Tax Revolt! California’s Proposition 13
Frank Murphy — September 23, 2010
I wanted to follow up on a point Ron made in a comment on the post How Much Freight Can Average Taxpayer Pay. He issued the challenge: “Perhaps we could begin with some suggestions about specifically which budget items might be cut.”
It occurred to me that the greater challenge might be to identify where best to spend, what areas are underfunded — hidden false economies like neglected maintenance that will bite us down the road.
Those interested in municipal taxation issues will want to look at California’s experience after its tax-revolt Proposition 13 that rolled back property taxes, capped them at 1 percent of purchase price, and limited yearly increases to 2 percent. Basing municipal taxation on property market value assessments has all kinds of problems but a lot of people think that Proposition 13 resulted in the disaster that is current California with entire counties declaring bankruptcy.
Here’s an interesting discussion on KPBS public radio San Diego.
A bit that stood out: best funded schools in the US: New Jersey. worst funded schools in the US: California. Highest municipal taxes: New Jersey. Lowest municipal taxes: California.
It might help to clarify if the topic for discussion here is along tax revolt lines or a discussion about the City’s spending decisions — right, wrong and neutral — and how it raises its funds.
If the discussion included property based market value assessments I think it would be interesting to look at alternatives. I might have more or less house than the next guy and I might use more or less costly City infrastructure but my share of paying for it all is based on the value of my property… inherent inequities there don’t you think? The California revolt if I understand it right was opposition to citizens tax levels rising dramatically simply because they had stayed in the same house for decades and had no desire to move. The value on paper of their property was penalizing them and even driving people out of their homes because they couldn’t afford the property taxes. Windfall on the property sure but they’d have to leave that market as well, wouldn’t they — or become renters I suppose.
Also, belonging in the discussion at some point is the provincial government program allowing home owners to defer property taxes. The 55+ program has been in place for a number of years but this year they introduced a new one which I thought was kind of innovative. Families with children 18 or under now qualify. The tax owing is cumulative but at a very low interest rate. It’s repaid by the estate or when the house is sold.
Frank makes some good points. It would be foolish to throw the baby out with the bathwater, but is it unreasonable to start throwing out the bathwater until only the baby is left? I have previously suggested that it is time to implement a serious try at a zero based budget once every five to ten years to get at just this point.
And it may be true that we need to spend more in some areas, but before we spend these areas need to be clearly identified. It appears that we are starting on infrastructure as the basis for property tax increases that have been running at 3+ times the increase in the CLI. Where are the tables showing what needs to be done where? And how much should come from general taxation and how much from local improvement charges? Show us the money.
Like the reverse mortgage, which at least appears to be privately funded, property tax deferment can be a lifesaver, especially for those ancient of days. I have a problem with what will happen to those with children 18 and under when those children are over 18 and the taxman cometh. I also have to wonder how good a deal this is for us older folks. Are those deferments actually subsidized? Someone has to pay the annual bills. If it is not the homeowner, then who? As Frank has said this is a topic worthy of discussion. Have we, in typical fashion, just kicked the can down the road? If the taxes are subsidized maybe all us oldsters in Nanaimo, and there are getting to be more and more of us, should sign up. I know many who have, thinking that they are getting something for nothing. Am I crazy for paying now?
Lest anyone think that my rhetorical question: “Show us the money.” is directed at Frank, I am, of course, asking that the city be forthcoming with the information needed to prepare such plans.
Understood Ron, that you were challenging the decision makers at City Hall to “show us the money”. I mention Prop 13 and the provincial government’s Property Tax Deferral Program because I think they just have a place in the discussion not because I’m a proponent of either.
What relevance do they have to the discussion? I’m not sure. I’m a lousy booster and I suffer from the ability to see several sides of the same argument.
I had hoped that we could expand the discussion of municipal taxation from our extensive and I think at this point well-documented list of injustices to something with more breadth and depth: how cities are governed and by what methods do they tax citizens; how are decisions made by municipalities on spending priorities and spending restraint.
In this morning’s news the provincial government and TransLink representing Lower Mainland Mayors announced a sketchy memo of understanding that inched forward the ongoing battle over who will pay for transit infrastructure in Vancouver. The burden will fall to the resident: property owner and renter if they don’t find forceful and effective ways to oppose it. Municipal politicians know this and well they might. The municipal tax payer is cranky and for good reason.
And Summerland citizens have had a successful petition drive to force the local council to take a proposed $3 million RCMP station to referendum.
Good for them. Both of these are specific-issue-based and allow for a focus and that can have dramatic political expression — like the anti-annexation petition here and the province wide HST revolt. That they may be more expressions of discontent with the methods and arrogant out-of-touch attitudes of the governments involved than the merits of the issues involved is another matter.
On the issue of the Property Tax Deferral Program — my understanding is that it is fully funded by the provincial government and secured by the properties involved. All principal and interest is repaid to the Provincial Treasury by the estate or when the house is sold. Interest is very low but you’re absolutely correct that it compounds and when the bill comes due it could be a shock. I do think it’s interesting though and an attempt at some creative thinking to give seniors and families some relief — it’s no handout though. The deferred funds are paid to the municipalities by the provincial government. I think most people would be well advised to avoid this choice but I find it’s intent as creative social policy interesting and I’d like to know more about the thinking behind it.
I have wondered if it was developed to try to deal with the fundamentally flawed taxation model which is based on levying taxes based on people’s on-paper-only increased market value of their properties.
I noticed the mention of a homeowner unable to face the rising costs of municipal taxes and school taxes, the solution would be to become a renter? Lest not forget, that every renter pays taxes through their rent. The owners of any rental property must pay taxes and that is reflective in rents charged. The one problem is that while rents are capped, taxes are not.
Good point George and certainly not lost on me. Renters are municipal tax payers and I hope they realize it! If someone was forced out of their home because their tax level rose with their property value when their other income levels didn’t rise, they would probably be forced to rent or purchase a house of much less value if they wanted to stay in the same market.
Unless I have missed something significant, all of us 55 plus who own our homes and have at lease 25% equity in them are eligible for a property tax deferment at a current rate of ).0025%, i.e. 1/4 of 1%. If this is correct, we should all apply immediately as we can get 2-3% in a tax free savings account. While I agree that the provincial government can borrow money at a low rate, I do believe that it is paying more for its loans than 1/4 of 1%, and, if so, we are providing yet another subsidy to the relatively well to do which must be recovered from all. The greater the assessment of your house, the better this deal becomes. Is this just? Remember, there is no requirement to show need. My financially astute friends have been right these past years and I have been financially stupid. Even with compounding of the debt, the compounding of the saved and invested tax money is about 10 time greater.
And by the way, for those in need, i.e. for persons with children under 18 or who are disabled, the interest rate on the property tax loan in 2.25%, i.e. 9 time higher. Have I gotten any of this wrong?
Ron, I think you’ll find that the interest rate has recently fluctuated between 1.5 and .25 per cent and historically has been somewhat higher but I believe always less than the rate of inflation. There’s an administration fee of $60. I don’t know one way or the other about the equity requirement or that the interest rate is higher for the homeowners with dependents/kids under 18. Pretty good interest rate. Is there a subsidy in there relative to the Province’s cost of borrowing? I don’t know, if so it would be tiny but your point is taken and you’re right to insist on clear, clean equal treatment for all in these things.
This ministry website says equity has to be 15% and interest is bank prime.
Click to access PTD_Families_with_Children.pdf
No valid comparison can be drawn with the municipal taxation methods and issues with United States local governments. The entire financing mmechanisms are so different they cannot be compared. In some ways U.S. municipalitoies are better off as they have many alternative financing methods we do not have. On the other hand the checks and balances on U.S. municipalities are almost non-existant especially on issue of bonds (which we cannot do!) and borrowing. Municipalites can and do go broke in the U.S.
No matter how you slice it. Projects done by any level of government gets paid by you and me, people. Nobody else, just us the taxpayers and those who pay taxes. Some of us pay a larger portion than others but believe me, we all pay and pay! Well, I ain’t got no more so give me a break or all currently elected officials will not get my vote next time regardless of how you vote to raise any type of taxes even if you are against. Get your fellow representatives to vote no or find a new income supplement. Simple.
Apparently, the rate of interest charged on the deferment of residential property taxes under BC’s Land Tax Deferment Act, is set by the Interest Rate Regulation.
I understand from my source, that effective October 1, 2010, (for a 6-month period), the rate is set at:
0.5% a year for the regular Property Tax Deferment Program and
2.5% a year for the Financial Hardship Property Tax Deferment Program and the Property Tax Deferment Program for Families With Children.
Wally: Could you elaborate on the differences you mention and on the alternatives which are available down south. Perhaps we should be considering them.
One of the issues our Canadian municipalities face (it varies a little by province as municipalitites are created by Provincial legistalion not federal) is the continued downloading from senior governments of functions without changing the revenue stream to the municipality but they are expected to pay. The Provinces often do not give up the revenue but do give up the function or give the municipalities a one time infusion to cover the downloading, then in future years the municipality pays the bill. I do not have the precise numbers but property tax as become a much larger share of municipal revenue stream than in the past. I know in some of the U.S. municipalitoies, there are many revenue stream including traffic infraction revenue, much more flexibility in user fees, service charges that are not universal across the community, special rates, and most important for them is the ability to issue municipal bonds. We have municipal oversight on borrowing from a Provincial agency to make sure they do not get too deep in debt plus there are certain borrowing limits over which a public vote is required. Most U.S. communities do not. We cannot do most of these. I know Toronto a couple years ago, after a decade of fighting with the Province, finally got some special powers for some alternate sources of revenue. Vancouver / Translink obviously has somne as does Victoria with putting a special transit tax. The Translink tax is now 21% which applies to all parking, public or commercial. Victoria also has a transit tax. The bad news to me on this one is we ask people to use public transit and people with limited resources often must use public transit then we put all these taxes on it and make it unaffordable. If we keep the tax off the transit user but acrue the tax reveune to transit then we might be able to keep affordable transit.
Translink in Vancouver, as an example, have an extra $5.00 fee for boarding the Canada Line at the airport. So only the arriving passenger at the airport pays yet the revenue accrues to the entire system. Not a big revenue stream but every bit helps.
Our municipalities I know continue to ask the Province for much more flexibility in revenue streams so the increasing burden does not just fall on the property taxes. It appears the Province does not want to give up the revenue streams.
Our answer possibly is to look at some of the Cadillac services we provide and get back to the Volkswagon or Chevrolet other than just increase taxes.
Janet: Thank for the heads up on the new interest rates coming in October. At 0.5%, this still makes a very profitable practice or borrowing from the Province and investing with a bank. But I reiterate: where does the money come from. If this practice is supportable, perhaps the government should lend me as much money as I want at 0.5% and I could get rich placing it in risk free investments. Canada Premium Saving Bonds will fetch 1% or better, ie. twice the cost of the loan from the province.
It strikes me from reading about prop 13 and after hearing the radio conversation that something is missing. If I heard correctly the connection between assessment and taxes was direct, i.e. if assessments went up, then property taxes went up. I find this hard to believe, but when I hear them talk about the huge surpluses they were running, I guess it is true.
I didn’t hear any discussion of mil rates ($ in tax per $1000 of assessment) as we have here and which are set by City Councils. Here we can double assessments in one year, cut mil rates in half, and have the same budget in both years.
If property taxes are increasing, it is because our Council wants more money. Even if assessments go down, they can increase the mil rate and get more taxes -and I have no doubt they would do so.
So while prop 13 can be instructive, for me its lesson lies more in believing that there is a simple programmatic solution for every tax problem, rather than realizing that politicians, left unchecked, will always vote for more and thus need constant watching. This is a matter of human nature, not of something necessarily wrong with politicians. If you leave your untrained puppy at home with your shoes out, don’t be surprised when you come home and your shoes are chewed and your carpet is wet.
Here’s Alan Broadbent writing in Urban Nation: Why We Need to Give Power Back to the Cities to Make Canada Strong –
“Canadian cities are particularly handcuffed fiscally. They all rely heavily on property tax. Canadian cities get about 50% of their revenues from property tax, while in the US, it is about 15% and in Europe it’s about 5%. In the US and Europe, cities have access to a much broader array of revenue tools, including income tax and taxes on consumption, such as sales tax, hotel tax, liquor tax and gasoline tax. The problem with property tax is that it doesn’t grow apace with the economy. Property values change slowly. When the economy does well income taxes and sales taxes rise accordingly. Those taxes also get levied on everyone who earns or buys whereas property tax is only levied on residents. People from outside the city — tourists and commuters — effectively get a free ride when they use tax-payer-provided services and infrastructure.”