Saturday, December 27, 2008

Prop 13 Hangover

I feel like this makes our mobility issues worse when people are unwilling to move closer to work for fear of losing their existing low taxes.

This leads to all sorts of idiotic consequences. Back when I lived in California, one of the few ways of raising taxes available to cities and towns was to increase the sales tax by some fraction of a percent. Result? Cities and towns did this, and then tried desperately to induce people to set up car dealerships and other places where people sell big, expensive things. Did it make sense to have so many car dealerships? Who cares! It's revenue!

Likewise, people in California don't always sell their houses when it would normally make sense to do so, because as long as they stay in their existing house, the assessment will not rise much and their taxes will stay low, whereas if they buy a new house, it will be assessed at its purchase price, and their taxes will go up.

"Free markets", indeed.

H/T Yglesias


Anonymous said...

That points out why free markets do work, but not why they don't. What is explained is the awesome consequences of Government manipulation, purposefully or accidentally, of the economic activity. Free markets I've screamed a million times would put people closer, because distance would equate to higher costs. But unfortunately our system doesn't work that way anymore.

When the system did, we built dense, sometimes super dense neighborhoods and cities, transit systems to serve those areas, and limited roads. In our freer market days we never even contemplated massive streets 5 lanes wide crossing at intersections because that would have been insane.

Thanks to the planners and the Government though, we have exactly that.

... :(

Robert said...

You have to take the good with the bad.

True, the incentive for people to leave their current home to move closer to work is limited by proposition 13. However, the incentive for people to move away from the city center, where home prices (and thus property taxes) tend to rise rapidly, particularly when mass transit options become more available or when gas becomes more expensive, is also limited. If such protections were not available, those that have always lived close to work might be priced out of it by increased taxes property taxes.

In the end, prop 13 is intended to ensure that rapidly rising home prices do not affect those that don't want to make real estate just like Wall Street, does not affect those that just want to live in their homes 40 years and call it a good life. It makes year-to-year expenses predictable and allows people to concentrate on other things, like keeping that job that is close to their current home.

The simplest way to make people want to live near work is to increase the gas tax. People have direct control over how much they spend on gas. They can go fewer places, walk to the local store to shop, take the bus to work, or whatever. There is zero complication with such a scheme.

If you try to use property taxes as an incentive, it becomes much more complicated. One cannot simply reduce one's property tax bill by make some responsible choice -- you have to move; that's the only way to do it.

Pedestrianist said...

The article isn't so much a condemnation of free markets as it is evidence that there's no such thing as a free market (say it with me, econ 1 students).

The market created by government post-prop13 is one that heavily favors private accumulation wealth at the expense of, well, publish expenditure of that same wealth.

It works if you're the (now archetypal) granny who owns free and clear, but only for so long. At what standard of living will she find herself when the roads leading up to her driveway have crumbled. Or worse, when she finds herself too old to drive.

Alon Levy said...

those that just want to live in their homes 40 years and call it a good life...

...can rent. If you choose to invest in real estate, you don't deserve any protection that people who invest in stocks or bonds don't get.