[quote=EconProf]Bearish Girl: you have often made the claim here that Propositions 58 and 193 are huge giveaways to an undeserving group of Californians–those who take over the property of their parents and keep the same tax assessment. Please tell us exactly how big a tax break this is. How much money is involved? How many people?[/quote]It depends on the area. In areas built before 1975, these measures had the effect of permanently holding an (unknown) portion of residential properties off the market. In areas built before 1960, it likely had the effect of permanently holding HALF of more of residential properties off the market, permanently. In areas located within one mile of of the ocean (particularly parcels situated on streets where at least one side of the street has a unobstructed whitewater or bay view), there is undoubtedly a huge portion (75-90%?) of current residential owners benefiting from Props 58 and 193, whether currently occupying those properties … or not. This phenomenon explains why there have been so few listings to choose from in the best areas of CA coastal communities. It will only get worse from here.
[quote=EconProf]First, I fully agree that it is an unearned and unwarranted giveaway. Why should the heir of a property owner, probably already above average in wealth and income, get this subsidy? Heirs of parents who are renters or are property-poor get nothing. From a wealth or income redistribution standpoint, the results are perverse. It’s like the government saying “Oh, you are going to inherit property? Here’s some more money, courtesy of all other California taxpayers.” Insane.[/quote]Econprof, your (italicized) phrase is an oft-held myth. Many of these occupying “heirs” did not even make it through high school and some did not even make it thru the 9th grade. Yes, even in Mission Hills (SD)! This large, low-income owner-occupant group is usually on some sort of fixed income and cannot in any way, shape or form maintain the home they have “inherited.” Many of them “inherited” their (free-and-clear) parent’s home without having to pay out any equity to other heirs solely because they were an only child or their only sibling was deceased.
[quote=EconProf]It was foolishly passed by the taxpayers (not, as you say, by the legislature) because it was a feel-good policy. The costs and benefits were not fully understood. As we economists often complain, policies that benefit a politically organized select few and harm a large, diffuse, and unorganized majority get approved.[/quote]My bad, you are correct. Props 58 and 193 were passed by what appears to be a vote in the general elections of 1986 and 1996 respectively. From the looks of the votes cast for/against the measures, they appear to have been a vote of only a small fraction of the populace, even back then. (I realize that a lot of voters in general elections only vote for the candidates and leave the ballot measures blank on their ballots.) Both “fiscal impact reports” on the two ballots (10 years apart) were way, way off. They did not take into account the incredible (at the time) future appreciation of CA residential real estate, especially along the coast.
Taking advantage of these two measures is highly attractive to CA heirs (especially those with no siblings) because upon the death of their parent/grandparent, they realize (and are no doubt advised by their counsel) that they will never in their lifetimes be able to buy any kind of dwelling at all in that particular locale and its low assessment is the icing on the cake that makes it possible for them to hang onto the property in the long term … even if they only move out their parent’s household goods and minimally clean it up for rental service.
[quote=EconProf]But I suggest the dollar amounts involved are not huge. The reason is because property turns over an average of every seven years, which cuts in half the number of eligible heirs drastically since 1975–the base year of assessments for Prop 13. Furthermore, what percentage of sales involve an heir taking over a property? 2%? 1%? Please do not use personal anecdotes from your neighborhood. Bring data.
Back to that seven-year turnover rate, which may be off–I remember it from a few years ago. The 41 years since 1975 involve nearly 6 such turnovers. So whatever the number is of heirs who got the benefit must be cut in half every 7 years.[/quote]Residential property most certainly does NOT turn over an average of every seven years in every micro area. Many older subdivisions of 80 or more homes (using SD County for an example) may only have a 0-6 actual listings in any one year. This low figure includes “pocket listings” (not listed on the MLS) and those listings which don’t qualify for a mortgage (in poor condition) which may be one and the same. As is often the case, the listings which DO come online in these areas are typically NOT for the “mainstream owner/occupier buyer” who needs a purchase-money mortgage.
[quote=EconProf]And what about the 2% increase Prop 13 allows every year? A cumulative 2% increase per year means a doubling every 35 years. So those original heirs did see a doubling of their tax bills. Oh, and there is the addition of taxpayer-passed bonds which makes the effective tax not 1% but about 1.25%. And there is the years when CA property values went down in the Great Recession, while those heirs still saw theirs going up 2% per year. But the main flaw in attributing a big welfare transfer to Props 58 and 193 is the rarity of its use when a property sells. Heirs seldom can or want to take over their parents property.[/quote]Yes, I agree that by 2010 (35 years after the base year assessment for original Prop 13 owners), these owners saw their 1975/76 assessment double. But let’s look at what constitutes a “doubled assessment,” using SD County for an example:
1900 sf SFR in SD’s upper OB (w/partial basement and alley access): 1975 assessment $68K; 2010 assessment $136K.
1750 sf SFR in SD’s College Area: 1975 assessment $58K; 2010 assessment $116K.
1350 sf SFR in Lemon Grove (on 1/3 AC): 1975 assessment $44K; 2010 assessment $88K.
1800 sf SFR all-brick tudor gem in Dtn Chula Vista: 1975 assessment $52K; 2010 assessment $104K.
2500 sf SFR in SD’s Mission Hills (Presidio): 1975 assessment: $140K; 2010 assessment $280K.
1800 sf SFR in SD’s Roseville (on std 5K sf lot with sit-down view of the entire SD Bay and SD dtn skyline from the entire rear of the home): 1975 assessment $72K; 2010 assessment $144K.
2300 sf SFR in SD’s Fleetridge (on 9K lot with quarter turn driveway and same view as Roseville sample [but 2-3 streets higher]): 1975 assessment $88K; 2010 assessment $176K.
2600 sf SFR in SD’s LJ Muirlands (rambling ranch on 15K sf lot with whitewater views from LR/DR and backyard: 1975 assessment $152K; 2010 assessment $304K.
Add in the tens of thousands of SFR’s in SD County’s “working class” areas which were assessed at $16K to 35K in 1975K and had double those assessments by 2010 of which there is a large audience waiting to “inherit” them (if they already haven’t). These homes are especially attractive as a stable personal residence to the heir with no siblings at the time of the death of their last parent (or their were liquid assets in the estate to equalize the other heir(s)) because they have never in their lives been able to own a home and have been at the mercy of landlords and whichever friend/relative they were living with. The vast majority of these “heirs” have never attended college and many didn’t finish HS. Most of them are now on fixed incomes or work only part time for minimum wage or close to it.
Moving onto multifamily properties, let’s travel over to LA and SF Peninsula and see what the typical “heir” in those locales is getting away with paying in property tax whilst charging exorbitant rents:
22-unit property in LA County’s Culver City (4 studios, 10-1 bdrm, 8-2 bdrm): 1975 assessment $556K; 2010 assessment $1,012,000.
42-unit property in LA County’s Compton (12-1 bdrm, 16-2 bdrm, 14-3 bdrm): 1975 assessment $426K; 2010 assessment $852K.
Examples of rent-controlled multifamily bldgs:
3-unit property in SF’s Southern Heights/Portrero (1 ground floor unit of 750 sf with small brick patio and rear garden, 1-2nd flr unit of ~2200 sf, 1-3rd floor unit of ~2200 sf. Bldg has two 2-car tandem garages. 2nd flr unit has peek views of the bay and city lights and 3rd flr unit has a 270 degree panoramic city and bay view with a partial wraparound balcony). 1975 assessment $356k; 2010 assessment $710K.
28-unit property in the heart of SJ (8 studios, 10-1 bdrm units, 10-2 bdrm units): 1975 assessment $688K; 2010 assessment $1,376,000.
I disagree that heirs do not want to take over their parents’/grandparents’ propertie(s). Quite the contrary . . . they are almost always advised by their counsel to take it over, due to its ultra-low tax assessment.
Also, in many (non-CFD) areas of SD County, voter-approved bonds and other fees (pest control, sewer, RR maintenance, etc) only total .11 to .18 of the assessed value. That is, the annual tax equals 1.11 to 1.18 of the assessed value.
[quote=EconProf]The actual dollars lost due to Propositions 58 and 193 would make an interesting research project, or Master’s Degree thesis. But I suggest it is a small and diminishing problem, and BG’s statement …”will eventually bankrupt our state.” is wildly exaggerated.[/quote]Econprof, one doesn’t need to be working on a “Master’s Thesis” to prove this largesse (doled out by the virtually broke Golden State, no less) is happening all over it. However, without a paid subscription to REALIST or WESTLAW (better) one must follow several steps in a particular order for this study because “change of ownership” forms filed with CA county assessors are not public record. One must first go down their county assessor’s office and pick their poison parcel map (depicting a pre-1975 built urban area), pay $2 for each map to be printed and then take them home and look up each parcel number on their tax collector’s website to obtain each annual tax bill. The tax bill will list the last document filed. If the tax bill appears to be ultra-low, one can reference that document number in the county recorder’s grantor/grantee index online to determine if there has been a change of ownership since 1986 (that’s as far back as the online GG index goes). If there is only 1-2 deeds on the property and the assessment appears ultra-low, one records the doc number(s) on a pad and takes that list to the recorder’s office’s computers to determine if any of those deeds were intra-familial transfer deed(s) of which no tax stamps were paid. If no quitclaim deeds are found on the property (or any deeds at all), it is VERY likely the original (pre-1978) owners still own it and thus its ownership has not (yet) been passed down.
The closer the parcel map is to the coast, an “historical area” or to a coveted, well-planned downtown area, all the better! If two or more of these attributes exist with said parcel map, then more “heirs” will have taken advantage of Props 58/193. Can we blame them?
The assessment examples I laid out above are just the tip of the iceberg. The Golden State has undoubtedly lost trillions on these ridiculous statutory schemes (Prop 58 much moreso than Prop 193) since 1986 and that is why its highway construction projects have taken so long and it had to give its employees IOUs in lieu of paychecks in three separate Junes due to gridlock in the Legislature in getting its dicey budget passed. The continuing deleterious results of the passage of Props 58/193 PLUS having the “unfunded mandates” of caring for 9M++ undocumented immigrants medically as well as supporting those many thousands residing in county jails and state prisons and shuffling a large portion of this group thru criminal, civil and domestic courts in nearly every county in CA has financially broken the state in more ways then one.
It can only get worse from here if Props 58 and 193 aren’t repealed and something isn’t done about the illegal immigrant population in CA, IMO.
