This probably deserves its own post, because it doesn't fit into a satire, and in any case, there is not necessarily an obvious answer. Here are my main observations:
1. Prop 13 has traditionally been the third rail of California politics, because the benefits are very tangible and the beneficiaries are politically powerful - wealthy people who vote. However, the benefits accrue almost entirely to a very small minority of property owners who are sitting on huge gains, people like Donald Trump, but also people that own expensive property in SF/LA.
Napkin math tells you that even most homeowners are actually net losers from Prop 13. If you assume that the average household is paying in $5k a year to maintain Prop 13, it's likely that the majority of homeowners are paying in more than they receive - you'd have to be sitting on $400k in appreciation net of inflation, which does not describe most homeowners in a state where the median home is ~$800k. So you have a situation where a silent majority (renters + middle class homeowners) are paying to subsidize a small group of very wealthy homeowners + big corporate landowners, they just don't realize it.
I was being facetious at the end but in all seriousness I don't think there would be as much support for Prop 13 if everyone got a postcard in the mail each year telling them exactly how much they paid in and how much they received that year.
I really recommend the John Brooks article I linked to in the essay from the 1960s. There are interesting parallels with Prop 13, and the absurd system he described did come crumbling down not too long after. Yes, there are powerful constituencies that will fight to preserve the benefits they have gotten used to, but the system relies on the average person believing silly myths (keeps grandma from getting kicked out, benefits ordinary Californians), and if you can dispel those, popular support disappears too. There are 49 other states that do just fine without Prop 13.
2. Taking down Prop 13 would be good, but doesn't really solve the root problem, which is artificial housing scarcity. The problem is that money always flows to whomever controls the most scarce resource, so more aid for actual needy families tends to get captured by the people that own housing - absent new housing construction, needy people will end up using the extra money to bid up the price of housing. It's the same dynamic as you see with financial aid and rising college tuition.
Prop 13 could possibly be taken down by the courts because the law favors white neighborhoods in violation of the federal Fair Housing Act. But it'd be a hard case and with the current court it's probably impossible:
“ Also, needy families are unlikely to be long term residents of California, because rents are rising faster than incomes. It only makes sense that California would take money away from transient renters who will eventually have to move to more affordable states like Nevada or Arizona, and give it to wealthier homeowners that will be able to stay in California for the long haul.”
Is that paragraph a joke? California property values are so high that renters could never afford a down payment to buy. Therefore perpetuating generational wealth through wealth transfers in homes.
Yes, it is a joke, but the point is you can't necessarily tell, because this is 100% a serious argument lots of people make, couched in slightly different language. They say "we should subsidize long-term homeownership" but they never say where the money should come from. By definition, it has to come from people who aren't homeowners, i.e. renters.
"A 1.2% property tax applied to a home purchased at a typical 6% cap rate (that is, a home that each year is returning 6% of purchase price in income or saved rent) is effectively the same as applying an income tax of 20%."
I am trying to make sure that I understand this. I get the math as a % of net income but then you are also taxed on net rent at ordinary income level right? But then you also are allowed to deduct mortgage interest and depreciation expense that wouldn't show up in the cap rate equation and even carryforward losses? That could mean that a landlord could be deducting/deferring tax at effective tax rate for the year near 0%, no?
This paragraph is just referring to owner-occupied properties, so it only applies if you're living in your own home. In the owner-occupied case you can more or less just imagine bonds that yield 6% - in that case you should be indifferent between a 1.2% wealth tax on your bonds or a 20% income tax. Maybe the use of "cap rate" was a bit confusing in that sentence since it does have a specific meaning.
It gets more complicated in the case where you are a landlord, because as you say, you are subject to some reduced income taxes as well. Even in that case, the general point applies - landlords in every other state pays full property tax and they are fine, because property tax at this level isn't that punitive.
There is a legitimate argument that we shouldn't discourage housing construction, and property tax is a tax on new housing, so maybe we should have a credit for improved buildings or something of that sort (land tax solves this etc) but that doesn't apply currently in California, where housing development is almost impossible and there are other, much larger taxes on new development.
The whole post is so good, but how does one actually move the needle on correcting this ridiculous setup?
This probably deserves its own post, because it doesn't fit into a satire, and in any case, there is not necessarily an obvious answer. Here are my main observations:
1. Prop 13 has traditionally been the third rail of California politics, because the benefits are very tangible and the beneficiaries are politically powerful - wealthy people who vote. However, the benefits accrue almost entirely to a very small minority of property owners who are sitting on huge gains, people like Donald Trump, but also people that own expensive property in SF/LA.
Napkin math tells you that even most homeowners are actually net losers from Prop 13. If you assume that the average household is paying in $5k a year to maintain Prop 13, it's likely that the majority of homeowners are paying in more than they receive - you'd have to be sitting on $400k in appreciation net of inflation, which does not describe most homeowners in a state where the median home is ~$800k. So you have a situation where a silent majority (renters + middle class homeowners) are paying to subsidize a small group of very wealthy homeowners + big corporate landowners, they just don't realize it.
I was being facetious at the end but in all seriousness I don't think there would be as much support for Prop 13 if everyone got a postcard in the mail each year telling them exactly how much they paid in and how much they received that year.
I really recommend the John Brooks article I linked to in the essay from the 1960s. There are interesting parallels with Prop 13, and the absurd system he described did come crumbling down not too long after. Yes, there are powerful constituencies that will fight to preserve the benefits they have gotten used to, but the system relies on the average person believing silly myths (keeps grandma from getting kicked out, benefits ordinary Californians), and if you can dispel those, popular support disappears too. There are 49 other states that do just fine without Prop 13.
2. Taking down Prop 13 would be good, but doesn't really solve the root problem, which is artificial housing scarcity. The problem is that money always flows to whomever controls the most scarce resource, so more aid for actual needy families tends to get captured by the people that own housing - absent new housing construction, needy people will end up using the extra money to bid up the price of housing. It's the same dynamic as you see with financial aid and rising college tuition.
Prop 13 could possibly be taken down by the courts because the law favors white neighborhoods in violation of the federal Fair Housing Act. But it'd be a hard case and with the current court it's probably impossible:
https://www.prop13.wtf/2023/06/18/Prop-13-illegally-favors-white-neighborhoods.html
“ Also, needy families are unlikely to be long term residents of California, because rents are rising faster than incomes. It only makes sense that California would take money away from transient renters who will eventually have to move to more affordable states like Nevada or Arizona, and give it to wealthier homeowners that will be able to stay in California for the long haul.”
Is that paragraph a joke? California property values are so high that renters could never afford a down payment to buy. Therefore perpetuating generational wealth through wealth transfers in homes.
Yes, it is a joke, but the point is you can't necessarily tell, because this is 100% a serious argument lots of people make, couched in slightly different language. They say "we should subsidize long-term homeownership" but they never say where the money should come from. By definition, it has to come from people who aren't homeowners, i.e. renters.
The whole article is satire.
"A 1.2% property tax applied to a home purchased at a typical 6% cap rate (that is, a home that each year is returning 6% of purchase price in income or saved rent) is effectively the same as applying an income tax of 20%."
I am trying to make sure that I understand this. I get the math as a % of net income but then you are also taxed on net rent at ordinary income level right? But then you also are allowed to deduct mortgage interest and depreciation expense that wouldn't show up in the cap rate equation and even carryforward losses? That could mean that a landlord could be deducting/deferring tax at effective tax rate for the year near 0%, no?
This paragraph is just referring to owner-occupied properties, so it only applies if you're living in your own home. In the owner-occupied case you can more or less just imagine bonds that yield 6% - in that case you should be indifferent between a 1.2% wealth tax on your bonds or a 20% income tax. Maybe the use of "cap rate" was a bit confusing in that sentence since it does have a specific meaning.
It gets more complicated in the case where you are a landlord, because as you say, you are subject to some reduced income taxes as well. Even in that case, the general point applies - landlords in every other state pays full property tax and they are fine, because property tax at this level isn't that punitive.
There is a legitimate argument that we shouldn't discourage housing construction, and property tax is a tax on new housing, so maybe we should have a credit for improved buildings or something of that sort (land tax solves this etc) but that doesn't apply currently in California, where housing development is almost impossible and there are other, much larger taxes on new development.
incredible post 🔥