Dollars and Jens
Monday, November 10, 2003
property taxes

It's a week now since Warren Buffett's letter to the Wall Street Journal has been published, explaining that what he said about California property taxes was misrepresented:

What I said in respect to property taxes was very specific. I gave him an example of three houses, two in Laguna Beach and one in Omaha. The first Laguna Beach house is a property that I bought in the early 1970s. It has a current market value of about $4 million and, because of the limitations embodied in Proposition 13, carried taxes of only $2,264 in 2003 vs. $2,241 in 2002. The second house, located just in back of the first, is one that I purchased in the mid-1990s. It has a market value of about $2 million and, simply because I bought it later than the first, carried taxes of $12,002 in 2003 vs. $11,877 in 2002. I pointed out to Joe that these figures mean that the tax rate on the second house -- same neighborhood, same owner, same ability to pay -- is roughly 10 times the rate on the first house.

I then referenced my house in Omaha, which I believe to be worth about $500,000 (though it's assessed at $690,000). Taxes on it were $14,401 in 2003 and $12,481 in 2002.


The severe failings in the article were compounded a few days later when the Journal's editorial page made the mistake of relying on the accuracy and completeness of the Journal's reporting. Though the editorial would have undoubtedly made many of the same points it did had the writer read a complete account of my views, its analysis would have had to be at least somewhat different if the editorial writer had been aware of both points I had made.

For example, the statement in the editorial's second paragraph that "no doubt the non-billionaires in Chico will appreciate Mr. Buffett's generosity with their cash flow" would make no sense if the writer had understood that I was criticizing the inequities within California. My sympathies are clearly with the "non-billionaire" family purchasing a $300,000 house in Chico today that faces real estate taxes materially higher than those borne by this non-resident billionaire on his $4 million house in Laguna. This family, because of Proposition 13, has been selected to subsidize me.

I share his feelings that "Residential property taxes in California are wildly capricious, tied as they are to the date of purchase rather than the value of the property or financial circumstances of the owner." There seems, though, to be a substantial political constituency for preventing people living in certain houses from having to move when those houses appreciate, creating for them paper wealth but practical cash flow problems. So I'd like to put forth a compromise idea: create this cap on property taxes, but instead of waiving the taxes in excess of the cap, defer them until the house is sold. When the house is sold, the owner recovers the appreciation on the property, and then pays the deferred property taxes, perhaps capped at a fraction of the sale price of the house.

It seems to me that someone liquidating a windfall gain on their real estate would make a less sympathetic character politically than someone who's just trying to keep his house; the down side here is that, at least initially, the city hasn't solved its cash-flow problem created by the cap, and while some of the perverse incentives not to sell a house you've had for a long time are mitigated here, that final cap, which is probably essential to the plan, will prevent them from being removed entirely. (Time-value of money — that the taxes being deferred are worth more when the debt is incurred than when it's paid — also becomes a significant issue for the houses in question, but I've confusingly decided not to comment on that.)

With today's sophisticated financial opportunities, in which anyone with home equity could borrow on it to pay property taxes, it seems to me that the initial complaint is a bit under-founded, but I was never so sympathetic to it anyway; I can't get my mind around the concept that there's a reason it makes sense to tax ownership of real estate, but that if one got to one's valuation by way of appreciation rather than recent purchase one is not tieing up resources or using services or whatever that a new purchaser would be. Reducing the friction associated with real estate sales seems like a small gain compared to whatever else the issue entails.

Powered by Blogger