|
A.K.A. a long and passionate diatribe against one of the most short-sighted tax laws in history
Imagine you are a young upwardly mobile couple looking to buy a home in California. You have $100,000 in cash and must borrow the rest at a 30-year mortgage at a fixed 5% interest rate. But the median home price in California is $473,000 while the median home price in nearby Nevada is only $252,000-- what to do?
Holding zip code constant, your mortgage payment on a 30-year loan on $373,000... assuming you can get the loan, is $2,002 a monthn, and your total payment is that times 360... $720,720.
Your total payment on the Nevada home is $816/month x 360 = $293,760.
Thus your total cost over 30 years to buy the average CA home is an additional $427,000, which means that you must demand roughly an additional $14,200 on your annual salary for the same utility on an employer in CA as opposed to an employer in NV. Now suppose you are an employer... would you rather hire the CA worker or the NV worker?
With CA homes so expensive, you would think that it's because CA has wealthier people who are able to afford for expensive homes, right? Wrong. According to the census bureau, the median income for 4-person families living in California was $63,761 in 2004, compared to $63,278 nationally. What's more, while the median home price in California is $473,000, the median home price nationally is just $176,000 as of April 2004.
In fact, it was reported last summer that the percentage of households in California able to afford a median-priced home stood at 20 percent in April. That means four-fifths of California residents cannot afford to buy the average home in their own state! One must now have a salary of over $100,000 per year to afford the average-priced home in California, while a $39,790 salary is sufficient to buy the average U.S. home price in April 2004 of $176,000.
-------------------------------------------------------
These simple dynamics explain why Nevada is currently the fastest-growing state in the nation by far, while California had 415,000 more people moving out of the state than moving in over the past 4 years... including a net loss of 145,000 people between July 2003 and July 2004.
Nor do these people leaving the state make those remaining any better off... California's current homeownership rate stands at about 56%, about ten percent lower than the national average of 66%. In fact, a lower percentage of Californians own their own homes today than all Americans as far back as 1970.
Explanations
Why are home prices so high? Various explanations have been offered. One is the state's powerful environmental lobby. There are two types of environmentalism... the first kind sees environmental protection as a kind of long-term protection of our future, with colossal financial costs in the that threaten to undermine the gains of development if not addressed. The second kind opposes any sort of economic development and seeks to restrict growth for its own sake, whenever it can. Yet this second type of environmental lobby is strong in many states with high homeownership, such as Maryland, where for years (if not decades), anti-growth forces have blocked the construction of key arteries such as the "inter-county connector". Yet Maryland has a homeownership rate of 68%. And its median home sales price in November 2004 was just $247,396, well in line with its high $82,879 median income.
So what gives?
Proposition 13
One CA resident recently remarked,
"I remember when I was living in La Habra, I bought a home for $87,000 in 1986 and ordered a "property profile" for my neighborhood from the title company. I was shocked to learn that while I was paying close to $1,000 a year in property tax, neighbors on my street with the exact same house were paying as low as $110 a YEAR!"
This strange and distorted tax system is the result of a law passed by referendum over twenty-seven years ago, long before California became the state we know it as today, known as Proposition 13.
The background of Proposition 13 is relatively straightforward. In the late 1970s, America was experiencing record inflation rates. The price of everything was going up at an unprecedented rate-- including homes. This caused taxes on property in California to grow disproportionately... suddenly, thousands of people found they could not afford their excessive property taxes. Enter Howard Jarvis, populist crusader. He campaigned for a proposition that would cut the property tax rate by 57%. But that wasn't all. It would also limit the tax rate on property at no more than 1% of the property's value at the time of its purchase, and from then on allow increases of only 2% annually on the tax value. Further, it required that a two-thirds majority in the state legislature consent before new taxes could be levied on anything. Local governments weren't spared... ALL new local taxes had to be approved by referendum.
At the start of the 1980s, the inflation rate dramatically dropped off. The underlying inflationary problems that initially led to Prop 13's popularity had suddenly waned. Yet Prop 13 had become an unassailable institution in California politics.
There are numerous problems with Proposition 13 that have had a terrible long-term detriment to the state's development, and will slowly strangle California if these detriments are not somehow confronted.
For one thing, suppose that you are like our resident from La Habra above and bought a home in 1986 for $87,000... your 1% property tax would be capped at $870 per year, increasing by no more than 2% per year. That means your current 2005 tax rate is $1,267.43. But the average home price in La Habra Heights, CA is now $750,000!!! That means if you were to sell your house and buy a new one across the street, your property taxes would suddenly jump nearly 500% to $7,500 a year. Would you sell your house, even if you wanted to? No. What does that mean to potential homebuyers? Fewer used homes on the market... and higher price.
When Warren Buffet in the fall of 2003 proposed repealing Proposition 13 (only to encounter withering persecution), he gave examples of two homes that he owns. One, in Omaha, Nebraska, is worth $500,000 and has a $14,401/yr. tax bill. The other one in Laguna Beach, California is valued at $4 million and has a $2,264/yr. tax bill.
No wonder the state cannot balance its budget!
You would think that with the shortage of used homes on the market and the high price of home sales combined with its high population and low home ownership rate, there would be a lot of construction companies wanting to build new homes, right? After all... supply meets demand, isn't that how it works?
Wrong again.
Because Proposition 13 makes it so hard for local governments to levy taxes (recently they have had to hold referendums just for basic services such as garbage collection), they rely on commercial and sales taxes to operate. But they cannot earn these taxes if land is zoned for residential construction. Due to a combination of the no-growth lobby and the lack of property tax incentives, cities across California have not adopted urban growth plans for several decades, resulting in overcrowded, overpriced metropolitan areas with poor infrastructure, services, and education. In fact, state infrastructure spending has dropped from close to 20 percent to under three percent in the last 30 years even as the state added tens of millions of new residents. The state has serious deficiencies in transportation, water, higher education, and housing ironically, things that California was renowned for under Pat Brown (1959-67) and Ronald Reagan (1967-75). In the 1990s the state gained over 10 million residents but only constructed 1 million homes, according to a spring 2004 edition of the Economist.
So how does the state earn revenues? The tax constrictions imposed by Prop 13 has forced the state government to rely disproportionately on capital gains and income taxes for revenues. Capital gains taxes is money that is taxed at the end of the year when a person makes money on the stock market, and is taken as a percentage of the profit. Income tax is a tax on income.
These sources are very cyclical since they are tied to the volatile financial and labor markets. When rising housing prices cushioned tax revenues in other states during the 2000-02 recession (Greenspan purposely lowered interest rates partially to fuel growth in housing and cushion the recession), they did not in California, thus creating a sudden budget crisis.
Finally, Prop 13 has hurt the state by setting a poor precedent. The rash of Propositions enacted since Prop 13's passage in 1978 has tied up 2/3 of the state's budget in mandatory spending. Representative democracy now only controls 1/3 of the state budget. The rest is legally mandated. How can the state legislature cut spending? It cannot. Also, since any budget must be passed with a 2/3 majority, this makes it difficult to get anything done. No wonder the state legislature has been unable to meet the fiscal deadline for passing a budget for the past two years.
Further research shows that people who vote on propositions do not have logical choices-- they would support a spending bill if asked "Would you support bill A to spend $x on y?" But they would not support the same spending bill if told "but your taxes will have to increase..." The same goes for a tax cut... people will generally favor any tax cut unless a specific budgetary cut to pay for the tax cut is spelled out in the survey question. When people are given trade-offs, they are remarkably logical and consistent: they overwhelmingly favor the status quo. But that is not the case with these proposition ballot questions.
Hence you have a state with a serious fiscal problem and crap ass bond rating spending millions of dollars on stem-cell research, something that is not supposed to be done by states in the first place! Yet Prop 13's political strength set the stage for a rash of ballot iniatives that are slowly strangling legislative flexibility not only in CA, but now in other Western states such as WA and OR.
There is little incentive for change among the political establishment. California's state legislative and Congressional districts are heavily gerrymandered for the incumbent. In 2002, out of 54 Congressional races, only that being vacated by Gary Condit was competitive. In 2004, even that became safe. Also, not a single state legislator lost his/her seat. Hence there is no longer representative accountability. With this kind of safety, no major party or leader wants to propose a major--risky change... even if it's in the best interests of the state and it's residents.
All of these problems have been widely known for some time. Yet when Warren Buffet proposed repealing Proposition 13 in the autumn of 2003, he found that he had encountered some kind of untouchable "third rail" of politics. Not a single politician will risk advocating structural reform, not to mention a major party. They are afraid homeowners will oppose repealing Prop 13 because they are afraid their property taxes will go up and homes values go down. Homeowners are the ones who do the most voting, after all. However, having overinflated property values does NOT benefit homeowners. It doesn't matter if your home is worth $400,000 or $450,000 unless you actually SELL it... and since Prop 13 makes it such a tax pain to sell your home and buy a new one, not many homeowners are likely to profit in the long run from doing so. Furthermore, repealing Prop 13 does not precluding replacing it would some more moderate safeguard against property tax increases... and it would allow a much better state environment to live in.
America's largest state cannot be sustained forever on the backs of its entrepreneurs and great companies. It is only a question of how much residents are willing to put up with, before it's time for someone to stand up to the mob... and fight for serious reform.
|
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(78 posts)
Send PM |
Profile |
Ignore
