patrick.net

Everyone is getting hung up on the absolute numbers from the URL I posted. It's not about the absolute numbers, but about the difference between relative comparisons that matters. The numbers are very low because they are measuring burden, not rate. Burden is the amount one pays in taxes from which they do not themselves benefit. It is a proxy for gov't efficiency, in a way. A state can have a very low absolute tax rate but a very high tax burden. The point of the study was to show that high absolute tax states usually (but not always) also have a high level of services thus lowering the tax burden to the typical tax payer.

I am categorically against all forms of income, property, and transfer taxation. But, I also think that the state-to-state comparisons that people throw out require a bit of objective analysis. It's not so straight forward as comparing rates.

To me the biggest problem with California's tax system is it's income tax. It seems to me that just about everyone I know pays a minumum of 1/3rd their annual pay to income taxes. This is huge. On the other hand, as mentioned by many others, people who've been living in the same house for 20 years pay 10 times less in taxes than their neighbors. I too believe that income tax needs to be flexibly adjusted per house every 2-3 years of appraisal. This will cause a number of obvious problems to be fixed. For one, it will reverse the status quo of hoping for the highest value possible. The higher the value, the higher the taxes. Less value equals more affordability.
In states like TX, they took this step one further by mandating a 3% tax on all real estate. This alone assures that their RE stays below a certain level. As you can see, only the immediate epicenter of every TX city has somewhat higher prices. TN has no income tax either, but this is made up with a fairly high consumer goods tax on everything. I like this system too because at least you have a choice on what you can pay taxes on since only the goods you voluntarily buy are the items you will be taxed on. On the other hand, people there complain about the lack of public funds, even though the school system is actually better there than in California.
Lastly, I highly doubt that any changes will be made to proposition 13 as long as the percentage of ownership is still in the owner's favor. Right now it is 59%, which while still the lowest in the country still gives the owners majority rule. This may change in the next few years.

Oh... by the way.. I couldn't resist. This weekend I was taking a break and eating lunch in front of the TV. It was Saturday afternoon when nothing worth watching is on. There was this 30 minute infomercial. The stars of the show were 2 twin brother midgets. They were both spouting on and on about the wonders of being able to gain financial independence via real estate investment. At first I thought that perhaps this was a publicity stunt and that someone had hired midgets to put on this act. But the longer I watched, the more I realized that they were the founders of this $10 class. As the show went on, here comes a whole slew of "sucessful" couples who had stories to tell. One couple had bought a house from an old lady who was moving into a retirement community( pretty sad) and flipped it 2 weeks later for a handsome 30K profit. Another couple bought a home for 65k, sold it for 100k 6 weeks later. One gal was a former bank teller, and as she put it- " had no professional experience whatsoevr" yet made around 45k on her "investment". Over and over, the hosts explained that RE was stable, easy, and required no license or experience. It was simply a matter of buying homes from the right people. " Think about it- one of them said." There are probably all kinds of people in your neighborhood that want to sell their house. Retirees who want a smaller home, foreclosures, old rentals, etc etc." It was as if there were simply houses just laying around with people eager to sell them to you so you could make some slick, easy cash.
The hosts were geniuses because hey- they're midgets and naturally people are curious about them. So when they talk about flipping houses, naturally people are want to listen. I almost peed in my pants watching this thing.

whoops- I meant property taxes need to be adjusted every 2-3 years in my statement in the tax reply above.

SFwoman,
how did that bode for your parents?

SFwoman,
I wouldn't have imagined they did. That said, it doesn't seem real fair to tax people that invest on their own accord. There are many incentives to starting up your own business, which in some ways is similiar to making investments as they both are geared towards financial independence.
I can recall one extreme case of taxation with a friend I had years ago in college. His father made so much money that it was cheaper to simply give each of his kids a 120k allowance a year rather than pay the taxes on it. His kids were basically used as tools to unload cash gifts to lower his taxes slightly. When his son got married, he bought them a large brownstone house in the smack middle of Brooklyn. Amazing, but I suppose if one makes enormous amounts of money, there are ways to avoid some taxes.

WWII,

Now I must admit I haven't seen this "infomercial" and while I don't have any thing against midgets, this just sounds crazy! I've always referred to this as the "Low Hanging Fruit" pitch. It's just there for the taking. "Low hanging fruit" is available 24/7 on cable TV.

WWII,

I wouldn't characterize your friend as "basically used as tools to unload cash gifts", the father would always receive more with taxed income than zero income by giving the money away as gifts and donations. However, he derives increased enjoyment from giving them money compared to keeping the paltry $120Ks to himself.

It is good tax planning to fund lifetime gifts and funnel income via dummy corporations (though the latter is technically illegal).

The problem with the scheme is that it often breeds lazy kids because they know they have an expectancy. On the other hand, some kids actually go out and take risky but more interesting career paths because they have a fall back cushion. I guess it all depends.

DinOR,

We had the low hanging fruit branches for the last five years. We "smart ones" just thought branches held down so far below their normal state would snap at any second and kill us.

Dinor,
I'll admit that at first I was like " ha ha- look at the midgets"- in a most politically incorrect manner. But indeed as a person that works in advertising, sometimes all you need is a shtick to lure people in. These guys knew their business, knew their clients, and most importantly knew that due to the fact that they were indeed midgets, it would jar people just enough to actually watch for a minute. I know that if I were a midget, giant, guy with 3 arms, or something like that, I'd go into business at the drop of a hat. Anything to get people to listen long enough to get the message is all you need.
Otherwise, I found the people being interviewed in the ad as the biggest sources of entertainement. I remember one couple sitting in front of this huge painting of the midget brothers in the background. It was totally weird. I fully expected fire-breathing clowns to come bursting out of nowhere at any moment. Maybe we should make a show. We could have monkeys selling flipper houses with crazy Bill, the ringleader as the host.

Astrid,
I haven't been in touch with him in years, but he seemed like an all around normal guy. He drove an old Ford Taurus and didn't do anything crazy, like fill swimming pools with caviar or anything. Just a plain joe like you and me. That said, I'd probably be ok "accepting" 120k a year, even if I was set on a hardcore career.

astrid,

So true. One only needs to rummage through the daily articles posted here and elsewhere to get a sense of the growing desperation on the part of sellers. It seems to me that the indignant rantings we get from realtors (and very recent buyers) is being somewhat scoffed at by the sellers that have already "gotten with the program". For those that have already listed, (reduced asking price) then re-listed w/ new agent (and reduced asking a 3rd, 4th or 5th time) they have dispensed with the "facade" of this being a "sellers market". For them this is no longer about having delusions of quick and easy money. They are now doing the damage control so they can bail and possibly salvage their credit rating and FICO scores. What is shattering all hope of a soft landing (let alone a Spring rally) is the busting at the seams inventory. It just keeps growing by the day.

I believe that as "George's Summer of IT" unfolds for many sellers this will distill down to saving one's own "primary residence". If your 2nd, 3rd or vacation home goes back to the lender, well whatever. The term we'll probably hear from Mr. Homedebtor-Specuvestor will be, "We just weren't at a point in our lives where we could really take advantage of it". "We got rid of it".

You, ahem, got rid of it? "Yeah, we got rid of it" (now glaring and quite clearly annoyed, as in I don't want to talk about it anymore).

People. We can not let this "slide". Let's all make a pact here and now not to let anyone "slide" on this O.K? Depending on the friend, co-worker or relative I'll let you decide the best course of action here. You might decide to peck away at them little by little but always leave them with nagging thought that you are NOT satisfied with their answer! You may (and be careful here) elect to "go after" them! "Come on! You lost it to the bank didn't you!?" or any degree in between. You can make it fun and interesting by playing on their fears that they'll be exposed alternating between varying degrees in your "investigation". If your spouse is there you can play good cop/bad cop! Better yet, allow them to believe that you are finally satisfied that they did indeed "make a killing" by getting out early (early would have been SOLD in 2005, not bought in 05). Let them savor this minor victory, this sense of relief. Later during the day you casually ask them if they've ever heard of Zillow? Man this is going to be GOOD!

Dinor,
The one thing I've noticed in my hood, other than the obvious slowdown is that pending signs stay up quite a bit longer. Then if the pending sticker comes off at all, the whole sign goes down. Thus it isn't very clear if it sold, or if the buyer defaulted and the seller took it down. I've seen this occur as well with a seller later putting up a sign with a diffrent realtor.
I think what annoys me more than anything is the mystery shrouded in some of the "sold" homes up and down my street from the last year. There's probably 6 of these and all of them have closed curtains and the occasional car in the driveway. Sometimes a light is left on. The obvious notion is that they are flipper houses, but then again I can't tell. I know that 2 of the houses I suspected as being so were very swiftly painted and slapped up for sale. The most recent was the 11 oclock at night tile cutting house across from mine. I saw them spray-painting the back door with a rattle can. It's now for sale.

SFWoman,

I would like to see a consumption tax on non-essential items (and yes, soda, cigarettes, BMWs and beer are non-essential). Ostensibly the very poor ‘can’t afford’ that many non-essentials, so the tax wouldn’t be very regressive.

I agree with a consumption tax (as I outlined the basics of earlier in this thread). You should know, however, that taxes on things like cigarettes are extremely regressive. Socioeconomic level is one of the best predictors of smoking rates.

For such taxes to be non-regressive, cig tax in this case, they would have to be ideally matched to costs. This is not practical and prohibitively costly to administer. That is, to be non-regressive the state would need to only tax an amount necessary to cover societal costs directly attributable to smoking; using overruns and funding under-runs purely out of the same tax revenue pool.

Then, there are the ethical/sociological/philosophical questions about who is really responsible for the inverse correlation between economic well being and smoking rates.

Other highly regressive taxes include Lotteries, alcohol taxes (which exempt or treat differently wines--the drug of choice for higher socioecon classes), cost-basis property taxes (like 13), junk-food taxes, fast-food taxes, big-box store "impact" taxes and fees, ...

My views are strongly on the personal responsibility and determination side, so I see no ethical dilemma with taxing regressively in cases where the regression is unintended or unwanted. But, people have stubborn behavior and I also don't pretend that even draconian regressive consumption taxation will change those behaviors. In fact, with enough taxes, the behavior simply goes into the underground economy altogether. We're seeing this already with cigs in many parts of the country.

WWII,

I am totally with you on this one! I'll just have to call them "Question Mark Homes". Back in the day (pre-bubble) homes were either *owner-occupied* , vacant, repo'd or whatever. You could tell they were repo's b/c they had all the tell tale signs of being neglected. When I was a kid usually it was b/c the "old man" died, divorce etc.

NOW, the lines are so blurred it's almost impossible to tell? Young couple, two, one or no kids. Perfectly healthy, both still gainfully employed. Little by little we see "the signs". They look almost exactly like every other home on the block, but it's these sublte things. Things that are hard to put your finger on. Things I'm sure as they plunk yet another "For Sale" sign down they hope and pray no one else notices.

1. Little or no participation in "holidays" or change of season type events. No Christmas lights go up, no corn stalks and indian corn in the fall. No more colorful banners in the spring and summer. The honeymoon seems to be over.

2. Lawn upkeep seems to be done "quick and dirty". Pride in ownership seems to be falling by the wayside. You know it's bad when you see the same weeds week after week.

3. Garage door is now always closed.

4. Newspapers and junk mail piles up and the place has that "on vacation" look ALL THE TIME!

5. No new "projects" being started, old ones left incomplete or hastily "finished".

6. No one is ever outside.

Next thing you know these people (and their toys) are gone without so much as saying a word. New owners don't seem to know if it was a repo or not. Then we start the process all over again. Weird huh?

Anything anyone else can add to the "Question Mark House"?

John Haverty, Randy H,

Some time back we tried to get the "Total Tax" on the ballot here in Oregon. The authors found in their research that many agencies were only about 35% efficient. Meaning that 65 cents on every dollar collected by that agency was used by that agency to keep same said agency running. The concept of the "total tax" was to simply do away with most if not all taxing bodies within the state. The Oregon Liquor Control Commission for one, along with county tax assessors and the like. With just a 1% total tax on all goods and services we would have been able to easily meet the needs of the state and attract new businesses. Because the largest employer in the State of Oregon IS the State of Oregon it had virtually no chance of passing. Another good idea dies on the vine.

The question mark house syndrome is kind of depressing to me because it's like there's a bunch of zombies living in the neighborhood. It gives you the feeling that you're not going to be able to say hey to anyone new or see any new kids or families moving in. My biggest flipper alarm is the lack of moving trucks that accomodate the new owners. I've yet to see a moving truck at ANY of the homes that sold this year. I see tons of people moving out though. The saddest thing is the house down the street that is ALWAYS OPEN. kids running in and out of it, a plethora of signs such as "HOME OPEN", PRICE REDUCED" "PRICE JUST REDUCED" little slips of paper with the same house on it on the sidewalk. The house down the street from us with broken windows- pending for now over 6 weeks.

Has Prop 13 even been challenged in the courts? If not, can it be? Does anyone know?

WWII,

Wow! That's a big one isn't it? Not ONE moving van? That IS weird! I realize that much of this sounds pretty intrusive but until homes have reader boards that say 30, 60, 90 days late, Notice of Default etc. on them we are kind of left to our own detective work. What's a little alarming to me is that folks these days don't seem to take the pains they once did to conceal their state of affairs. Back in the day my mother would make my brother and I cut widow's lawns for free (or very cheap) and my old man would repair screen doors and the like just so they could keep up appearances and hopefully get the place sold. It usually wasn't so bad b/c the other neighbors would throw in a few extra bucks b/c we were "good kids!" If only they knew.

What's to prevent individuals from transfering their houses to their own corporations (which they own 100% stake in) and then renting it back from the corp for a nominal rate. When time comes to sell the house, sell the corporation instead and pass along the reduced tax rate to the new owner (with a hefty markup for the privilage).

If this became popular enough, it might generate enough outrage to rip Prop 13 from the books.

Oh! Pffft. Dumb.

How about the 10,000 plus homeowners in Orange County that still haven't paid the 2005 property taxes! I know there was someone that was tracking that. Owneroccupier? Was that you? I guess debating taxes and actually paying them are two different things. I suppose I'll be putting the 10,000 in the "taxes are too high column".

FRIFY,

If you did that, the benefit you receive (in discounted rent, discounted taxes, etc.) could and would be taxable as income. It also probably pierces the corporate indemnity shield, putting your personal assets at full risk of any corporate liabilities.

There are also lots of accounting and tax rules about how companies own property, derive income from property, etc.

Finally, if your company only owned one property--your home--and simply rented that back to you, you'd get slapped down by a judge for tax evasion since there is no reasonably justifiable business purpose to the scheme. You can't create a corporate structure for the sole purpose of avoiding taxes; there must be at least some reasonable business justification.

New thread: Orb of influence

Since I started this thread, I guess I should comment on it.

I basically agree with Joe Schmoe that we have done a bad job planning for future growth. Overcrowded schools, traffic jammed freeways, bad roads, water shortages, are all a symptom of us not spending the money on taking care of our basic infrastructure. While there is always room for improvement, neither California's state nor local governments seem especially corrupt to me. So we just need to raise the money to fund the new highways, mass transit systems, schools and repairs to keep things moving.

According to Schmoe's own link, we are taxed at the 15th highest overall state rate. I had a link in an earlier thread that has us as the 21st highest. In any case, we are not especially high. Our federal rate is higher, because of higher incomes, but there isn't a lot we can do about that, without changing the federal code.

I think there is an increasing awareness amongst Californians that we are just going to have to bite the bullet and spend more money on some of the public sphere. There is going to be a $37B bond on the ballot in November, that is supported by both Schwarzenegger and the Democrats in the legislature.

http://www.knowledgeplex.org/news/166238.html

My guess is that it is going to pass.

I just wish there was a high speed bullet train from LA to San Francisco in there. I guess the airlines are not as down and out politically as I had hoped. It is kind of an embarassment that Europe, Japan and South Korea have high speed bullet trains, but the US does not.

My biggest concern for California is that out of all the states I have lived in, I've never lived in one that bad-mouthes itself as much as this one does. I'm one of them, and have the overall expense as my one major beef to chew. But it seems that people here seem to be on a constant state of self defense. Everyone is out there to make sure they get as much as they can, whenever they can right away before anyone else.
California's biggest problem isn't the taxes, the schools, or real estate. Their problem is population. It has the most people even given the size, and few if any kinds of legislation that takes this into account. The result is pressures on the system that nobody ever accounted for. There are only 2 solutions: enact new legislation that more evenly distributes the expense, which will NEVER happen, or the state will simply lose a lot of it's population to other states as the backpressure builds.

While there is always room for improvement, neither California’s state nor local governments seem especially corrupt to me.

Jimbo, three words: Belmont Learning Center.

Google it and weep. While I doubt even the LAUSD approaches the monumental levels of corruption we read about in historic accounts of Tammany Hall & gangster-era Chicago, it ain't pretty.

WW2,

California’s biggest problem isn’t the taxes, the schools, or real estate. Their problem is population. It has the most people even given the size, and few if any kinds of legislation that takes this into account. The result is pressures on the system that nobody ever accounted.

Yes and no. IMHO, what's really killing affordability and overwhelming infrastructure here (Fed/GSE induced credit bubble ignored for the sake of argument) is the rate of population growth, and the fact that most immigrants are poor, undecated laborers from third world countries. Japan and Europe's population density is higher even than CA's and yet they don't have anywhere near the same problems associated with rapid population growth we do (France, with it's large unassimilated Arab population being the notable exception).

About 20 years ago the Cato Institute took a typical couple and added up ALL the taxes they pay and it was way over 50% of their income.

Sorry, just don't believe it. I don't think anyone pays 50% of their income in taxes.

Let's look at a single guy making $1M/yr in salary. He is probably going to be in the highest overall tax bracket possible. He pays $5850 in Social Security taxes. He pays $93k in state tax and gets a deduction for that from his federal taxes. Let's say he somehow owns a $5M house with no mortgage, which he then pays $50k in property tax on. So he then pays 33% of the rest, which is 282k. That adds up to 425k. I guess if he spent every single cent and invested none of it and paid 8% sales tax on it, that adds 46k, which puts him at 471k or 47%.

And the average Joe? Not even close... Here are Federal overall tax burdens as calculated by the CBO:

http://tinyurl.com/28nh9

Middle quintile is 15% overall Federal burden and this includes Social Security for both the taxpayer and his employer. Add 9.3% state and 8.5% sales and you are at 35%.

I know the marginal rate exceeds 50% sometimes, especially where AMT starts to kick in, but that is a different story.

The Cato Institute here calculated that the average taxpayer pays 38% overall:

http://www.cato.org/pubs/pas/pa-302.html

Belmont Learning Center seems more like an example of government incompetence than corruption, but perhaps there is more to this story that I am unaware of.

Actually, in the link Randy posted, we are something like the 9th state in total tax burden. (my link was for property tax burden only) If you go by those numbers, it means that 80% of the states have lower total tax burdens than we do.

Yes, 9th is total tax burden (including federal taxes) and 15th in state tax burden.

http://www.taxfoundation.org/taxdata/show/443.html

California sends quite a bit more to the Federal government than we get back and has been doing so for a while. I don't know what to do about that, other than overthrow the government 0:-)

Actually, it was not as bad during the Clinton years and presumably a Nancy Pelosi Speaker of the House would take care of her home district.

http://www.ppic.org/content/pubs/jtf/JTF_TaxBurdenJTF.pdf

"California's burden as state and local taxes, fees and other charges ranked twenty-second in the nation"

Sorry, this is just not enough. All of the other urban, densely settled states are at a higher rate.

I see a more likely resolution is to have a drop dead date for Prop 13. They can fix the rate at purchase until a certain date and then go to float rate. RE prices will drop significantly after the drop dead date and eventually things will even out. The trick is to do the right slight of hand and fool the home owning masses.

For anybody interested in the constitutionality of Prop 13, a case against it went all the way to the Supreme Court and lost. It DOES NOT violate the 14th Amendment according to the decision handed down. "The court ruled that an acquisition-value system does not violate the Equal Protection Clause of the U.S. Constitution because it "rationally" furthers a legitimate state interest. " from http://www.hjta.org/content/ARC000024C_Prop13.htm

Personally, I hate Prop 13, but at least the Santa Clara County Assessor will lower my property taxes as my equity tanks to match the "real" value of my $850K piece of CA. :-|

Personally, I hate Prop 13, but at least the Santa Clara County Assessor will lower my property taxes as my equity tanks to match the “real” value of my $850K piece of CA.

I wouldn't count on that, it isn't automatic and they will be in real hurry to do so. In my opinion, it isn't going to happen. Just as your neighbors house that is now worth 900K, didn't get their taxes raised from the 70K they paid for it. To have one you have to have the other. Why exactly do you think the assessor will lower your taxes to match the "new" value, they didn't raise them to match the new value did they? I am totally fine with prop 13 provided the McDebtors have their property taxes raised each time they refi.

randyh:
I agree with a consumption tax (as I outlined the basics of earlier in this thread). You should know, however, that taxes on things like cigarettes are extremely regressive. Socioeconomic level is one of the best predictors of smoking rates.

yes, correct. and so are consumption taxes, cos they're a 'flat tax' on consumption, rather than a progressive tax such as income tax as it's levied in most countries. however, you often find that when consumption taxes are brought in they end up being waived on 'necessities' such as uncooked or unprepared groceries, razors, sanitation items, health products, etc to give people at the bottom a break with subsistence needs... this is effectively 'unflattening' the tax or making it progressive, i.e. a 2-tier system of 'all' or 'none'.

gambling, drinking and smoking are vices disproportionately engaged in by low SES all taxed pretty heavily ;) altho moet et chandon is not cheap...

there seems to be an uneasy truce between so-called 'direct and indirect' taxes and 'progressive and flat' tax aproaches in most modern industrialised countries, with some mixture of all... plucking the goose to obtain the most feathers with the least squawking... good post tho...

For such taxes to be non-regressive, cig tax in this case, they would have to be ideally matched to costs. This is not practical and prohibitively costly to administer. That is, to be non-regressive the state would need to only tax an amount necessary to cover societal costs directly attributable to smoking; using overruns and funding under-runs purely out of the same tax revenue pool.

Other highly regressive taxes include Lotteries, alcohol taxes (which exempt or treat differently wines–the drug of choice for higher socioecon classes), cost-basis property taxes (like 13), junk-food taxes, fast-food taxes, big-box store “impact” taxes and fees, …

A consumption tax extracts taxes from each person in proportion to the affluence of the lifestyle they enjoy. Last time I checked, the rich were buying and consuming far more than the poor. So how is it that a consumption tax is regressive?

BTW, while a consumption tax would be better for the economy (encourages savings and investment), a change to such a tax would be worse for anyone who has been saving money for the future. They have already been taxed on that money as income, and would then be taxed again when the money is spent.

The good feature in Prop 13 was putting a cap on the tax rate. Government spending was ballooning out of control and people were literally being taxed out of their homes at the time that prop 13 was passed. It put an end to those unbridled tax increases.

The bad feature was putting a cap on the assessed value. This cap on value (subject to 2% inflation) is what has long-time owners paying ridiculously low taxes compared to new owners. This is not equitable, and it leaves local governments underfunded.

Like many extreme problems, this one was overcorrected by prop 13.

It should be noted that prior to prop 13 the taxes were also not equitably distributed as well. This was because the assessment process was a combination of random assessments and rotational assements. Your home could get reassessed while your neighbors stayed at a lower assessment. So uneven taxation existed in the pre-prop 13 world.

To be equitable, assessments should be done on all homes in the same year, so that everyone is assessed under the same market conditions and relative value levels. Many communities do it precisely this way.

Surfer-X:

I am pretty sure that Larry Stone will lower the property tax as the value declines. Check out this article from 2003: http://tinyurl.com/fzc9x

Property values dropped a few years ago and it was hardly noticed. I was just like most of you renters for over 13 years here in BA. My income finally rose to the point where I could afford a traditional 30-yr fixed with 10% down. I'm in it for the long haul. It is not without risk, but I got what I wanted and I'm not hurting. This whole blog just shows me that there is still plenty of pent up demand in RE. You have to accept that our parents struggled to buy a house. It isn't easy. The current market is out of control, but it won't go down as much as many here hope.

very nice blog.

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