretty obvious that it does not.

I suspect that the reason is that demand is vastly under-aaccounted for in our society. Everyone can point out some program or perk that some other person does not need. But the government spending that supports their way of life is always eminently justifiable. And then there are the indirect benefits from infrastructure and social welfare spending that they simply refuse to acknowledge.
you're barking up the wrong treemohair_chair
Aug 15, 2003 2:17 PM
I am not advocating cutting taxes. I am advocating not increasing property taxes.

If the revenue base is shrinking, it's not because of Prop 13. The population of California has grown tremendously, and a lot of those people have bought homes. God knows they are paving over paradise and building homes like crazy out here, and most of the new owners are new taxpayers paying higher taxes due to higher property costs.

Housing costs are astronomical in California and with those high costs logically come higher property taxes. I'll bet that the per capita property tax bill today is two or three times the 1976 per capita property tax bill adjusted for inflation. Property taxes are NOT the problem. Just because neighbors living in identical homes perceive inequities in the system doesn't mean the system needs to change. Hell, I wish everyone on the freeway would go the same speed, but it's not going to happen.

What has definitely decreased are income tax revenues (lots of high wage jobs gone), payroll taxes, and sales tax revenues (fewer jobs means less people buying stuff). Property taxes are perpetual. You can get away with not paying income tax, but you will pay property tax every year.
you're barking up the wrong treeMe Dot Org
Aug 16, 2003 3:18 AM
One of the problems that California has faced since Prop 13 is finding a revenue stream that is less volatile. We have have seen the "feast or famine" syndrome dramatically in the past few years, when capital gains and income rose, and then fell, dramatically.

Yes, your parents pay less property taxes than you, but J. Paul Getty Junior pays less property tax for his San Francisco mansion than a couple buying their first home in Daly City.

Interesting article about revenue streams:
when in doubt, go with class warfaremohair_chair
Aug 18, 2003 8:10 AM
So the Gettys are screwing over first time home buyers in Daly City? Well, then something must be done.

Property taxes are a flat tax. They are applied equally in all cases. If Getty buys a $1 million mansion today, he pays 1.2%, with 2% increases yearly. If Mr. and Mrs. Smith buy that boring cookie cutter in Daly City for $400,000 today, they pay 1.2%, with 2% increases yearly. That seems the same to me. That's about as fair as taxes get.
re: California's problems: RE taxesAlpedhuez55
Aug 15, 2003 10:02 AM
We had a simular proposition in Massachusetts in 1980. It basically was to limit the increases the cities and towns could put on properties. Some towns were getting out of hand with the increases and had to be controlled. When it passed the cities were all saying there would be massive layoffs and the streets would not longer be safe. It was a big load of bull.

One of my teachers told all the students to tell their parents that if Prop 2 1/2 passed, she would lose her job. Well, ity passed and her and all the other teachers were back the next year.

I think the problems in California are a lot deeper than controlling revenues. It is controlling spending. They also refuse to deal with the drain illegal immigration is putting on the state. It will not be an easy job for the next governor.

Mike Y.
But 2 1/2 is different,TJeanloz
Aug 15, 2003 10:46 AM
There is a critical difference between the California system and Proposition 2 1/2 in Massachusetts - we can override the provision in any year by simple vote. So if there is a revenue shortfall, it's quite easy to make up for it. Things would be very different if Cities were forced to hold to 2 1/2.

I agree that California has a problem with controlling revenues. Before you blame illegal aliens though, keep in mind that California's economy would fall apart without the cheap labor that this group provides.
Energy dereg also caused a large part of the current problem,sn69
Aug 15, 2003 12:39 PM
and water resources are the next boogeyman under the bed.

The onion always has a LOT of layers.
The Solution: Pay as you goMR_GRUMPY
Aug 15, 2003 1:19 PM
#1 All limited access highways will become Tollways.
(If you don't like it, move to Nevada)
#2 $ .50 per gallon gas tax.
(If you don't drive, you don't pay)
#3 $1.00 per pack cigarette tax
( 'Nuf said)
#4 $5.00 per car entry fee for all out of state cars.
( Hey , they use the roads, don't they)