Land value taxation, Prop 13 reform and single family homeowners

I’ve been participating in a long Twitter discussion about my value capture with somebody who is terribly worried about taxing single-family homeowners out of their homes, since SB827 covers so much of San Francisco.

While our debater was discussing things with me, his responses came back to, again and again: you will “tax them out of their homes.”At one point, he told me that my policy suggestions would be like “forcing people to sell their homes at gunpoint.”

Gah. None of that need be true. Greg Morrow and Dan Immergluck (bless them) joined in to explain various aspects of land value finance tools.

No matter what we say, this particular participant can’t move off his claim about single-family homeowners “being taxed out of their homes.” So he can’t deal with any potential change to Prop 13. But this discussion might help people actually consider the policy tools in play even if he refuses to.

How do we keep from taxing single-family homeowners out of their homes with land value assessments if we don’t keep Prop 13 set in stone forever?

The answer is, in the long-term, we don’t. Guys, I don’t know how to say this any more clearly: having single-family housing by transit stations is a terrible idea. It’s bad for cities, it’s really terrible for transit, and it’s bad for renters and young people. Investing in transit under our current land use conditions, which are heavily, heavily influenced by Prop 13, means throwing away money on transit so that we will never be able to supply it at city-changing levels with the ridership allowed by low-density development patterns. (We may never get the ridership we need–that’s a possibility–but we have well and truly established that low customer densities are bad for every direct service business.)

Prop 13 has hurt our schools. It’s hurt our infrastructure. And so on, and so forth.


Now, mayyyyybe the assumption here is wrong, that Prop 13 locks single-family home ownership patterns in place, but I don’t think it is.

We may feel sorry for individuals who are caught in the whipsaw of prior generations of bad policy decisions and potential reform of those, but Prop 13 is highly, highly problematic even if it does help some homeowners stay in their homes. Over the long term, cities need those single-family homes by transit to become something else. Sorry.

As worried as we might be about homeowners, our current system hurts renters–who as a class are far, far poorer than homeowners, and it hurts transit riders, who are, as a class, ditto.

The problem is that homeowner wealth is not liquid unless they are renting out spaces or doing something else that generates a near-term revenue stream. Otherwise, that wealth is locked up in their homes, and new taxes could be a hardship. Sure.

This is not a reason to hand over absolutely all of the financial benefits of urbanization and public investment to landowners and screw everybody else. Remember your Ricardo.

So first, we can design land value taxation methods to be revenue neutral, even at the payer level. The debater last night had a problem that a person with a 10 unit apartment complex and a single-family home would pay the same in taxes. I don’t actually know why that’s a problem, other than in this person’s mind. Why the entity housing 10 HH should pay more taxes than a person sitting on their land to house 1 HH is a bit beyond me.

But non-problems notwithstanding, your yearly tax bill could basically stay the same for the lifetime of your tenure in the house and the accumulated value of the tax, or some portion, gets extracted at point of sale. That is, when you move and sell, the state captures the public increment out of the sale price. (Ouch, still, but you aren’t being taxed out of anything; if the home value wealth is “paper” wealth until it is made liquid, then it’s merely a “paper” loss to hand over that increment at the end. We’ll see the double-standard in play as people react to that statement).

Moreover, the land value taxation structure means you can improve your house and capture all of the financial benefits yourself rather than splitting them with the state. There are real benefits to land value taxation over property taxation for building owners, too. The real burn in land value taxation happens to people who just expect their land to appreciate in value–they don’t get the value increase they would normally get just from owning land and not doing anything.

Going from a situation where your land investment paid you hand over fist to a situation where it doesn’t pay you at all likely feels like a hardship even though one never should have been able to buy a house, get wealthy-doing-comparatively little in the first place, especially when this strategy was primarily for white people’s benefit.

As dysfunctional as our current public finance is, people have optimized around it. What our debater does not realize is that we might actually have MORE homeowners with land value taxation than with our current system. Why?

Because one of the reasons why housing is so outrageously expensive to buy in California is that the land’s value as a tax shelter is already capitalized into the selling price of the home. That is, you pay up-front for the amortized value of the future tax savings on wealth that you will accrue, which means that price to get into the market are much, much higher up front than they would be if we knew that the public increment of value were not going to the home owner. Such a difference effects how much you were willing to pay.

The real burden, even with point of sale protections, comes from the policy change itself. People brought property with the expectation that it would be a tax shelter for retirement savings at a higher price than otherwise, and then, boom, with the policy change, the buyers looking at your home no longer have that tax shelter and thus are not willing to pay for it. Thus existing landowners get soaked because they paid in the sale pricesomething that policy both giveth and taketh away.

Some policy thinkers aren’t terribly worried about that wipe-out. After all, people should not be in the habit of assuming public policy owes them a risk-free wealth generator, and the risks of policy change are just as real as the risks of other types of shocks. But I do think it’s a problem. These losses are real to individuals, and good government should center on trying to help people regardless of individual desert. (There, I said it, come at me, bro).

I’d prefer to phase in changes to Prop 13 over the long term, and to do so in a way that repays at least in part homeowners for their capital loss. Lots of ways exist to do that; I generally prefer a give-back on income taxes commensurate with the amortized yearly loss of the value of the tax shelter. That retains the incentive structure of tax policy change so that people still have an incentive to sell up and move when they should, but they are not made significantly poorer. If they really really love their homes (and people do), they could use that give-back to pay the tax change. Or they can pocket it, sell off, and move to a location where they aren’t paying for transit service they don’t value enough to pay for it. Or whatever. This way, it changes the relative price of hanging onto a SF in a place where society unfortunately doesn’t want SF homes.

Isn’t this all terribly complicated?


There are no simple, easy, painless solutions to Prop 13 reform, just like there are no simple, painless solutions to spinal surgery. Prop 13 was a game changer for California, and its effects are everywhere, both positive and negative, and if we want to protect people from the effects of backing off from the policy that never should have passed in the form that it did, it will take time and effort.

4 thoughts on “Land value taxation, Prop 13 reform and single family homeowners

  1. There was a recent study showing that despite Prop 13 the tax receipts on SFDs have risen spectacularly because the selling prices are so astronomical that the ones still protected are less relevant. As to education funding, in the same year that “13” passed the Cal Supremes ruled that real estate based funding of education was unconstitutional because poor school districts are unable to spend what the students deserve. So, please stop harping on Prop 13 WRT SFDs. We geezers who could afford a house in CA 41 years ago–and could not today– will soon die off or be sent to elder storage freeing up our homes for the overly rich to pay full sale price based RE taxes. Commercial property is a whole different ball of wax.

    Proximity to mass transit was a part of my calculus of where to buy, but I would use transit anyway, just as I did before when living in Chicago,Philly, NYC.

  2. Yay.

    It’s really important to avoid dumb public policy like Prop 13, because people will arrange their lives and finances around it, and then we have a constituency for dumb.

  3. You are ignoring the elephant in the living room: The initial drive for Prop 13 was from the large property owners like railroads and utilities. Homeowners came along for the ride. The result: Those large owners NEVER sell their properties, whereas single-family homes turn over ~5 yr. average; thus the tax burden increasingly falls on single-family homes. If you want to look at Prop 13 reform, look at those major iniquities in large corporate vs. individual ownership.

    Moreover: Prop 13 provides homeowners with housing security against runaway taxation costs. Renters don’t enjoy that protection. So if you want reform, must look at creating true equity in housing cost increases, which means rent stabilization.

    And finally: you’re trying to justify the “social good” of increased urban density by stripping away the one protection that allows people to continue living in increasingly expensive cities. That is such a transparent attempt at a land grab the rest of your thesis falls apart.

  4. Hi Dr. Schweitzer! In your paragraph about “Why the entity housing 10 HH should pay more taxes than a person sitting on their land to house 1 HH,” the reason that comes to mind for me is as a source of revenue for those services whose cost scales by person, rather than by building or by land area. Schools, sewers, etc. Of course, there are other tax structures that can provide revenue for these services, but that’s always the thing that comes up in my mind for why land value capture might not be sufficient as the *sole* source of tax revenue for a locality. Clearly it doesn’t negate your point, but I can understand that portion of your interlocutor’s thought process.

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