You Get What You Tax For

[M II A II R II K]

You Get What You Tax For


March 4, 2019

By Charles Marohn

Read More: https://www.strongtowns.org/journal/...at-you-tax-for

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When officials from Naples were on their way to extract the kingdom’s share of wealth, inhabitants of the Trulli would simply disassemble their homes. No home, no tax. When the tax collectors moved on, the house was reassembled, and life resumed. — The Mansard roof is another example. In France, property owners were taxed based on the number of floors below the roofline. By putting two slopes into the roof and adding some dormers, the Mansard roof allows a building owner to have a tax-free floor. Paris is filled with them.

- American cities are also shaped by the taxing approach we have chosen to use. Most cities have a property tax, which is a tax on the value of land plus the value of the improvements that have been made on that land. During suburbanization, governments favored property taxes because they put most of the tax burden on newly-developed properties. Cities that grew horizontally collected a lot of taxes very quickly. — As the post-war development pattern matured, as shopping malls and big box stores began to appear, the sales tax grew in popularity. For the lucky city that could capture a regional retail hub, a sales tax shifted more of the burden to outsiders. The sales tax is also popular because it raises lots of revenue in ways generally imperceptible to the payer.

- Cities continue to mature, and the tax systems they are allowed to use need to be updated to reflect an evolving set of challenges. Today’s cities are burdened with maintenance expenses from prior investments; they have too much infrastructure and do not make very good use of it. The number of neighborhoods trapped in decline is growing. And in those neighborhoods that do receive private investment, it tends to cause displacement of the residents who have lived there the longest. It’s an all-or-nothing bargain; the trickle or the fire hose. There are many causes of the stress our communities are experiencing, but a major factor and one we can address is the incentives that come with our current approaches to local taxation.

- The property tax punishes modest improvements and rewards steady decline. People who take steps to add value to their property pay more taxes, while those who allow their property to diminish in value pay less. The property tax makes slumlords possible, allowing them to buy distressed properties and ride the cash flow down a slope of decline, paying minimal taxes the entire way. — And property taxes encourage idleness. Buying a vacant lot or a decrepit building in an otherwise improving area, then waiting for other properties to improve, all while paying low taxes, is an easy way to have large investment gains with minimal risk. The investor who refuses to improve but also refuses to sell their property is a common frustration within neighborhoods. It’s a direct byproduct of the property tax.

- The distortions of the sales tax are in some ways subtler, but equally pernicious. There is a winner-take-all aspect to the sales tax, where the only city that can capture the big retailers get the tax. This is true even though a collection of smaller retailers often produces more revenue. Cities that don’t play the incentive game and don’t give the retailers subsidies lose out to ones that do, ultimately making a loser out of every local government. — Cities that are funded disproportionately by the sales tax have an incentive to pursue regional-scale retail, but a disincentive to accommodate residents, especially those who are high-cost or have limited value as consumers. Put another way: the optimal sales tax city would have the regional mall, the big box stores, and the auto dealerships, but no residents. All the people who shop there and pay the tax would actually live someplace else.

- What is needed most today is an approach to taxation that allows cities to grow financially strong and resilient when property owners invest incrementally in their own neighborhoods. We need a taxing system that rewards neighborhood investments, discourages idleness, and closely aligns private gain with the public good. And a modern approach to taxation must encourage increasingly productive use of all the existing infrastructure, parks, and amenities local governments struggle to maintain. Fortunately, there is such an approach. It’s called the land tax. — The land tax considers only the value of the land. The most consequential impact of this is that someone who improves their property will not automatically have a tax increase. If a landlord fixes their leaky roof, a homeowner adds an accessory apartment, or a shop owner expands their building, they are not punished with more taxes.

- Enacting a land tax shifts the burden from financially-productive properties to vacant and under-utilized properties. From the community’s standpoint, this realignment makes a lot of sense. The street in front of the vacant lot, the pipe that leads to the neighbor’s house, the sidewalk, the fire-fighters, the police force… they all must be there whether someone builds on the property or leaves it vacant. Why increase taxes on those investing in the community while giving absentee landowners and slumlords a free ride? — There are a lot of reasons for cities to switch to a land tax, but few are allowed to make that change. Only a handful of state governments have given cities the authority to make this choice. Even though such a reform would lower local taxes for most families and businesses, it would raise them on some major retailers, developers and land speculators, all of which are influential constituencies.

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[chrisvfr800i]

Great article, but somehow in my locality five figures of property taxes translates to Zillow-rated 3 out of 10 schools.

[Pedestrian]

It is with some trepedation that I raise the issue of California's Proposition 13; trepedation because younger folks and newcomers sometimes go into jealous rants over the perceived unfairness of older, longer-term residents getting something they aren't getting.

First, what is it:

* CALIFORNIA CONSTITUTION - CONS

ARTICLE XIII A [TAX LIMITATION] [SECTION 1 - SEC. 7] ( Article 13A added June 6, 1978, by Prop. 13. Initiative measure. )

SECTION 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed One percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.
(b) The limitation provided for in subdivision (a) shall not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any of the following: (mostly special purpose taxes approved by supermajorities of voters). . . .

SECTION 2. (a) The “full cash value” means the county assessor’s valuation of real property as shown on the 1975–76 tax bill under “full cash value” or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment . . . .
(b) The full cash value base may reflect from year to year the inflationary rate not to exceed 2 percent for any given year or reduction as shown in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced to reflect substantial damage, destruction, or other factors causing a decline in value . . . .

SECTION 3. (a) Any change in state statute which results in any taxpayer paying a higher tax must be imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on real property, or sales or transaction taxes on the sales of real property may be imposed . . . .

http://leginfo.legislature.ca.gov/fa...ticle=XIII%20A

So, in other words, when someone buys a property in CA, they establish the "full cash value" of the property on which their property taxes are based as long as they own it. Those taxes can't exceed 1% of that cash value plus (a) special purpose taxes approved by voters, (b) increases based on the value of improvements (also at 1%) and (c) inflationary adjustments not to exceed 2% (of the 1%) per year.

Thus, the longer you own a property in CA, the lower your taxes come to be relative to newcomers (and to what your taxes will be if you sell that property and buy another one of higher value).

The purpose of all this is to keep people on relatively fixed incomes from being driven out of their homes by escalating property taxes based on runaway inflation of home values. The downside is it feels like being stuck because if you move your taxes can triple . . . , quadruple. And your neighbors, who can check what you are paying at the tax collector's web site, can be awfully jealous; even hostile.

It's clearly not an ideal solution to a very real problem. The ideal solution would be to somehow keep pure inflation from driving up property taxes for anyone, if necessary by not basing them on the market value of property. But I admit, I don't really have the ideal solution. I just know that should Prop. 13 someday go away, I will no longer be able to afford to live as and where I do and would have to join the hordes leaving CA (and I am NOT low income).

[hammersklavier]

Originally Posted by Pedestrian

. . . should Prop. 13 someday go away, I will no longer be able to afford to live as and where I do and would have to join the hordes leaving CA (and I am NOT low income).

In other words ... Prop 13 is a major driver behind the insane land value inflation that we see in high-demand markets in California, because it disincetivizes any change to the ownership status quo, wouldn't you say? It sounds like the unintended consequence of Prop 13 is that the only way to cash out is to move out of the state entirely, which basically forces all property in the state to become generational wealth and creates prima facie ridiculous valuations (like the half mil for a shack that made the rounds a few years ago).

[BrownTown]

Originally Posted by Pedestrian

It's clearly not an ideal solution to a very real problem. The ideal solution would be to somehow keep pure inflation from driving up property taxes for anyone, if necessary by not basing them on the market value of property. But I admit, I don't really have the ideal solution. I just know that should Prop. 13 someday go away, I will no longer be able to afford to live as and where I do and would have to join the hordes leaving CA (and I am NOT low income).

Not to sound callous, but if you can't afford your property then you SHOULD have to move. It's entirely unfair to charge some people less taxes than others. Indeed it's incredibly regressive that older people get to pay much less taxes than younger people. Prop 13 is one of the worst laws in the country when in terms of establishing efficient cities. It massively subsidizes NIMBYism and disincentivizes young workers from moving to areas with good jobs.

[Pedestrian]

Originally Posted by BrownTown

Not to sound callous, but if you can't afford your property then you SHOULD have to move. It's entirely unfair to charge some people less taxes than others. Indeed it's incredibly regressive that older people get to pay much less taxes than younger people. Prop 13 is one of the worst laws in the country when in terms of establishing efficient cities. It massively subsidizes NIMBYism and disincentivizes young workers from moving to areas with good jobs.

I totally expected this type of comment. I disagree. I don't think government should be able to force people to move by raising it's fees and costs well beyond the rate of inflation and Prop. 13 does act as a brake on spending other peoples' money as well as a benefit to homeowners.

But I raised the subject to let the majority who don't get this break for themselves imposed on their rulers to vent.

[Steely Dan]

the issue of seniors who've spent an entire lifetime of hardwork to own their homes only to be threatened with having to move because of skyrocketing property taxes is a serious one.

california's prop 13 perhaps goes a bit too far in its attempt to correct the issue.

here in chicago, we have a property tax assessment freeze program for low-income seniors who qualify. that's probably a better compromise than simply giving away the store to everyone who just happens to be old.

[Pedestrian]

Originally Posted by Steely Dan

the issue of seniors who've spent an entire lifetime of hardwork to own their homes only to be threatened with having to move because of skyrocketing property taxes is a serious one.

california's prop 13 perhaps goes a bit too far in its attempt to correct the issue.

here in chicago, we have a property tax assessment freeze program for low-income seniors who qualify. that's probably a better compromise than simply giving away the store to everyone who just happens to be old.

Prop. 13 is probably targetted more at the middle class than low income though. Very few "low income" folks left owning homes in the Bay Area certainly. Maybe other parts of CA.

[benp]

Originally Posted by Steely Dan

the issue of seniors who've spent an entire lifetime of hardwork to own their homes only to be threatened with having to move because of skyrocketing property taxes is a serious one.

california's prop 13 perhaps goes a bit too far in its attempt to correct the issue.

here in chicago, we have a property tax assessment freeze program for low-income seniors who qualify. that's probably a better compromise than simply giving away the store to everyone who just happens to be old.

In Houston over 80% of the value of my inner-loop property (less than 5000 sq ft lot size) is land value, which is now assessed at greater than $100/sq ft. for the land.

Values are re-assessed yearly, and taxes are allowed to increase up to 10% per year up to the current home market value. My taxes have been raised the full 10% 6 out of the last 7 years. I will not be able to afford taxes in retirement, so I must sell and my home will likely be torn down (it was my thought to retire here when I bought). As land values rise, improvement (i.e. the house) continue to drop in value unless they are new builds. There are older neighbors whose properties nearby have fallen into disrepair as the residents have aged, and although taxes continue to increase they cannot find a house within 20 miles that they can afford that's not a slum, and cannot afford to maintain their homes.

This was a neighborhood of 1400 sq ft bungalows, but in the last 10 years has gone insane with $1M++ new builds on small lots. Yes its the free market, but long time homeowners of lesser income (who cannot afford or do not want to move) are getting slammed. Typical property taxes on these small lots is $11k to $15k per year, and increasing.

[BrownTown]

Originally Posted by Steely Dan

the issue of seniors who've spent an entire lifetime of hardwork to own their homes only to be threatened with having to move because of skyrocketing property taxes is a serious one.

california's prop 13 perhaps goes a bit too far in its attempt to correct the issue.

here in chicago, we have a property tax assessment freeze program for low-income seniors who qualify. that's probably a better compromise than simply giving away the store to everyone who just happens to be old.

It's not even a real problem, it's a "first world problem". We're talking about millionaires who aren't willing to pay their fair share in taxes while younger and less fortunate people get slammed by high taxes and/or long commutes because all the desireable properties are filled with seniors who are squatting on them for the tax benefit.

There are two very simple solutions for people in these situations:
1. Sell the house, pocket the millions of dollars it's worth and then move to a different state and live like a king. The average cost of a house is San Francisco is more than enough for an elderly person to retire on and live a good life not even including any other retirement savings or pension they may have.

2. If you want to stay then just get a reverse mortgage and use the millions of dollars you receive to pay your taxes for the rest of your life.

PS: And this isn't even getting into the NIMBYism this law creates because obstructing new housing units causes the value of these people's property to rise while their taxes stay still. They have a HUGE incentive to try and obstruct new development and drive up home prices which obviously fucks everyone else right in the ass.

[Steely Dan]

Originally Posted by BrownTown

We're talking about millionaires who aren't willing to pay their fair share in taxes while younger and less fortunate people get slammed by high taxes and/or long commutes because all the desireable properties are filled with seniors who are squatting on them for the tax benefit.

that's why i think chicago's low income senior property tax assessment freeze program is a better compromise because it specifically does not apply to millionaires.

[Jonesy55]

I think Land Value Tax is better than a tax on the whole value of the property including buildings, it encourages better use of land without punishing somebody for making improvements to their property and the value of the land itself is usually dependent on external factors rather than anything the owner has done themselves so any windfalls from increasing value are not really 'earned' in any way by the owner.

The point about Sales taxes is an interesting one, the way it works in the US is very different to VAT here. We have a national VAT system so it doesn't matter if any particular local jurisdiction has lots of retail or not, the rate is the same everywhere and the money raised goes into the national tax pot rather than to local governments.

[JManc]

Originally Posted by benp

In Houston over 80% of the value of my inner-loop property (less than 5000 sq ft lot size) is land value, which is now assessed at greater than $100/sq ft. for the land.

Values are re-assessed yearly, and taxes are allowed to increase up to 10% per year up to the current home market value. My taxes have been raised the full 10% 6 out of the last 7 years. I will not be able to afford taxes in retirement, so I must sell and my home will likely be torn down (it was my thought to retire here when I bought). As land values rise, improvement (i.e. the house) continue to drop in value unless they are new builds. There are older neighbors whose properties nearby have fallen into disrepair as the residents have aged, and although taxes continue to increase they cannot find a house within 20 miles that they can afford that's not a slum, and cannot afford to maintain their homes.

This was a neighborhood of 1400 sq ft bungalows, but in the last 10 years has gone insane with $1M++ new builds on small lots. Yes its the free market, but long time homeowners of lesser income (who cannot afford or do not want to move) are getting slammed. Typical property taxes on these small lots is $11k to $15k per year, and increasing.

The Heights? That area has been ravaged by gentrification and yuppification that there is little soul left in it. As for people getting 'priced out' by rising property taxes who with an old home on $500k worth of dirt, I'd cash out. Houston is getting expensive but there are still nice homes in the $300k-400k range in the vicinity.

[Jonesy55]

If people are getting priced out because of land value taxes then its because they have seen huge windfall gains on the value of the land they own. I understand that might be inconvenient but ultimately they have still profited from the gains and the taxes due are only a small proportion of those gains, so overall they are still winners.

As has been mentioned before if they really don't want to cash in the increased value and move elsewhere they could take out a reverse mortgage and use that to pay the taxes. Maybe there could be a system whereby taxes for low income property owners in high value areas could be deferred until they die or move away then the accumulated taxes are charged to the estate or sale proceeds instead?

It's a 'first world problem' imo when you don't want to pay an extra $2,000/year in land taxes while your land has increased in value by $500,000 just by sitting on it and doing nothing to earn that extra wealth.

[eschaton]

Pittsburgh is probably the biggest city in the country which instituted a land tax for a long period of time. First instituted in 1913, it lasted until 2001. At the time it was repealed the tax on land was approximately 5.77 times the value of the tax on buildings/property improvements. It was ultimately repealed because it was time for a reassessment, as a study had shown that the land value tax was regressive. Even with the higher real estate values in Downtown and wealthy neighborhoods, overall the land value tax fell more heavily on those of modest income. When coupled with a steep rise in assessments due to decades of fudging the numbers, the city blinked and decided to scrap the whole system.

It should be noted partial land value tax systems survive in a lot of the smaller cities in Pennsylvania, including Allentown, Scranton, Harrisburg, Washington, McKeesport, New Castle, and Duquense. In most cases there is a small building tax millage as well, and in only two cases are school districts taxed in the same way, so no city has taken it to the logical conclusion. That said, none of these locations are currently thriving economically, and in many cases are quite blighted.

[jtown,man]

Originally Posted by Steely Dan

the issue of seniors who've spent an entire lifetime of hardwork to own their homes only to be threatened with having to move because of skyrocketing property taxes is a serious one.

california's prop 13 perhaps goes a bit too far in its attempt to correct the issue.

here in chicago, we have a property tax assessment freeze program for low-income seniors who qualify. that's probably a better compromise than simply giving away the store to everyone who just happens to be old.

Light-years better. Older people typically have more wealth than younger people coming into the market, which makes sense, they've had time to accumulate wealth. Why should someone who lives on 100 or 200k a year get a tax break while a new couple bringing in 70k a year doesn't have the same break?

These types of situations are when I become quite progressive. Helping low-income seniors is the least society can do.

[llamaorama]

In Houston is that its overall property tax revenues are fixed at a certain level by a voter proposition passed a decade ago. If the overall value of land in the city goes up faster than inflation, the tax rate must go down. It's even more extreme than Colorado's TABOR, which puts any tax hikes up to a vote.

However, this does not protect people whose home values increase faster than the citywide average. If the example grandma's heights home doubles in value, a 5% rate decrease doesn't keep her in her home.

I think the property tax revenue cap needs to be repealed. It's one of the contributing factors along with another voter proposition mandating firefighter and police pay parity that is going to bankrupt the city. The city can't increase its sales tax rate either, so it has no tools at its disposal to deal with rising costs. There are about to be some massive cuts to public services. Voters don't like taxes and like firefighters so they say yes to these things, not understanding the fiscal consequences. Another problem very common in Texas is that biggest commercial and industrial properties are perenially undervalued.

Perhaps a compromise would be something like California Prop 13. It would protect existing residents from regressive tax hikes but would charge newcomers and big investors their fair share. Because Houston is growing and will continue to do so for the forseeable future it would put a lot of money in city coffers, while by definition everyone who votes for the measure gets a permanent freeze on their property taxes.

[BrownTown]

Originally Posted by llamaorama

In Houston is that its overall property tax revenues are fixed at a certain level by a voter proposition passed a decade ago. If the overall value of land in the city goes up faster than inflation, the tax rate must go down. It's even more extreme than Colorado's TABOR, which puts any tax hikes up to a vote.

However, this does not protect people whose home values increase faster than the citywide average. If the example grandma's heights home doubles in value, a 5% rate decrease doesn't keep her in her home.

I think the property tax revenue cap needs to be repealed. It's one of the contributing factors along with another voter proposition mandating firefighter and police pay parity that is going to bankrupt the city. The city can't increase its sales tax rate either, so it has no tools at its disposal to deal with rising costs. There are about to be some massive cuts to public services. Voters don't like taxes and like firefighters so they say yes to these things, not understanding the fiscal consequences. Another problem very common in Texas is that biggest commercial and industrial properties are perenially undervalued.

Perhaps a compromise would be something like California Prop 13. It would protect existing residents from regressive tax hikes but would charge newcomers and big investors their fair share. Because Houston is growing and will continue to do so for the forseeable future it would put a lot of money in city coffers, while by definition everyone who votes for the measure gets a permanent freeze on their property taxes.

No, the solution is to not have a limit on the tax revenue. Or more accurately to have a limit that scales with population and inflation. Prop 13 does exactly what you claim to hate.. it underfunds essential government services. That's how you can get crappy public schools in a place like San Francisco. Because all the people getting tax subsidies mean there isn't enough revenue for good schools.

[digitallagasse]

Originally Posted by BrownTown

It's not even a real problem, it's a "first world problem". We're talking about millionaires who aren't willing to pay their fair share in taxes while younger and less fortunate people get slammed by high taxes and/or long commutes because all the desireable properties are filled with seniors who are squatting on them for the tax benefit.

There are two very simple solutions for people in these situations:
1. Sell the house, pocket the millions of dollars it's worth and then move to a different state and live like a king. The average cost of a house is San Francisco is more than enough for an elderly person to retire on and live a good life not even including any other retirement savings or pension they may have.

2. If you want to stay then just get a reverse mortgage and use the millions of dollars you receive to pay your taxes for the rest of your life.

PS: And this isn't even getting into the NIMBYism this law creates because obstructing new housing units causes the value of these people's property to rise while their taxes stay still. They have a HUGE incentive to try and obstruct new development and drive up home prices which obviously fucks everyone else right in the ass.

Very well said. This is fuel to the NIMBYism fire. This privatizing the gain and socializing the pain at a very selfish personal level.