Thoughts on Fixing California Property Taxes

(Note: This is another area-specific post, so if you don't care about politics in California, this won't be very interesting to you. Consider yourself noted.)

Property taxes in California are kinda messed up. For a quick primer, skim the Wikipedia page on Prop 13; this is not the only problem, but is the genesis for a lot of the issues. Note that Prop 13 itself was a voter backlash against the inability of the state to constrain its tax & spend addiction, which has not really abated since its passage, and also represents a huge ongoing issue for the state... but that's a topic for another blog post. In this one, I'm going to concentrate on things I would change with property taxes alone, to make that system more sane.

I see two fundamental problems with the current taxation scheme, which will be the basis for three changes I would suggest (two to address the issues, and an additional one which I think would just be a great improvement in general), and one substantial thing I would leave alone. First, the issues:

• There is no substantial advantage, tax-wise, for people owning property for a single family residence (as opposed to owning property for investment purposes, or owning multiple properties)
• The tax system incentivises "creative" accounting to advantage corporations even further, because of the ability to skirt change of ownership (which would trigger re-assessment of property value)

So, ignoring the political infeasibility of such, these are the things I would change. Each one will get a section, and I'll try to include enough context as possible for justifications.

Change Prop 13 Qualification and Benefit

First, I would fundamentally change the qualification criteria for inclusion in the primary benefit of Prop 13 (that is, the limit of increase of assessed value for properties). This benefit would only be applicable to a primary residence, as declared on a tax return, owned by a member of a family residing there. Secondary residences, and properties used for income/business purposes, would be adjusted annually for assessed value purposes.

Further, I would change the maximum increase to be the lesser of 4% and the official inflation value. This would, on average, imply around a 2% maximum, but would allow faster increases in times of greater inflation.

Why this change? Simply, it would achieve the original nominal goal (of preventing people from losing their primary residences from increased taxation over time), without the absurd, counter-productive benefit to investors and the very wealthy.

What would the effects be? Well, rent would increase, but that would be absorbed by the market (and/or making buying more financially attractive). Some wealthy people holding investment property might make slightly less non-productive income annually. Other very wealthy people would pay slightly more for their summer homes. So, there would basically be no appreciable downside to average people.

Change Homestead Exclusion Amount

The homestead exclusion (or equivalent; essentially, the amount of assessed value you're not taxed on), for primary residences, should be set to be the average home price for the area. Area could be done by zip code, or city, or school district, or any other reasonable criteria, as long as it was reasonably local and objective. Again, similar to the above, one would only be eligible for the exemption if the property was claimed as a primary residence on a California tax return for a head of household.

Why this change? This would dramatically reduce the tax burden for most people who own their primary residence in the state, and for which the residence is not extravagant for the area. This would substantially incentivise people to own a home (compared to present), which would be beneficial to the society as a whole.

What would the effects be? Well, obviously there would be an effective decrease in tax revenue, which would ideally be entirely offset (and more) by the other proposed changes. There would be several indirect societal benefits, equally obviously.

Increase Taxation for Vacant Space

Currently, lots of usable real estate space goes unused for long periods of time, for a variety of reasons. Some of these include outside investment (eg: REITs) with no strong incentive to rent the space they own, vacant properties in various states of foreclosure where the lender doesn't move quickly to transfer ownership (so they don't need to be liable for the taxes), companies who sit on vacant storefronts in struggling areas, etc. All of these instances cause available space to be more expensive elsewhere, and increase city aggregate maintenance costs for the affected areas (ie: there may be more crime, more litter, less occupant involvement in the community, less business tax revenue, etc.).

I would change the law to mandate an increase in property taxes on all properties (or proportional parts of properties) which are vacant. There would be a leeway period (say, 3 months or so) to allow for normal turnover, then a ramp up. I'd suggest that after 1 year of vacancy, the property tax rate be triple the normal rate, and to continue at that rate until the property was inhabited productively (either leased to a person of business unconnected to the owner, or sold and occupied).

Some of that additional tax revenue would naturally go to a new governmental organization which would track vacancies and investigate fraud. The penalty for fraud should be a multiple of taxes due, plus all back taxes. I'd suggest tracking occupancy by looking at power consumption and utility hookup, with visual inspection and random visits as another method to be utilized in suspicious cases. I don't think it would be overly difficult to detect fraud, though.

In addition to this, I would alter the existing law slightly to make any lien holder on a property explicitly also jointly responsible for property taxes on a property (if that's not so already). Banks often are slow to reclaim and sell properties for which the owner has walked away, and I imagine a 3% annual property tax bill for them send directly to the bank would provide sufficient motivation to alter that behavior.

Why this change? This would provide a strong financial incentive to productively use real estate space in the state, in addition to lowering overall vacancy. The latter would mean more individual vestment in communities and consequently less opportunity for crime and/or vandalism; the former would force prices for space to better track the market (and/or make space less expensive in general). In addition, more occupied commercial space means more local tax revenue, more services for communities, and generally less potential for blighted spaces. So it would be a win/win/win/win/etc.

No Change: 1% Limit on Taxation at State Level

The other crux of Prop 13, the limit on the amount the state could impose in property taxes, is unequivocally a good thing, irrespective of the government's continuous complaints about it since. California has strongly and repeatedly demonstrated (and continues to demonstrate, to this day) a complete inability to be financially responsible at a government level, leaving the onus squarely on the people to reign in otherwise limitless tax-and-spend tendencies. There are better ways to potentially increase tax revenue, as detailed above, which do not impose any additional tax burden on the typical working families of the state (and indeed, for the proposals above, would decrease the burden in most cases). There's no reason to give up the hard-fought gains in limiting the government's otherwise self-destructive behavior in this respect, imho.


Anyway, that's my current thought on this matter, for what that's worth.