I always assumed the causal method of prop 13 → Minimal redevelopment was much simpler:
Individual homeowners who are not leaving the state and have lived there during widespread appreciation have a huge incentive to stay in the same home: the cheap property taxes they lose if they are to move.
Take for example someone who owns a $2.2 million dollar single family home next to a transit station. They pay $2k per year in property tax, while neighbors across the street pay $22k per year. Selling their home and buying the home across the street costs them $20k per year, even if there are zero real estate transaction costs and the prices of the two homes are the same. It follows that this $20k/year reduced living expenses has value to them, and they will not sell for less than an additional amount (let’s say an additional $500k, though it could be easily another $1M for someone in a high tax bracket) over market price as a single family home.
This raises the implicit price of land (especially when trying to amass multiple parcels) by an increasing amount as long as the average tenure of homeowners gets longer. That in turn raises rents necessary for new redevelopment to happen. Ergo, less redevelopment because of land availability being lower than peer states, not because of some large difference in land policy allowing more redevelopment elsewhere.
This causal hypothesis also conveniently explains longer commutes and higher VMT: when switching jobs, homeowners do not want to move because of the additional ‘forfeited prop 13 benefits’ when they sell one home and buy another.
Would love to see some data on whether changes in land policy are actually more common in peer states versus California, or if the land cost for redevelopment projects is a bigger factor.
Well said. The challenge is that every city manager and financial planner I talk to still believes new housing doesn’t pay for itself. The people running local governments largely haven’t updated their opinions about the fiscal impact of new development in decades. Changing the institutions will take time
Well-put. I agree that the real operating mechanism of Prop 13 is that CA homeowners become insulated from the pain of out-of-control home price growth. (Wonder if there's a category of yearly or monthly expenses like prop tax -- e.g., car insurance -- that feel to consumers like they should be constant, such that any increase prompts an outsized reaction.)
But I'd like to offer up one small anecdote to show how this dynamic can also stymie new home construction.
My family was in the business of mixed-use development in Texas (buying distressed properties like abandoned factories in CBD-adjacent warehouse districts and redeveloping them into downtown apartments plus commercial space). I'll never forget attending a local homeowner meeting one evening, as we were presenting a project update along with city officials, and concerned homeowners kept objecting to the idea of redeveloping this abandoned factory in the first place. "But this is such as 'win' - bringing jobs and new apartments to this part of the city, that everyone agrees has been historically disinvested from!" we argued. But no. The big applause line of that from the homeowners' side was, "But if this project succeeds, our taxes will go up! Many of us are on fixed incomes. We don't want this!"
Zooming out, the idea of local control and granting homeowner's veto to projects benefiting the entire area was such a mistake.
The basic formula for any given property: *tax* = *base* x *rate*.
The glaring difference between Florida and California is that Florida *limits* the annual increase in the base value of the property; the limit is the lesser of 3% or the CPI rate (for a primary residence) and 10% (for all other property).
California *bans* increases in the base value for as long as the homeowner or their heirs still own the property.
Put a different way, Florida homeowners face a somewhat reduced downside if their property value is artificially inflated by limits on development, etc.; California homeowners don't face any downside whatsoever.
Absolutely right. Prop 13 destroyed California in many ways, a self serving gift from the so-called "Greatest Generation" and a product of Nixon and Reagan Californian conservatism (yeah, folks may forget SoCal was a bastion of the right at one time). And it remains a third rail for politicians in the state. Yet, as we approach its 50th anniversary, it's time for some brave politicos to admit that it has been counterproductive and run on change.
I love this! Prop 13 let's CA homeowners believe that worsening housing affordability and availability is not their problem. Property taxes make it their problem. Same is true in CAs insurance market. Capping insurance increases makes homeowners think climate change is not their problem, when it is truly everyone's problem.
Great connection to the insurance market. Many homeowners don’t understand that capping insurance rates below what reflects actuary-calculated risk, disincentives insurance companies underwriting and strains the FAIR plan. Just like a breaking point will come with the home insurance market in California, so will one with the housing market.
Great post! Prop 13 as a direct disincentive to new housing has never felt right for me, although I guess you could argue that because it limits the growth in property tax revenues that cities would be a little leery of it.
I agree that you need to give homeowners a stake in housing affordability, but I think you can do that and those homeowners still do the wrong thing, like vote for prop 13 for example.
In the end I think planners and government think of things (however mistakenly) in fiscal terms while voters operate emotionally. No NIMBY is going to change their tune because they read even a convincing analysis showing upzoning will raise their property values. At some point you have to fight in and win the culture war.
After reading this, I’m worried now that impact fees will never go away. If that’s the last thing that will save the general fund, LA is never going to reduce those fees.
henry george's land value tax should really be part of these discussions.
a property tax is better than no property tax, insofar as it mimics a land value tax. but why do we put a fee on constructing highly valuable structures vs the being a slumlord or a parking lot lord?
the 100 city states is super fascinating. i think sortition government could allow us to move in this direction with much more local control, but not with the kind of local politics that now exist (read: dominated by landowning, wealthy, retired, busybodies). a sortition-formed civic assembly could allow the young, the working, the unemployed, along with the old, the retired, the landowning, to all be heard together.
This exploration of Prop 13 from a political economy point of view is so needed. I think it should also be noted that the tax dynamic is preventing intrastate migration and limiting economic growth that could arise. Also, I believe it contributes to retirees moving out of state, since they reap the difference in the sold California price and the price of the bought out of state new property, rather than buying another expensive California property that will now have a higher tax than what they were used to. This may have its benefits, though, as older individuals can rival kids as the “ultimate fiscal nuisance” (I enjoyed that line too much).
California cities impose impact fees because their property tax revenue is insufficient, being determined by an allocation formula that locks in the 1978 funding levels. You missed the important fact that Prop13 disconnected local revenue from local agencies. Prop13 did five things, not just setting rates. Local governments are effectively precluded from raising almost any kind of tax - impact fees are the only sources that remain.
That allocation formula was cooked up by Jerry Brown with the help of Arthur Laffer, he of the bullshit “curve”, and godson of Justin Dart, who funded Reagan.
This is something that I've thought for a while: Prop 13 results in California homeowners having unlimited upside from artificially inflated property values (their asset appreciates), and no downside (they'll never pay more in property taxes).
"Privatized profits, socialized losses" will cause problems anywhere you find it.
I always assumed the causal method of prop 13 → Minimal redevelopment was much simpler:
Individual homeowners who are not leaving the state and have lived there during widespread appreciation have a huge incentive to stay in the same home: the cheap property taxes they lose if they are to move.
Take for example someone who owns a $2.2 million dollar single family home next to a transit station. They pay $2k per year in property tax, while neighbors across the street pay $22k per year. Selling their home and buying the home across the street costs them $20k per year, even if there are zero real estate transaction costs and the prices of the two homes are the same. It follows that this $20k/year reduced living expenses has value to them, and they will not sell for less than an additional amount (let’s say an additional $500k, though it could be easily another $1M for someone in a high tax bracket) over market price as a single family home.
This raises the implicit price of land (especially when trying to amass multiple parcels) by an increasing amount as long as the average tenure of homeowners gets longer. That in turn raises rents necessary for new redevelopment to happen. Ergo, less redevelopment because of land availability being lower than peer states, not because of some large difference in land policy allowing more redevelopment elsewhere.
This causal hypothesis also conveniently explains longer commutes and higher VMT: when switching jobs, homeowners do not want to move because of the additional ‘forfeited prop 13 benefits’ when they sell one home and buy another.
Would love to see some data on whether changes in land policy are actually more common in peer states versus California, or if the land cost for redevelopment projects is a bigger factor.
Well said. The challenge is that every city manager and financial planner I talk to still believes new housing doesn’t pay for itself. The people running local governments largely haven’t updated their opinions about the fiscal impact of new development in decades. Changing the institutions will take time
Also little known that Prop 13 actually took multiple decades and over a dozen efforts to pass https://jeremyl.substack.com/p/direct-democracy-is-undemocratic
Well-put. I agree that the real operating mechanism of Prop 13 is that CA homeowners become insulated from the pain of out-of-control home price growth. (Wonder if there's a category of yearly or monthly expenses like prop tax -- e.g., car insurance -- that feel to consumers like they should be constant, such that any increase prompts an outsized reaction.)
But I'd like to offer up one small anecdote to show how this dynamic can also stymie new home construction.
My family was in the business of mixed-use development in Texas (buying distressed properties like abandoned factories in CBD-adjacent warehouse districts and redeveloping them into downtown apartments plus commercial space). I'll never forget attending a local homeowner meeting one evening, as we were presenting a project update along with city officials, and concerned homeowners kept objecting to the idea of redeveloping this abandoned factory in the first place. "But this is such as 'win' - bringing jobs and new apartments to this part of the city, that everyone agrees has been historically disinvested from!" we argued. But no. The big applause line of that from the homeowners' side was, "But if this project succeeds, our taxes will go up! Many of us are on fixed incomes. We don't want this!"
Zooming out, the idea of local control and granting homeowner's veto to projects benefiting the entire area was such a mistake.
Property taxes rates are high in the Northeast, and property values are high too.
Property taxes are low Florida and subject to a 3% annual cap, but this hasn't stopped Florida from building lots and keeping prices down.
I won't say there is nothing to the story, but I think property taxes are probably a sidebar to building incentives.
The basic formula for any given property: *tax* = *base* x *rate*.
The glaring difference between Florida and California is that Florida *limits* the annual increase in the base value of the property; the limit is the lesser of 3% or the CPI rate (for a primary residence) and 10% (for all other property).
California *bans* increases in the base value for as long as the homeowner or their heirs still own the property.
Put a different way, Florida homeowners face a somewhat reduced downside if their property value is artificially inflated by limits on development, etc.; California homeowners don't face any downside whatsoever.
Prop 13 restricts annual property tax increases to a maximum of 2% of the assessed value. Which isn't that different.
Anyway, property taxes are ridiculously high throughout the northeast and it hasn't made housing there more affordable.
Absolutely right. Prop 13 destroyed California in many ways, a self serving gift from the so-called "Greatest Generation" and a product of Nixon and Reagan Californian conservatism (yeah, folks may forget SoCal was a bastion of the right at one time). And it remains a third rail for politicians in the state. Yet, as we approach its 50th anniversary, it's time for some brave politicos to admit that it has been counterproductive and run on change.
I love this! Prop 13 let's CA homeowners believe that worsening housing affordability and availability is not their problem. Property taxes make it their problem. Same is true in CAs insurance market. Capping insurance increases makes homeowners think climate change is not their problem, when it is truly everyone's problem.
Great connection to the insurance market. Many homeowners don’t understand that capping insurance rates below what reflects actuary-calculated risk, disincentives insurance companies underwriting and strains the FAIR plan. Just like a breaking point will come with the home insurance market in California, so will one with the housing market.
Great post! Prop 13 as a direct disincentive to new housing has never felt right for me, although I guess you could argue that because it limits the growth in property tax revenues that cities would be a little leery of it.
I agree that you need to give homeowners a stake in housing affordability, but I think you can do that and those homeowners still do the wrong thing, like vote for prop 13 for example.
In the end I think planners and government think of things (however mistakenly) in fiscal terms while voters operate emotionally. No NIMBY is going to change their tune because they read even a convincing analysis showing upzoning will raise their property values. At some point you have to fight in and win the culture war.
After reading this, I’m worried now that impact fees will never go away. If that’s the last thing that will save the general fund, LA is never going to reduce those fees.
Great article, Nolan! I have been telling people this for years, now I can just permalink them here.
Oof that artist rendition tho 😅
henry george's land value tax should really be part of these discussions.
a property tax is better than no property tax, insofar as it mimics a land value tax. but why do we put a fee on constructing highly valuable structures vs the being a slumlord or a parking lot lord?
the 100 city states is super fascinating. i think sortition government could allow us to move in this direction with much more local control, but not with the kind of local politics that now exist (read: dominated by landowning, wealthy, retired, busybodies). a sortition-formed civic assembly could allow the young, the working, the unemployed, along with the old, the retired, the landowning, to all be heard together.
I Had No Idea It Could Be So Expensive Not To Build or Accomplish Anything https://torrancestephensphd.substack.com/p/i-had-no-idea-it-could-be-so-expensive
This exploration of Prop 13 from a political economy point of view is so needed. I think it should also be noted that the tax dynamic is preventing intrastate migration and limiting economic growth that could arise. Also, I believe it contributes to retirees moving out of state, since they reap the difference in the sold California price and the price of the bought out of state new property, rather than buying another expensive California property that will now have a higher tax than what they were used to. This may have its benefits, though, as older individuals can rival kids as the “ultimate fiscal nuisance” (I enjoyed that line too much).
California cities impose impact fees because their property tax revenue is insufficient, being determined by an allocation formula that locks in the 1978 funding levels. You missed the important fact that Prop13 disconnected local revenue from local agencies. Prop13 did five things, not just setting rates. Local governments are effectively precluded from raising almost any kind of tax - impact fees are the only sources that remain.
That allocation formula was cooked up by Jerry Brown with the help of Arthur Laffer, he of the bullshit “curve”, and godson of Justin Dart, who funded Reagan.
This is something that I've thought for a while: Prop 13 results in California homeowners having unlimited upside from artificially inflated property values (their asset appreciates), and no downside (they'll never pay more in property taxes).
"Privatized profits, socialized losses" will cause problems anywhere you find it.
What a great blog post. I've wondered forever how exactly Prop 13 is screwing Los Angeles.