Mary Owens: The Way Forward for Nevada County, continued
In my previous column, I indicated that I would be writing about the options open to our community leaders to increase the availability of moderate housing in Nevada County. If you are a first time home buyer, a downsizing senior or a renter, you know first-hand about our local housing shortage. So how do we solve this problem? The solution seems so simple. Why don’t the contractors build more moderate priced housing? The demand is certainly there, but unfortunately nothing with this state is as simple as it appears.
One of the fundamental elements of solving any issue is an understanding of how the problem developed and grew over time. During the coming months, we will explore the history of why moderate priced housing is currently in short supply.
ORIGINS OF HOUSING CRISIS
We have to start way back in 1978 at the start of the California taxpayers’ revolution of the Jarvis-Gann initiative, better known as Proposition 13. Prior to Prop. 13, California home owners were experiencing significant annual increases in their property tax bills. Under the older system, the local assessor could adjust upward annually without limit the amount of your home’s assessed valuation. Assessors could make a subjective judgement based upon their opinion of the property’s best use (by a developer, for instance). If a new development was built near an existing residence, the assessor had the right to “revalue” upwards the older home simply because it was near the new development. You can imagine how the start of “not in my back yard” began with this tax bill dilemma. New construction near your home could easily mean your property tax bill was going to increase. What really triggered the wide protests against the increasing bills were the high inflationary periods of the early seventies. Annual inflation rates were commonly running in the 10 percent range. With the inflation running this high, a property tax bill could double in a mere seven years. Adding to the complexity and confusion, property values were not just established subjectively prior to Prop. 13 but also at differing percentages of current market value. A Board of Equalization study found that some houses within the same county were assessed at 2 percent and others at 200 percent or more of current market value. The disproportional assessments were infuriating taxpayers! Some were even losing their homes over their inability to afford the rapidly rising property taxes.
The next crisis in this property assessment mess was the ineffectiveness of the California Legislature. In the fall of 1977, the elected group left for their break without passing any significant property tax reforms. The subject wasn’t being ignored; the problem was no one would agree on how to fix it. Twenty-two different reform plans were proposed and 22 reform plans failed to pass. The state was so large, its regional issues so diverse, it was becoming ungovernable because of intensely differing interests. The rural communities, large older inner cities, newer cities, suburbs and the agricultural areas all had different views and problems; few of them were being effectively addressed. The voters of the state took control of their property taxes as a response to the complete absence of leadership in the legislature. Proposition 13 was easily passed by a wide margin. The people won….. or so they first thought. Those in favor of Prop 13 believed they were getting tax reform and a new system to constrain the size of government, but things have a way of warping into something else.
The basic premise of Prop. 13 was relatively simple. The maximum tax rate that could be assessed was limited to 1 percent of the value of the property. The real property values were set to the 1975/76 levels as the starting point. Thereafter, the only increases that would be allowed without substantial improvements or resale were further limited to a 2 percent maximum annual increase, and any special taxes needed to be approved by two thirds of the voters. And lastly, the tricky part: the distribution of the collected property taxes were to be allocated according to law. But laws governing the distribution did not exist at the time of the adoption of Prop 13, thus new laws had to be created. This is where the slope starts to get very slippery.
Prior to Prop 13, local agencies providing public services set their own tax rate and received those funds directly from property tax payments. Fire districts, school districts, and similar public service entities created their internal budgets and then adjusted the tax rate to fund their annual budgets. But after Prop 13, tax receipts were no longer under the control of the local districts. Now, for the first time in California history, the state had full control over the allocation of the tax proceeds of the locally levied tax, with the rate and base defined by the new state initiatives. Local control was lost and the total tax collections were significantly reduced. Trouble lay ahead for those local entities delivering public services.
The California Legislature was now in a position to write the new laws on all property tax distribution. The details are long, but two major pieces of legislation were created that now shape the distribution of our local property tax dollars: SB 154 and AB 8. These new laws created a complicated matrix of tax distribution among cities, schools, counties and special districts, like fire protection. They essentially prevented a city from getting more tax revenue unless it annexed areas away from the county or through economic development. These new rules pitted cities, counties and special districts against one another in tax receipts game. But none of the players had any control of who gets what except the state, which was now in total control. To increase their share of the tax revenue, the state “took over” many of the service functions mandated by state programs that were formally provided by the counties.
The last major step in the complete redesign of local taxes issues came with the passage of Proposition 4 (Gann Limit Initiative) in 1979. This new piece of legislation forced the state to provide funding for imposed mandates on counties. But more importantly, it encouraged all districts, cities and counties to impose user fees for new services. These new user fees were not limited under the new complicated web of spending limits of Prop 4. With this last piece of ever-so-important legislation, home builders were now facing a myriad of “mitigation fees” when trying to build new homes or do major remodels.
Next month, I will go into the detail of how “mitigation fees” lead to the significant increase in costs when building new housing. The local governments no longer could count on property taxes to pay their bills. So a new “capitalization” of government services became their next line of defense. Property taxes in the past were designed to fund all our local services, which they no longer do.
Mary Owens, CPA, MS, Principal, President of Investments, Branch Manager RJFS with Owens Estate and Wealth Strategies Group, located at 426 Sutton Way Suite 110 Grass Valley, CA 95945 | (530) 272-7500. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. The information provided has been obtained from sources considered to be reliable but cannot guarantee that it is accurate or complete. Any opinions are those of Mary Owens and are not necessarily those of Raymond James. Raymond James Financial Services and its advisors do not provide advice on tax or mortgage issues. These matters should be discussed with the appropriate professional.
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