Why I'm Against Prop 13
Everybody but me supports ballot proposition 13 (not to be confused with the 1976 initiative often referred to as Prop 13). But I'm coming out against it anyway. There are three basic problems with it:
1) It makes an existing statutory tax break into a constitutional right, which takes away the ability of the legislature to amend or abolish it if it becomes too expensive or people find a clever way to abuse it.
2) It gives people a tax break for doing something they're required to do in the first place. That's kinda stupid.
3) It gives people a tax break for something they already did. There's no way a tax break can give people an incentive to do something they've already done, it's just a windfall.
California is bankrupt. Handing out a new constitutional tax break is a bad idea.
1. The Way it is Now
Currently, the provision of the California Constitution concerning property values allows property taxes to increase only 2% a year, no matter how much the property has increased in value. However, the property value is reassessed to market value (dramatically increasing the property tax) if the building is renovated enough to count as being "newly constructed." The legislature is allowed to (and has) exempt renovated properties from tax reassessment is the renovation is to increase seismic safety. However, there is an exception from the exemption if the zoning code requires the landlord to retrofit. In that case, the property is reassessed but the increased valuation (and higher property tax) doesn't kick in for 15 years. The 15-year rule is in the Constitution, so the legislature can't change it.
2. What the New Prop 13 Would Do
The new Prop 13 would repeal the 15-year rule for mandatory seismic retrofitting and give property owners who are required to retrofit the same tax break as property owners who retrofit voluntarily. So if the zoning code requires you to retrofit your property, your property still wouldn't be reassessed and your property taxes wouldn't go up even 15 years from now.
Prop 13 would also constitutionalize the existing tax break for non-mandatory seismic retrofitting. Currently, the California Constitution permits the legislature to add a tax break for non-mandatory seismic retrofitting, but Prop 13 would make that tax break a constitutional right, eliminating the legislature's ability to repeal or limit it.
In other words, Prop 13 would give property owners a tax break for complying with the law. This sounds kind of stupid, but would be an incentive to owners who are willing to say, fuck the law, I'm going to risk getting caught and be fined. That increases safety, which is a good thing. It would also make an existing tax break a constitutional right, which is bad.
3. Worthless Windfalls
There's one gaping hole in Prop 13. Prop 13 can easily be read to give a tax break to owners who did their retrofitting in the past (though you can read it this way if you squint). This is bad, because it's impossible to provide people an incentive to do something they've already done.
For example, a property owner who retrofit 5 years ago would get a tax break: ten years of property taxes at the 1976 value. Prop 13 gives these people an getting an enormous instant windfall with no benefit to public safety.
Of curse, a property owner might decide to say, fuck the law, I'll just ignore the zoning code and pay the fine if I get caught. So I'll do some back-of-the envelope calculations.
4. Math (feel free to skip this part, lj's outdated interface makes it impossible to hide text
Assume the reassessment would increase the value of the property by $1 million. The NPV of the the NPV of the existing tax break is a 15-year annuity, where the payments starts at $10,000 (1% of $1 million) and increases at 2% a year (the constitutional rate). Based on the current Moody's rate for AAA bonds, which is 5% (tax laws are pretty darn non-risky but not as safe as Treasuries, I think), the NPV of the existing tax break would be about $84,000. The new tax break would be a growing perpituity, which has a value of about $333,000. So the net present value of the additional tax break would be about $250,000.
Now let's consider the owners who retrofit in the past. An owner who retrofit last year would effectively get a 14-year growing annuity with an NPV of about $79,000. For an owner who retrofit 5 years ago, the NPV of is about 58,000; for 10 years ago, it's about 31,000. (You can find all the formulae I just used inthis Wikipedia article
(start here if you wanted to skip the math)
Based on the calculations above, if retrofitting increased the property value by $1,000,000, the present value of the additional tax savings from an owner who retrofit right after the new law came into force would be about about $250,000. If the owner retrofit last year, the tax windfall would have an NPV of $79,000; $58,000 if it were 5 years ago, and $31,000 if it were 10 years ago. So the additional incentive for new retrofitting is considerably greater than the windfall for prior retrofitting.
5. Regulation, Fines and Compliance
Unfortunately, I haven't found any good source of information on when seismic retrofitting is mandatory, how serious enforcement is, and what the potential fines for noncompliance are. But as far as I can tell seismic retrofitting is rarely mandatory, except when the building is retrofitted for other reasons (in which case the tax exemption doesn't apply anyway).
6. Conclusions
Ultimately, I come out against Prop 13. There are four basic reasons:
1) Prop 13 would eliminate the legislature's ability to repeal or reduce an existing tax break by making it into a constitutional right. Constitutional tax breaks are really, really bad. They've already made the state of California bankrupt. Even though eliminating the tax break for voluntary seismic retrofitting probably wouldn't be a good idea at the moment, it might be necessary to limit it if it eventually becomes unnecessary, too expensive, or too easily abused.
2) I'm unconvinced that property owners need a significant additional incentive to be convinced to comply with the law. I'm also unconvinced that the property tax reduction ($250,000 per million-dollar increase in assessed property value) will be enough to induce significant additional compliance.
3) If property owners really do need an additional incentive, it can be done without giving a tax windfall to people who retrofitted in the past.
4) The state of California is bankrupt. Additional tax cuts will only make things worse.
1) It makes an existing statutory tax break into a constitutional right, which takes away the ability of the legislature to amend or abolish it if it becomes too expensive or people find a clever way to abuse it.
2) It gives people a tax break for doing something they're required to do in the first place. That's kinda stupid.
3) It gives people a tax break for something they already did. There's no way a tax break can give people an incentive to do something they've already done, it's just a windfall.
California is bankrupt. Handing out a new constitutional tax break is a bad idea.
1. The Way it is Now
Currently, the provision of the California Constitution concerning property values allows property taxes to increase only 2% a year, no matter how much the property has increased in value. However, the property value is reassessed to market value (dramatically increasing the property tax) if the building is renovated enough to count as being "newly constructed." The legislature is allowed to (and has) exempt renovated properties from tax reassessment is the renovation is to increase seismic safety. However, there is an exception from the exemption if the zoning code requires the landlord to retrofit. In that case, the property is reassessed but the increased valuation (and higher property tax) doesn't kick in for 15 years. The 15-year rule is in the Constitution, so the legislature can't change it.
2. What the New Prop 13 Would Do
The new Prop 13 would repeal the 15-year rule for mandatory seismic retrofitting and give property owners who are required to retrofit the same tax break as property owners who retrofit voluntarily. So if the zoning code requires you to retrofit your property, your property still wouldn't be reassessed and your property taxes wouldn't go up even 15 years from now.
Prop 13 would also constitutionalize the existing tax break for non-mandatory seismic retrofitting. Currently, the California Constitution permits the legislature to add a tax break for non-mandatory seismic retrofitting, but Prop 13 would make that tax break a constitutional right, eliminating the legislature's ability to repeal or limit it.
In other words, Prop 13 would give property owners a tax break for complying with the law. This sounds kind of stupid, but would be an incentive to owners who are willing to say, fuck the law, I'm going to risk getting caught and be fined. That increases safety, which is a good thing. It would also make an existing tax break a constitutional right, which is bad.
3. Worthless Windfalls
There's one gaping hole in Prop 13. Prop 13 can easily be read to give a tax break to owners who did their retrofitting in the past (though you can read it this way if you squint). This is bad, because it's impossible to provide people an incentive to do something they've already done.
For example, a property owner who retrofit 5 years ago would get a tax break: ten years of property taxes at the 1976 value. Prop 13 gives these people an getting an enormous instant windfall with no benefit to public safety.
Of curse, a property owner might decide to say, fuck the law, I'll just ignore the zoning code and pay the fine if I get caught. So I'll do some back-of-the envelope calculations.
4. Math (feel free to skip this part, lj's outdated interface makes it impossible to hide text
Assume the reassessment would increase the value of the property by $1 million. The NPV of the the NPV of the existing tax break is a 15-year annuity, where the payments starts at $10,000 (1% of $1 million) and increases at 2% a year (the constitutional rate). Based on the current Moody's rate for AAA bonds, which is 5% (tax laws are pretty darn non-risky but not as safe as Treasuries, I think), the NPV of the existing tax break would be about $84,000. The new tax break would be a growing perpituity, which has a value of about $333,000. So the net present value of the additional tax break would be about $250,000.
Now let's consider the owners who retrofit in the past. An owner who retrofit last year would effectively get a 14-year growing annuity with an NPV of about $79,000. For an owner who retrofit 5 years ago, the NPV of is about 58,000; for 10 years ago, it's about 31,000. (You can find all the formulae I just used inthis Wikipedia article
(start here if you wanted to skip the math)
Based on the calculations above, if retrofitting increased the property value by $1,000,000, the present value of the additional tax savings from an owner who retrofit right after the new law came into force would be about about $250,000. If the owner retrofit last year, the tax windfall would have an NPV of $79,000; $58,000 if it were 5 years ago, and $31,000 if it were 10 years ago. So the additional incentive for new retrofitting is considerably greater than the windfall for prior retrofitting.
5. Regulation, Fines and Compliance
Unfortunately, I haven't found any good source of information on when seismic retrofitting is mandatory, how serious enforcement is, and what the potential fines for noncompliance are. But as far as I can tell seismic retrofitting is rarely mandatory, except when the building is retrofitted for other reasons (in which case the tax exemption doesn't apply anyway).
6. Conclusions
Ultimately, I come out against Prop 13. There are four basic reasons:
1) Prop 13 would eliminate the legislature's ability to repeal or reduce an existing tax break by making it into a constitutional right. Constitutional tax breaks are really, really bad. They've already made the state of California bankrupt. Even though eliminating the tax break for voluntary seismic retrofitting probably wouldn't be a good idea at the moment, it might be necessary to limit it if it eventually becomes unnecessary, too expensive, or too easily abused.
2) I'm unconvinced that property owners need a significant additional incentive to be convinced to comply with the law. I'm also unconvinced that the property tax reduction ($250,000 per million-dollar increase in assessed property value) will be enough to induce significant additional compliance.
3) If property owners really do need an additional incentive, it can be done without giving a tax windfall to people who retrofitted in the past.
4) The state of California is bankrupt. Additional tax cuts will only make things worse.