Saturday, May 07, 2005

Property Taxes Are Another Bubble Problem

When the real estate bust of the 1980's hit the problem that vexed homeowners was the property tax. The local and state governments had grown used to the funds and were very slow to adjust appraisals down. When they could no longer fight the public, the various entities had to slash services in response.

This Des Moines Register story shows that scenario is replaying itself now. "'I don't mind paying an inflationary increase, but mine is like 17 percent. That's out of line. I haven't done anything to the house to lift it up that much,' Ben Veach said. 'This is just a way to raise taxes without saying you're raising taxes. And it's so blatant. But there are still some of us out here who'll fight it.'"

"Ralph Fetters and his wife recently paid off the mortgage on their home and retired. Fetters worries now, on a fixed income, he can't continue to absorb the mounting tax burden."

"'You keep getting those raises year after year, and you can have a problem,' Fetters said. 'I'm 65, and I've lived here all my life. And I've never seen a property tax (bill) go down. It'd be nice to see that once in my life.'"

29 Comments:

At 1:55 PM, Anonymous bob r said...

When this first became a big problem in California, the voters created Proposition 13. While this has helped keep tax increases manageable for people who have lived in their houses for awhile, it also shifted the burden to people who have purchased their homes more recently. That's why you can have two identical houses next to each other, but one owner pays thousands of dollars more each year in taxes. With housing prices skyrocketing in California, it's a tax system that will get more unfair as time goes by, kind of like rent control in New York City.

 
At 1:59 PM, Blogger Bookish Betty said...

Another problem with Prop 13 is that it has siphoned huge amounts of money away from public schools. Teachers, who are underpaid to begin with, now spend their own money on basic classroom supplies.

 
At 2:17 PM, Anonymous Anonymous said...

It wasn't 'siphoned' away from public schools. Instead, it was never 'taken' from the citizens.

If you have to spend your own money on basic school supplies, complain to your superintendent, or recall your school board. Don't tell us that 40%+ of the General Fund (plus untold property bonds) isn't enough.

I think the increase cap part of Prop 13 should be repealed. But the 66% vote requirement should stay, and the recent modification that lets school bonds pass with 55% should be put back to 66%.

 
At 2:53 PM, Blogger Bookish Betty said...

Well, my kids go to the same school that I went to in Santa Barbara . . . and I gotta say there is one helluva difference between the pre- and post-Prop. 13 classroom in terms of supplies, upkeep and maintenance, staff (we had a school nurse, for instance! Wow, those were the days; we also had extensive P.E. and music courses. Today? Those are gone, except as after school "enrichment" programs that kids pay extra for). Property values have soared to about 15 times their value since that time. Perhaps something needed to be done, but Prop. 13 has had a devastating effect on public schools, including universities and community colleges, which have seen a major increase in tuition. Many people don't care, since they've already sent their kids to school (after having enjoyed a blockbuster increase in their property values). Lucky for them, they won't be around to reap the "rewards" of underfunded schools.

 
At 3:11 PM, Anonymous Anonymous said...

bookish betty,

so the solution is to raise taxes... yeah, right... i live in new jersey and that's all they do... sometimes taxes go up by 15% a year... and that's just from the board of education... and the schools just get worse... it's not a money problem at all... it's a demographic issue... or should i say it's an english as a second language issue...

 
At 3:21 PM, Anonymous Anonymous said...

Oh, Santa Barbara. Say hi to Meredith Brace for me.

 
At 3:35 PM, Blogger Bookish Betty said...

Sure! I'll just tell her annonymous from the housing board says "hello."

 
At 3:59 PM, Anonymous Anonymous said...

Bookish Betty

What ever happened to all the Lotto money that was suppose to go to the school system. I think it's a crime how they have deverted the lotto money for other purposes.

I also think it is a crime how underpaid teachers are, and how the Governator now wants to base their compensation based on their performance. Is the performance based compensation plan so they can pay them less or justify paying them more.

It's ridiculous how they will pay a high school drop out millions of dollars per year just because he can throw a ball through a hoop. But only pay the teachers who are educating the children of the future, about $40,000 per year.

 
At 4:17 PM, Anonymous bingobongo said...

I assume we will see many states begin to pass Prop 13-type initiatives. After all, it's the American Way. When prices skyrocket, no one complains as long as it benefits them. When taxes rise to meet the new prices, all hell breaks loose.

California has been thru many of these property bubbles. The one in the '70s created the atmosphere for the passage of Prop 13. California public schools---in aggregate---have gone downhill ever since.

Now that other states are experiencing their first little bubbles, they go running to fix the property tax. If these initiatives pass, they will have decades of declining school performance (and other state services) to look forward to.

You either pay taxes to the state to support education or you cut taxes and pay out of your pocket for private schools or for the "extras" that public schools no longer provide. There is no free lunch. You pay one way or the other. It's disingenuous to think otherwise.

 
At 5:04 PM, Blogger John Law said...

when I was a sub, all the suburban schools were bursting at the seams. almost all the schools were cramped and construction was underway everywhere.

in the cities that they were fleeing from, schools were consolidating but still had rising costs.

how does the housing bubble fit in? I'm sure many small school systems have many more students now because they're building lots of houses in their district because of the housing bubble. schools just can't handle the growth.

 
At 5:04 PM, Blogger goleta said...

a colleague who grew up in Santa Barbara is also seeing the deteriorating of the public schools he went to. His observation is this town is losing middle class families fast. Rich people either don't want kids or just send their kids to private schools. Middle class families are not qualified for affordable housing or other benefits, but they can't afford a $1.25M median priced SFH or even a $750K 3-bedroom condo.

UCSB has long had a hard time getting young scholars coming here for teaching positions. Now it's almost impossible.
High home price has been a major problem for decades, but it has never been this ridiculous.


Many people chose to buy houses in Solvang or Santa Maria, but I don't think anyone wants to spend 3 hours in daily commute. Local newspaper had a report about their lives and they basically treat their homes like hotel. They don't participate in their kid's school fairs, anything in the town, or even do much shopping there- they are just too tired to do anything after work.

The way I see it, the RE bubble is hurting the middle class the most and that directly and indirectly hurts the public schools.
I just don't see California a good place to raise kids.

 
At 5:09 PM, Anonymous Anonymous said...

Anyone who thinks public schools waste inordinate amounts of money should compare the tuition at private schools. It isn't that much lower.

Of course, my personal belief is that students learn as much as they want to learn and teachers and schools are essentially irrelevant. Ghetto kids don't seem to have any trouble learning to be excellent basketball players and musicians for example, despite lack of facilities, coaches and music teachers. For whatever reason, Americans don't take math and science seriously and that is why students do so poorly in this area--it has nothing to do with underpaid teachers. As a former engineer myself, I can hardly blame these students. Math and science are hard work. Why bother when it's so much easier to get rich quick as a real-estate "investor"?

 
At 6:03 PM, Anonymous Anonymous said...

As a former teacher (and student) in L.A., I would agree that the quality of schools has gone down. I don't believe this has anything to do with Prop. 13, though. One thing that everyone is afraid to talk about is the exponentially increasing number of students from poor families, many of whom are on public assistance. These families can not afford to provide their children with supplies and materials needed for school. The parents often lack even the most rudimentary educations themselves. They cannot help their children with homework or teach them the skills necessary to succeed in school. Many only speak foreign languages, and their children have to learn double (language and skills) in order to catch up. The parents often work long hours and are not available to get involved with school activities, etc.

I'm not sure what the answer is, but it's not "money" as schools have plenty; but are forced to spend on "teaching coaches" and lots of in-service, not to mention materials, in order to just get kids to the "starting gate" of education. These families pay less in taxes and use more resources than in past generations.

 
At 6:14 PM, Anonymous Anonymous said...

My sister works in a school district here in San Diego county, she makes about 60,000+ for 180 days of work per school year. 180 days! She doesn't want to work any more. She chose that line of work. As did ALL the other school teachers out there. No one forced them to work only 180-185 days per year. I'm sure they could get more work if they wanted it.They are in a labor union (just like truck drivers, machinists and janitors)and union work means less work for more $, and the taxpayers suffer for it. So, cry me a river about how much you all don't get paid...

 
At 7:09 PM, Anonymous sunny said...

Florida has a tax cap similar to FL prop 13 I assume, but the counties' coffers are experiencing a ballooning because of incredible transaction volume. I guarantee you, if and when this market declines, all the "investors" and new homeowners go on the warpath complaining about how the tax burden is making their housing cost a burden. No, its not the ARM loan that has adjusted 4 percentage points, they'll say, its the taxes.

 
At 7:27 PM, Anonymous Anonymous said...

6:14 Anon,

i completely agree with you... i have a couple of friends who are teachers and they always complain about their income... it's so annoying... mostly because i always have to remind them that they're only working about 180 day a year and that they have the summer completely off... and can easily get another job... and work all year-round like everyone else!!!

Also... i really think that these vice principals are a complete waste of money... they're just paper-pushers... and they make on average $125,000 per year!!!... and again... these people also only work for 180 days or so!!!

 
At 7:31 PM, Anonymous Anonymous said...

As a relatively new follower of this blog, I don't mean to be impertinent relative to the old hands, but I, and I'm sure many others, read this to get a feel for the effects of rapidly rising real estate prices and predictions about the future of those prices.

Public and private school education are great topics and I'm sure there is a blog for that somewhere. I was disappointed that most of the feedback on this particular topic/thread/whatever-you-call-it has just been sparring about tangent issues.

 
At 7:32 PM, Blogger Ben Jones said...

Sunny,
In Texas, it wasn't just the taxpayers pain that got the attention. The taxing entities had to cut and cut for years. You know how governments are, they grow to fit the funds available; but when asked to cut, lookout.

BTW, the investors disappeared in 6 months, compounding the problem for owner/dwellers. Thanks for the comment.

 
At 7:46 PM, Blogger deb said...

In the last decline in So Cal, most people got their taxes lowered considerable. We did. You just have to file a form with the county showing your value has declined. The state will be in a world of hurt then.

 
At 7:48 PM, Blogger goleta said...


One thing that everyone is afraid to talk about is the exponentially increasing number of students from poor families, many of whom are on public assistance.



One major reason urban public schools are increasingly dominated by students from poor families is the RE bubble in California is forcing middle class families to move away from the urban areas. Now parents have to take more time commuting and they send their kids to schools close to homes.

But since they are usually far away from homes and schools during the daytime of a workday and the commuting deprives them the time and energy they would have had had they lived close to work, those parents can no longer pay enough attention to their kids studies.


This creates two problems:

1. Urban schools are dominated by poor families that parents work long hours and can't help their kids with school work and/or help them make better academic decisions.

2. Suburban schools now have more students from middle class families, but their parents are far away from schools and don't have time and energy paying attention about their kid's education.

So both urban and suburban schools suffer from the RE bubble.

 
At 8:07 PM, Blogger Ben Jones said...

deb, goleta,
The tax districts are forced to lower vlaues if you have proof, but they can drag their heels and if you don't appeal, you get stuck. Also, our experience in TX was that the value declined year after year, so it became an annual headache to dig up comps and head down to the tax office.
Great on-topic points, thanks.

 
At 9:16 PM, Anonymous Anonymous said...

bingobongo:

If the long-run increase in real estate values is 1% per year, then the 1% increase cap of Prop 13 should be perfectly fair. It would smooth out all increases; the increases continue even during down markets, until they match actual value.

I think the problem with Prop 13 is that assessment is allowed to jump up immediately upon a sale. This leads to many market distortions and the 'unfairness' aspect. Assessment increases should either be 1% no matter what the circumstances, or there shouldn't be a cap at all. If there was no cap, a lot of people would be mad -- and vote. As always, I support 66% approval for taxes/bonds.

 
At 11:10 PM, Anonymous Anonymous said...

California's Proposition 13 was pushed by commercial real estate interests, and they have achieved their goals: real estate tax revenue from commercial real-estate is now 1/4 of all real estate tax revenue. (It used to be 1/2.) That's because commercial real estate is sold (and therefore re-appraised for tax) much less frequently than residential real estate. The commercial real estate guys suckered the California taxpayers.

Other states, such as NY, have a "circuit breaker" tax system. If you're over 65, you can petition to have your real estate tax frozen. That keeps taxes affordable for fixed-income retirees without distorting the tax base.

 
At 7:10 AM, Anonymous Anonymous said...

Here in MA, we have the best of both worlds.

Property taxes are regulated and contained by Proposition Two-and-a-half, whilst our schools are amongst the best in the country.

MA has continued to provide excellent education for its children even as house prices have skyrocketed over the last few years.

 
At 10:12 AM, Blogger goleta said...

Here in MA, we have the best of both worlds.

Property taxes are regulated and contained by Proposition Two-and-a-half, whilst our schools are amongst the best in the country.


I know high school graduates in NE generally score higher in SAT than their peers in California, but I think the poorer performance of California kids also have something to do with the ideal weather here.

During my 9 years stay in Santa Barbara, there have been less than 20 days that the high exceeded 90F that I ever felt there was a need for a fan. The night temperature almost always (over 95%) stays between 40 and 70 degrees and the daytime high stays below 80F 95% of the days. We hardly get over 2 weeks of raining days a year, except this year. California probably has the best weather in the world.


Before I moved to California, I lived in New Jersey and Pennsylvania for 9 years, so I know kids tend to study harder in NE. Because over half of the days in a year there, it's either too cold, too hot and humid, or raining outside, so kids have no where to go but home.

 
At 11:05 AM, Anonymous Anonymous said...

As an appraiser for a Virginia suburban county assessor's office, I agree that in some states high taxes could be a legacy of this bubble. However, property tax systems vary by state. Where market value is used as in Virginia, the time lag between the sales period used and when assessments are released can be a few months to a year. This means that when prices drop, assessments will not drop immediately because they had never caught up with the market. We have properties selling now with a 75% sales ratio (assessment/price), 33% over 2005 assessments. So prices will have to drop considerably before assessments are reduced. I reduced assessments in 1991-92.

 
At 1:21 PM, Anonymous Anonymous said...

goleta said...
I think the poorer performance of California kids also have something to do with the ideal weather here.

California probably has the best weather in the world.

Before I moved to California, I lived in New Jersey and Pennsylvania for 9 years, so I know kids tend to study harder in NE. Because over half of the days in a year there, it's either too cold, too hot and humid, or raining outside, so kids have no where to go but home.


You may have been a bookworm during your years in NJ/PA, but here in New England active kids spend half the year snowboarding, snowtubing, snowmobiling, skiing, playing hockey etc. and the other half hiking, rock climbing, windsurfing, mountain biking. Kids in MA are much better educated that kids in CA because CA schools really suck whereas MA schools are excellent.

 
At 7:49 PM, Blogger goleta said...

"Kids in MA are much better educated that kids in CA because CA schools really suck whereas MA schools are excellent."



What you said about California's public schools is true.

I'm moving out of California in a few months and that's why I've been all over the west coast and NE from Boston to PA to see where I want to move to. Unfortunately, RE bubble is everywhere I've been to.

My manager wants me to move to Boston to work with colleagues at our major labs there. But the bubble in Boston is probably as big as the one here, even a colleague who got his degrees there, including his Ph.D, wants to move away as he can not afford a decent house in Boston. My goal is owning a home close to a good research university with good public schools like MA has, but I don't want to become a slave of the house. I've come to a conclusion that the coming RE decline will last more than 10 or even 20 years to reach the bottom and the new low will even be lower than it has ever been in the 90's, so I'll probably move to states like Texas, Minnesota, or even Canadian Rockies that don't have much of a bubble to begin with and still offer a rich outdoor environment.

 
At 10:39 AM, Blogger Thomas said...

9:16 Anonymous had an excellent point about Prop. 13 and why it's not the reason California schools underperform.

The problem is not a shortage of money; schools receive more money, in constant dollars, per student today than they did before Proposition 13 passed.

Essentially, Prop. 13 prevented property from being taxed at its bubble-driven paper value. The consensus on this board appears to be that speculation-driven bubble prices are disconnected from economic fundamentals. It follows that during a bubble in which house prices are increasing by 25% a year, there is no reason to expect that the cost of educating a student is also increasing by 25% a year. All Prop. 13 did was to prevent the state government from garnering a windfall from the speculation-inflated property prices of the late 1970s.

Now, you can question whether the annual increase in appraised taxable value Prop. 13 permits is a fair or accurate one; maybe it ought to have been set higher to be more in line with actual fundamentals-driven increases in property value. But the basic premise is sound, I think: people shouldn't be taxed out of their longtime homes just because some arsehat speculators have bubbled the paper value of those homes up under their feet.

 

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