Sunday, March 20, 2005

The risks of property tax appraisal caps

I'm not a tax expert, but I have heard some anecdotal evidence from California on the risks of property tax appraisal caps (something our state legislature is currently considering). There are a lot of risks, some of which are articulated here. My understanding is that California put an insanely low appraisal cap (1-2%/year) in quite a while back (Proposition 13), which has created a very warped real estate market. Appraisals are reset whenever a property is sold or major improvements are made, and they now have properties that, for instance, can be worth $800K but appraised on the books at only $300K. Those people can never sell or make improvements without generating a huge new annual tax bill, so houses go unimproved and unsold, leading to a state of renters rather than owners. It's a mess, and one that's just about impossible to undo without a voter revolt.

A better approach is to automatically reduce the property tax rate (rather than the appraisal). Or, even better, maybe increase a property tax exemption on the first $X of value, which makes it easier for the poor to become homeowners because of a lower tax burden on lower value housing, while still spreading the benefit across everybody.

4 Comments:

At 9:25 AM, March 21, 2005, Anonymous Richard R. Johnson said...

Prop 13 is an important example of why it's not always a good idea to grant citizens the ability to bring for a vote anything and everything that they can get onto a ballot, especially when it involves a choice between their short-term personal benefit vs. long-term personal and societal benefit.

There's a reason why we typically outsource these kinds of decisions to our governments...

 
At 11:28 AM, March 23, 2005, Anonymous Chris Smith said...

The Governator briefly talked about repealing Prop 13 during the election/referendum process, but it quickly became apparent that he wouldn't have a chance at the polls unless he completely dropped the notion (which he did).

The CA real estate market - particularly the SF Bay area, where physical constraints and excessive environmental concerns intersect with Prop 13 regulatory madness - is a complete mess. Starter homes in poor condition are $750K+. Typical landlords are 65 years and up, own and rent 3+ homes, and make life extremely difficult for their tenants because they are accustomed to demand far exceeding supply.

Incidentally, I thought Texas/Houston already had a similar cap in effect, something like a max annual increase in appraised value of 10%/year.

 
At 11:38 AM, March 23, 2005, Blogger Tory Gattis said...

My understanding is that we do currently have a 10% cap, and they're looking at dropping it to 5% - thus my concern in the post. I think 10% has worked without significant negative ramifications, but 5% could start to cause problems.

One thing I don't know is if full reappraisal occurs during a sale or major improvements. If not, that could alleviate some of the problems, since there would be no penalty for selling or improving.

 
At 12:11 PM, March 23, 2005, Anonymous C Smith said...

that's the funny/ironic part, right? If they implement a cap and it actually has an effect, you know it's going to cause problems!

The way it worked a few years ago was that the county(?) would re-appraise each year, they'd typically try to give it a pretty substantial increase based on comps, but then it was incredibly easy to protest to a minimal increase (http://www.novotnycompany.com/ did a great job for us). Practically speaking, when a house changed hands, it was impossible not to see the appraised value go to the sale value...since by definition, that's the market value for that house.

 

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