A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

Warren’s house in Emerald Bay became newsworthy later on during Arnold (“The Terminator”) Schwarzenegger’s successful 2003 campaign to become governor of California. Initially, Buffett was a supporter and an economic adviser to Arnold. One campaign issue was how to cut California’s budget deficit. The problem was caused largely by the anti-tax measure Proposition 13, adopted by California voters in 1978. This limited the tax on real estate to 1 percent of the assessed valuation with a cap of 2 percent per year on any revaluation upward. With California’s soaring prices, the tax on houses that weren’t traded fell over time to a small fraction of 1 percent of their current value, thus sharply eroding the tax base and expanding the budget deficit. A house was reassessed at the current market price only when it was resold. As a result, taxes on comparable houses varied greatly, depending on when they last changed ownership. This led to major inequities in the taxes paid by different homeowners. In addition, by drastically lowering the overall effective tax rate on residences, Proposition 13 reduced the annual expense of homeownership, which in turn fueled the excessive rise in California home prices.

Unintended consequences, written in to tax law. California is *still* messed up. Make your wealth elsewhere, I say. You heard it here first.