Is The Only Way To Save California To Destroy Its Property Value?

Figuring out the right number

Earlier this year, the Los Angeles teacher’s union (the LAUT) went on strike.

The LAUT argued that the schools were over-crowded, under-resourced and poorly maintained. It was a good argument; the school district had class sizes up to 40 students.

The district argued that it didn’t have enough money. It did have some money, $2 billion in a reserve account, but claimed it would be gone in a few year’s time.

Both sides were right.

But the most obvious solution — raise more money — was out of the question.

Most school funding is done through local property taxes, and in California, it’s against the state constitution to raise property taxes over one percent.

That mandate makes California’s property taxes very low; on average for the entire state, it was about .81 percent in 2015. Compared to other states with large cities, like New York (1.64 percent) or Illinois (2.32 percent), it’s tiny. Even Texas has an average rate of 1.9 percent.

So, California’s local governments need money for schools, homeless shelters and all our other problems. Raising property taxes would fix that.

Why is it so hard?

It’s probably not surprising that homeowners don’t want to pay more taxes. Or that moneyed special interests also want to keep taxes low.

But the welfare of the state is also a legitimate concern.

In California, property prices are high. Ownership is low. Investment properties and rentals are common. And a high percentage of investors are all-cash buyers (a rough proxy for foreign buyers).

Add in the fact that development is expensive and often politically impossible, and it seems like a lot of California’s property price is driven by speculation.

And changes the constitution to allow higher taxes would scare a lot of those speculators away to more profitable possibilities. And as they flee the value of homes may well tumble — an unthinkable nightmare.

Raising property taxes might even lower property tax revenue, since governments would be taxing a higher percentage but on a much lower value.

It’d be running on ice for local governments — and Californian homeowners, especially ones with bad mortgages, would find themselves going into the red.

Yes, there are a lot of corrupting influences in Californian politics, but messing with home prices has real consequences for real people.

Doing It Anyway…

It’s probably not worth it to pay half a million dollars for a home in the Los Angeles Fashion District, the dirtiest and most dangerous part of L.A. It’s also probably not worth it to pay over $3,000 a month to rent a two-bedroom in San Francisco. A lot of people can’t, and so they end up homeless.

After the financial crash in 2008, ownership and investment in property plunged, hitting a low point between 2011 and 2012. In the high of 2007, California’s average house price was $531,800, at its low it went down to $306,000.

Now, prices are back to their pre-bubble high.

You could argue that higher taxes and lower property taxes would drive away developers, but that would mean ignoring that soaring prices and securely low taxes have failed to lure developers.

Neighborhood associations and special interests dead-set on protecting home prices from apartment developments are the more of the problem. Forcing property prices down also means curbing those groups’ power.

Yes, innocent homeowners would be hurt, but most Californians aren’t homeowners, and they never will be unless something changes.

And yes, speculative money will run, but good investors will stay. Rents are still high, and if California ever unlocks the potential building boom that’s waiting behind miles of red tape, those investors will be happy they held on.

It’s not a public policy slam-dunk. It’s weighing the needs of the majority against the financial well-being of a minority, albeit a large one.

Those decisions require political courage, maybe even suicide, and there are no politicians like that around.

For now, raising property taxes is just an academic exercise, but someday, something may have to happen.

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