By Wayne Lusvardi

What draws working and middle class Californians to states like Texas is mostly a freer home sales market, which brings lower prices.  A zero state income tax rate and lower business tax rates that provide incentives for job creation also matter, but to a lesser extent.

The Texas advantage occurs even though its property base tax rates are double or triple those in California. However, although the tax rates are higher, because home prices are lower, the rates are applied to the lower values.

That is the conclusion of Jed Kolko, the chief economist for Trulia, an online home sales listing company.  Kolko found that net California out-migration (those leaving minus those coming in) is higher for the working and middle class than it is for the wealthy.  Kolko’s statistical analysis actually found that high-income households making $200,000 per year or more were holding steady in California.

Thus, the media hullabaloo about rich people fleeing California’s high income tax rates was not found, at least so far, after analyzing a large set of home price data.  Businesses may be fleeing California, but high-income households are not on a net basis.

Kolko’s study found that out-migration fell when home prices fell and vice versa. According to his analysis, Californians move to states like Texas because they have a freer real estate market and more market-produced affordable housing. It’s simple Econ. 101: Greater supply reduces prices.

In California, affordable housing is erroneously thought to be something that only government produces.  Actually, current median home prices in both California and Texas are nearly what they were in August 2008 before the Mortgage Meltdown and Bank Panic.

Texas still cheaper even with higher electric costs 

Expanding on Kolko’s findings, this writer additionally found that net out-migration from California to Texas is occurring despite higher property tax rates and electricity costs in Texas.  Because property taxes are higher in Texas, home prices are also lower.

Total housing costs — mortgage payment plus property taxes plus electricity bills — are 20 percent lower in Texas than California. That happens even though average electricity bills in Texas are $49.10 per month higher than in California. The Golden State’s lower cost is mainly due to more moderate weather and energy efficiency policies.

Total Housing Cost Comparison

Texas has something that draws working and middle class residents from California. It is lower total housing expenses, not just no state income tax.  And this is primarily due to a freer real estate market in Texas that is unburdened by growth controls, environmental restrictions, rent controls open space requirements and historic preservation laws.

By Wayne Lusvardi

The attacks on Proposition 13 never seem to end. The 1978 tax-cut initiative’s enemies, such as former Assembly Speaker Willie Brown, conjure up a misleading image of large corporate owners of commercial real estate dodging taxes by selling commercial properties through “stock transfers.” They call for a “split roll” that would increase taxes on commercial property, while leaving residential property tax at current rates (for now).

The reality is that 97 percent of businesses in California are small. And small commercial properties are not sold by stock transfers. Moreover, stock transfers of large commercial properties are only a tiny fraction of the 3 percent of large commercial properties in the state.

Neither politicians nor the public seem to have an understanding how hard changes in Prop. 13, increasing property taxes, would hit small commercial properties with low tax-assessed values:

* A small mom and pop store or restaurant on a 5,000 square-foot lot could be hit with a combined added split roll property tax up to $6,250 per year.

* A family-owned small office building on a typical 10,000 square-foot lot could be facing up to $12,500 in added taxes per year.

* A 3,000 square-foot historical home leased for offices on a 12,000 square-foot commercial-zoned lot in a primed downtown location could experience $15,000 in added property taxes; or about half of the existing net office rent.

* An older convenience store and gas station on a 15,000 square-foot lot could face up to $18,750 in added property taxes.

* An older family-owned grocery store on one acre of land could incur up to $54,450 in added property taxes.

Demolished

In each of the above-described properties, the only way to afford the property tax increase would be to demolish the older, under-improved buildings and construct new, multi-story apartments, condominiums or offices.  This may be highly speculative.  Thus, taxes on sales of older commercial properties could occur.

Just as senior citizens on fixed incomes had to sell their homes for taxes in 1975 prior to Prop. 13, small businesses with older structures would likely have to sell, as they would be unable to pay the higher taxes.  This is because property taxes are assessed on the highest and best use of commercial land, not on its existing use.

Theoretically, such older properties are under-assessed for property taxes.  But in the real world, such properties may be the only current economic use other than letting the land remain vacant.

Ending Prop. 13 for older structures on commercial-zoned land also would end one of the favorite public policies of many liberal elites: historical preservation. Without the lower tax assessment afforded under Prop. 13,  many historical properties would have to be demolished, replaced by three to five floors of condos, apartments, offices or mixed-use residential projects.

The only other alternative would be for small commercial property owners to insulate their properties from such higher taxation by signing 100-year land leases or leasing their properties to non-profit agencies that have property-tax exemptions.  This strategy might escape the higher taxes, but it also would lead to disinvestment and the deterioration of the commercial building stock.

Under-assessed?

There is a perception problem that commercial property owners are under-assessed when it comes to property taxes as a result of Prop. 13. Many single-family property owners believe they are being overtaxed and that businesses should pay their fair share of taxes.

However, an impartial 2008 study by economists Jose Albero and William G. Hamm found that commercial properties were assessed at 60 percent of their market value and residential properties at only 53 percent. The study estimated that a split-roll property tax alone would result in the loss of 86,000 to 152,400 jobs; and 48,700 families, or about 170,450 people, would migrate out of the state for economic reasons.  That would equate to California losing the population — and the tax base — of a city about the size of Santa Rosa, Santa Clarita or Oceanside.

Nonetheless, homeowners that more recently bought their homes and pay full taxes often feel that any under-assessed properties are shifting added taxes onto them.

With their new supermajorities in the Legislature, Democrats already are taking aim at Prop. 13. As the Mercury News reported, “‘It is time for a fix, because Proposition 13 is broken,’ said Assemblyman Tom Ammiano, D-San Francisco, who plans to introduce a bill … aimed at forcing businesses to pay higher property taxes.”

If the tax increase is passed, it will hit small businesses the hardest. A small commercial property owner by the name of “Maureen” in Contra Costa County described her plight in a comment left on the Political Blotter of the ContraCostaTimes.com for Dec. 5, 2012:

“We have owned a small piece of commercial property for several years. The rent on this property is our only livelihood. We are not a corporation. If the split roll goes through either our 2 renters pay more rent (who are already doing badly) or we lose our property to the state, as we won’t be able to afford the taxes. In either case we all lose.”

“Maureen” goes on to explain that it will also be apartment renters — not just big corporations — that will be affected by the ending of Prop. 13 for commercial properties:

“[W]e bought the property in 1979. Because this is land it is an unusual piece of property as there isn’t much land in our area. Not only will we become victims of the state but our renters will [be] out of a place to rent for their needs (as there will be no other available) & will also go under.

“I know several other people in the same boat who are definitely not wealthy people. Our property taxes will probably go up 4 or more times to about $30,000/year. This is 1/2 the rent we collect. Our renters can’t afford to pay more. You do the math. The renters at trailer courts & apartment buildings will find their rent will increase for the most part. Read the Pepperdine University report which says minorities & female owned businesses will suffer the most from the impact & that is just the beginning.”

This is the reality of the battle over Prop. 13. It’s not the “big corporations” that would pay, but the small property owners, the backbone of the economy and jobs creation.

                        Estimated tax increase on underimproved
            commercial-zoned land due to split-roll property tax 

By Wayne Lusvardi

By now most Californians have heard the radio ads by Texas Gov. Rick Perry urging businesses to move to Texas.  California Gov. Jerry Brown has inferred that the Texas governor is an annoying person.

But Brown may have more to worry about than jobs-poaching governors.  California currently is enjoying an “Echo Boom” in real estate, a boom following a crash. The money from the echo boom may be providing financial liquidity for small businesspersons, retirees and anyone with marketable properties in desirable locations finally to flee to Fort Alamo to escape the emerging flood of tax increases in California.

The Echo Boom selectively has exploded in Southern California.  So far this bubble mostly helps sellers, not buyers nor those property owners with upside down mortgages or property owners in loan default.  If the Mortgage Bubble of a decade ago was a buyer’s bubble, the Echo Boom is a seller’s bubble.

Market for “good” properties booming

Thus far, the Echo Boom is occurring on any “good properties.”  This means homes with little or no debt problems and vacant land in close-in locations with favorable near-term development potential.

What is inflating the boom is a confluence of factors:

* The federal government’s Zero Interest Rate Policy is producing low mortgage interest rates that are below the rate of money inflation (effectively free money).

* Government suppression of foreclosed and upside down homes from reaching the open market has created a very limited supply of homes on the open market.

* Asian buyers and investors are looking for tangible assets like real estate to buy rather than hold diluted Yuan (dollars).

* The supply of vacant or effectively vacant land for development has been limited resulting in less supply of new homes on the market.

* Entire subdivisions of homes are being taken off the sales market by large hedge funds buying up foreclosed homes for rental and eventually re-sale when the market recovers.

* A real estate salesperson in San Marino –- an upscale suburb of Los Angeles -– told this writer that prices are the highest in 20 years, even surpassing the recent past Mortgage Bubble.  Only 8 homes are listed for sale in San Marino and any home listed for sale typically gets ten or more offers.  She said that brokers no longer know what the market value of any home is because the prices get bid up so high.

And this boomlet is not just occurring in coastal cities with fewer foreclosures and no available land on which to build.  A broker in the city of Corona — in the foreclosure zone of the Inland Empire — says the government’s suppression of foreclosures has resulted in the same type of price bubble for sellers with homes that are not saddled with excessive debt.  He said those in foreclosure, or with upside down loans, are having their second mortgages forgiven and being given a new first loan with teaser interest rates.

The hook in these loan reductions is that the new loans require a balloon payment — a payoff of the entire first loan in 3 to 5 years — with a refinanced loan.  But the concentration of homes with upside down mortgages and defaulted loans in the Inland Empire is also driving buyers back to close in coastal locations.

In coastal Orange County, it is reported that 2,926 new home escrows were opened last year.  The Irvine Company reportedly sold 1,200 new homes last year.

The Manhattan Institute has documented a “Great California Exodus” to other states such as Texas, Nevada, Arizona, and Oregon.  Texas is the most popular state for California tax refugees.

California’s foreclosure policies backfiring

The policy of President Barack Obama, Brown and California Attorney General Kamala Harris of suppressing home foreclosures from reaching the open market seems to be having unintended consequences.  It has led to such a tight supply of homes and land that sellers are commanding prices that top those of the previous decade’s Mortgage Bubble.

Although we won’t know for sure until data is available later, it appears that the Echo Boom may be aiding middle-class tax flight from California.  IRS data migration numbers have been discontinued for the first time in 21 years.  Apparently, the Obama administration does not want to provide embarrassing data on where Californians are moving.

The San Antonio — Austin areas of Texas seem to be the most popular destination for tax flight, not only from California but every economically distressed Blue State in the United States.

U-Haul trailer rental data indicate that San Antonio, Tex. is the most popular destination city for Californians moving out of state.  San Antonio is the location of the famous Mission San Antonio —  “The Alamo” — which became a fortress for Texas soldiers in a war with Mexico in 1835.

San Antonio is now becoming a symbolic fortress for Californians in an interstate tax and business war.  Thus far, Texas appears to be winning most of the battles thanks to California’s politically motivated foreclosure policies unintentionally financing tax and business flight out of state.   No wonder Texans still shout: “remember the Alamo!”