California Tax Reform Association



Realtors Initiative: Them That’s Got Shall Get, Them That’s Not Shall Lose

The three initiatives called “People’s Initiative to Protect Proposition 13 Savings” should be entitled the “Realtors’ Initiative to Increase Our profits”. There is only a slight element of truth in the title: the wealthiest, oldest homeowners who have gotten the greatest savings from Proposition 13 would get new tax breaks and even greater savings, to the substantial disadvantage to the young and to less well-off homeowners and renters.

The initiatives would allow homeowners to take their current assessments on their houses with them when they buy a more expensive house, adding only the difference in tax between the old and new house. The alleged intent is to counteract Prop. 13’s lock-in effect and increase turnover of homes, thus increasing supply on the market and lowering home prices. Those with the lowest current assessments who have held their houses for the longest time would be supposedly encouraged to sell their houses and buy a more expensive house using the old assessment plus the difference. These long-time homeowners would get the largest share of the new tax breaks, and, in California’s expensive coastal markets, will have the largest equity gains to roll into the next house.

It is best understood with numerical examples: Homeowner A bought her house for $200,000 in 1990. With the 2% per year increase, it is now assessed at $340,000. She sells it for $1 million and buys a new house for $1.5 million. Under this measure her property taxes would be $8400 yearly instead of the $15,000 it would be under Prop. 13 currently. ($3400 of the old assessment plus $5000 on the additional value over $1 million).

Homeowner B bought his house in 2014 for $800,000, now assessed at $849,000, for roughly $8500 in tax. If B sells his house for $1 million and buys a house for $1.5 million, the new tax would by $13,500 ($8500 of the old assessment plus $5000 for the increase value).

If both homeowners had roughly the same budget and were seeking the same house, the older homeowner could pay over $400/month, or $5100 per year more for the house, allowing them to outbid the homeowner with less savings.

The advantage gets larger from there. The measure calls for the new assessment to be the new base year. At a 2% growth rate, after 10 years, the initial tax difference between the older and newer homeowner of $5100 yearly would grow to about $6000 in yearly savings. Actual tax differences will be larger and savings greater for the older homeowners in these examples because rates from local overrides are higher than the 1%, an average of $1.18% statewide.

The new homebuyer is a complete loser in this system, since she has no tax savings at all when she buys a house. To go back 20 years, the assessed value of the median house in Los Angeles bought in 1996 is $243,000 while the 2016 median is $581,500, a tax difference of $3400 yearly that the median homeowner can carry forward into the next house purchase. In Orange, the tax difference from 1996 to 2016 is about $4000, so that the new homebuyer buying a median home in Orange is disadvantaged by over $300/month, not to mention that she has no equity build-up. As noted in the example above, in the higher-end market the tax benefits get substantially larger, and the more expensive the new house the greater the advantage of carrying the assessment forward.

What income group is likely to benefit? According to the LAO, 50% of the benefits of Prop. 13 go to households earning over $120,000. These households tend to be older, and of course have far more

home wealth as well. So older wealthier people who have received the most Prop. 13 benefits will get even more benefits than younger, less well-off people from this initiative.

Is there a broader societal benefit to this measure other than helping those who have benefited the most from Prop. 13? The argument made by the realtors is that it will increase the turnover of houses, putting more on the market. The implication of that is that increased supply on the market will lower home prices.

However, basic economics says that providing tax benefits to landowners will increase the price of the land. Like the mortgage interest deduction, lower property taxes for homeowners will inflate the cost of housing, since lower tax costs means a higher mortgage is affordable. So the potential benefit of marginally higher turnover (increased supply) and billions in tax benefits flooding the market (increased demand) run in the opposite direction, leading to housing prices that are far more likely to increase than to decline.

To summarize the impact among homeowners: the most-favored homeowner under Prop. 13 gets even bigger breaks; the median and recent homeowner who wants to move up would get some; the new homebuyer would be completely disadvantaged and unable to compete fairly for the house. And housing prices will likely increase at a faster rate than currently.

It should be noted that a limited version of this policy already exists: senior homeowners over 55 can move their previous tax assessment to a different house, but only those of lesser or equal value and to a county that agrees (Props 60 and 90; 11 counties agreeing). The concept behind this is to allow seniors to move to more modest homes and free up the housing market for their larger family homes. Bills to allow only seniors to transfer their assessment to a more expensive home, as one of these three measures would do, were killed in the legislature.

What is the likely revenue impact from marginally higher turnover and large tax reductions? The first lesson of tax policy is that no tax break ever paid for itself. Behavioral and market impacts are routinely included in revenue estimation, and it is rare to find a tax expenditure which results in revenue equal to 20% of its cost, and those are highly targeted. Flooding the housing market with increased tax benefits to homeowners may on the margin increase some turnover but overall it can’t help but lose revenue.

One way to think about this proposal is that low property tax assessments will run with the homeowner, not the house. Thus after a first purchase, the homeowner throughout his/her life will benefit from lower property taxes on every house they subsequently buy. Thus, except for those houses bought by first-time homebuyers, the entire housing stock will be assessed at less than the selling price. While a small margin of those might turnover because of the tax benefit, houses are purchased for innumerable important life reasons other than taxes, and virtually all of those houses will have lower assessments than under Proposition 13.

The Legislative Analyst has now examined the revenue loss. Because there may be some one-time lock-in, the initial revenue losses are in the 100’s of millions of dollars “growing over time to a few billions of dollars per year” for schools and for local government, each, that is many billions of dollars in revenue loss yearly. In the long-term the losses grow larger and larger each year, as most houses that turnover (as most eventually do) will be taxed at less than their full value, and the 2% growth factor will be on a reduced base every year.

In short, young and new homebuyers will be disadvantaged, home prices inflated and the public sector will lose billions of dollars so that long-time better-off homebuyers buying the most expensive houses can increase their long-term savings from Proposition 13. For the Realtors, a great deal: more turnover equals more commissions, higher home prices mean higher commissions. For most of California, not so much.

Frank Polito