Yisroel Pensack: Proposition 13’s Devastating Impact on Housing Affordability in California

A 21st-century follower of 19th-century political economist Henry George, whose classic “Progress and Poverty” was written in San Francisco and published there in 1879, has analyzed the effect of California’s property-tax-cutting Proposition 13 and found that that 1978 measure has had a devastating impact on housing affordability in the Golden State.

“Cutting [the] property tax was supposed to make housing affordable. Instead, the tax cuts attracted so many speculators that California’s ‘affordability index,’ which had been only 10% higher than the national average when Prop 13 passed, is now about 300% higher,” wrote Dan Sullivan, director of education of Pittsburgh, Pa.-based Saving Communities.

The affordability index divides the median house price by the median income, noted Sullivan, writing in response to a Sunday New York Times article on George’s land value tax idea.

The same article, “A Tax Policy With San Francisco Roots” by Elizabeth Lesly Stevens, also ran in The Bay Citizen, a Times-affiliated San Francisco publication, which is where Sullivan’s online comment appears. I reported on the Stevens article on Lukeford.net.

According to Sullivan, “Twenty-three of the twenty-five least affordable [U.S.] cities are in California. The least affordable of all is San Francisco, where the median house price in 2005 equalled 12.64 years of median income.” He noted, “I don’t count Berkeley, which has so many students with part-time jobs that its median income is artificially low.”

Sullivan’s affordability data appears at

http://www.savingcommunities.org/issues/taxes/

property/affordabilityrank.html#r219 .

Sullivan suggests that although proponents of Prop 13 might contend that “high prices [exist] because of California’s growth during the second half of the twentieth century…[actually] Most of California’s pro-growth momentum developed before Prop 13, and most of the housing price boom came after [it], while growth momentum was slowing. Also, Texas, the other of the two fastest-growing states, relies heavily on property taxes and is one of the most affordable states generally, containing four of the six most affordable cities.”

According to Sullivan,

high real estate taxes do not mean high taxes overall. California has very high taxes on everything but real estate. New Hampshire, which has very low taxes overall, gets [two-thirds] of its total state and local revenue from real estate taxes. The anti-tax Libertarian Party spent years reviewing states to see which state would be called “The Free State,” and chose New Hampshire.

Also, Massachusetts, which passed a slightly watered-down version of Prop 13, also ended up with very high sales and income taxes, leading to a…wave of migration from northern Massachusetts to southern New Hampshire.

In general, within cities of a particular population category, the lower the property tax the less affordable the city.

http://www.savingcommunities.org/issues/taxes/property/

affordabilitycharts.html

Property-tax bashers should know that one does not have to tax the entire property to get stable housing prices. Pittsburgh went to a higher tax rate on land [value] than on buildings in 1913, after being hammered by depressions throughout the 19th century.

During the Great Depression, and despite the great flood of 1936, Pittsburgh´s land prices fell only 11% between 1930 and 1940, compared to 58% in Detroit, 50% in Los Angeles, 46% in Cleveland, 28% in Boston, 27% in New Orleans, 26% in Cincinnati, 25% in Milwaukee and 21% in New York. Land prices in Pittsburgh even fell less than in Washington, D.C., where the New Deal was booming. Pittsburgh also grew while other rust-belt cities declined in the wake of the collapse of Big Steel, and Pittsburgh real estate values are actually increasing during the current depression.

http://feasta.org/documents/

fleeing_vesuvius/?p=167

Twenty other taxing jurisdictions (mostly cities) in Pennsylvania have shifted to land value tax, and every one of them has seen construction surges without real estate price booms.

California committed economic suicide in passing Proposition 13, not because of lost tax revenue, but because of the land speculation it attracted. For every dollar a home buyer saves in property taxes, he pays several extra dollars to the previous owner and the banks. Small wonder California leads the nation in foreclosures.

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