#proposition 13

From the essay:

With a net worth of over $79 billion, Zuckerberg could replace every pipe in California and not even notice the cost. But instead the Chan-Zuckerberg Initiative, the name of the charity and political organization of one of the world’s wealthiest couples, has spent $2.1 million to raise other people’s taxes even after Facebook had used Ireland as a tax shelter to avoid paying taxes in the United States.

Wiping out property tax protections won’t hurt the big dot com firms like Facebook. But it will make it even harder for any prospective rivals to function in an area with impossible rents and the highest housing costs in the country. That’s why one startup was charging $1,200 in rent for bunk beds for aspiring Zuckerbergs who “want to focus on their startups”, but can’t actually afford to live there.

The pressures of commercial rents are already catastrophically punishing. Zuckerberg’s move to crush commercial real estate protections will significantly raise the cost of doing business for competitors without Facebook’s deep pockets, potentially reduce future income tax impacts on his own vast fortune and those of many Facebook employees, and leave behind chaos as Facebook expands elsewhere.

The downward pressure of commercial property tax hikes will turn much of the rest of California into the Bay Area with impossible rents squeezing out small businesses and the people that depend on them. If you want to see the future of California, imagine a handful of dot coms, satellite startups, and the businesses owned by them, from Whole Foods to the leftovers of the entertainment industry, and gig economy delivery services making up the leftovers of the economy. And a whole lot of poor people living in housing subsidized by dot coms like Facebook, which dumped $1 billion into affordable housing, and taking tech vans for hundreds of miles to do grunt work for the tech masters of the universes.

So, California proposition 13. Not the one about property taxes, the new one that’s one the March 3 ballot. It

a) Authorizes 9 billion of bonds for preschool-high school education

b) Authorizes 6 billion of bonds for higher education, 2 billion of which goes to community colleges

c) Changes the way state preschool-high school funds are allocated between districts

d) Raises the debt limit for school districts issuing their own bonds

e) Reduces fees to school districts for new residential construction

Pros:

a) Appears to have wide and bipartisan support in the legislature. To the extent that California direct democracy system is bad and contributes to gridlock, a general policy of voting for propositions supported by the legislature ameliorates that.

b) Most of the things it funds seem to be good things to do (prima facie, before doing cost-benefit analysis).

c) The changes to how state funds are allocated at least sound good, prioritizing districts where the funds would do the most good. But I don’t know how gameable that is.

d) More flexibility for local government funding is probably better.

e) Reducing barriers to residential construction is good. But this isn’t the biggest barrier (since it’s just money, though apparently sometimes a large amount of money, not an actual regulatory bar), and its one that arguably makes some amount of economic sense.

f) If the state Legislative Analyst’s cost estimate is accurate, the borrowing will be relatively cheap: 11 billion in interest in 15 billion principal for 35 year maturity suggests an interest rate of ~2.2 percent, lower than 2019 inflation (though higher than the target inflation rate).

Cons:

a) Appears to be a significant amount of fiscally procyclical borrowing. Which is kind of an issue with California

b) Some amount of tulip subsidies. Mitigated by only a small portion going to 4-year institutions, and being earmarked for capital improvements, but still.

Major open questions:

a) Over what time period can we expect the money to be borrowed and spent?

b) What alternative arrangements are likely to be made in the event the proposition does not pass?

c) Are the changes to funds distribution likely to work as intended?

I was out for drinks recently with a friend of mine who is a developer in California and she mentioned a few things to me that I thought were really interesting. 

First, she talked about how virtually nothing gets built in the Bay Area “as of right.” And so the market is hugely supply constrained. She said, you’re lucky if you can get your entitlements in 2 years. It’s starting to take longer. I immediately said: “That’s Toronto.”

Second, we talked about Proposition 13, which was timely given this recent post. One of the consequences of Prop 13, beyond helping golf clubs survive, is that longtime homeowners seem to be highly incentivized not to move. 

Their property taxes are so below market that it can be more cost effective for them to stay put as opposed to downsize -- even if they have too much house. This means far less turnover in the housing market.

Third, there really does seem to be a feeling in the Bay Area that it’s at a breaking point in terms of affordability. When a successful software engineer making $200,000 a year can’t afford housing, people naturally start to look to other cities.