Proposition 13 (Prop 13) shows no signs of losing favor among first tuesday readers: in a recent poll, 82% said Prop 13 is not a regressive tax amendment and does not need to be reformed.
This majority opinion is one long-held by our readers and remains unchanged from a 2013 poll yielding nearly identical results — 81% voted in support of Prop 13 then.
Why the Prop 13 adoration — and criticism?
Prop 13 has been commended by many in the real estate community as necessary legislative reform, providing tax relief to vulnerable homeowners — particularly those pensioners over the age of 55 — releasing them from the insatiable tax trap bought on by reassessment at distorted property values.
Prop 13 garners support due to its tax limitations which:
- reduce annual property tax assessments to 1% of a property’s cash value at the time of purchase;
- restrict inflation of the property’s assessed value to no more than 2% a year; and
- prohibit reassessment of a property at the current market rate until the property changes ownership or undergoes new construction.
It is undisputed that Prop 13 provided one solution to the ‘70s-era tax issues prompting its inception, but is it the tax savior proponents make it out to be?
Despite Prop 13’s popularity, it does have some critical drawbacks.
Prop 13 disproportionately impacts new homebuyers whose higher property tax bill subsidizes existing homeowners and provides a larger share of local revenue to pay for public services. The asymmetrical assessment of new and existing homeowners has earned Prop 13 the nickname of the “welcome stranger” law.
Not only does this tax plan reward perpetual homeownership at the expense of expanding homeownership to newcomers, but it also unjustly leaves some with the short end of the stick based solely on when they purchased their home. For example, a homeowner who purchased their home prior to 2003 pays a property tax rate shielded from the price inflation of the mid-2000s housing market, while a homeowner who bought during the recent 2013 speculator price wars and government failures to zone for a sufficient housing supply will pay higher property taxes far after their home’s value has deflated.
Prop 13’s alleged tax haven further keeps homeowners tied to their homes by discouraging relocation for fear of increased property taxes — an effect which factors into employment rates in a labor market that rewards mobility.
Most importantly, Prop 13 is the perfect conduit for property tax evasion by income property owners and investors, as exemplified by a 2014 court case, which confirmed what every real estate attorney understood.
With change of ownership — the turnover needed to support upward mobility and sales volume — being a key to property reassessment under Prop 13, defining ownership and when it changes is crucial. For income property owners privy to Prop 13’s ambiguous change-of-ownership rules, Prop 13 acts as an assessment pass-through. Owners simply take title to a property in the name of a tax-free entity. An entity vesting allows the owner to transfer full ownership of income property in increments of 49% or less to avoid reassessment of the property — indeed, the perfect tax haven for those wealthy and primed on how to exploit tax loopholes.
Meanwhile, the homeowner takes title in their own name to receive a homeowner’s exemption and a reassessment. In turn, they dutifully pay property taxes to disproportionately shoulder the burden of providing revenue for local governmental services enjoyed by all property owners.
While Prop 13 proponents tout the image of poor grandma being taxed out of her home as reason to uphold Prop 13, they simultaneously turn a blind eye to the obvious ways Prop 13 is abused by income property owners to game the system — all the while grandma and other homeowners dish out their share of property taxes. Grandma on the fixed income can be fully protected from property tax increases without the rentier class with fluid incomes gaining the same capped advantage.
To put it more bluntly: by amending Prop 13, California can impose on income property owners their pro rata share of property taxes and safeguard grandma from losing her home at the same time.
The obstructed road to reform
Recent attempts at legislative amendments to Prop 13 have failed, attesting to the enormous challenge current lawmakers face in reforming Prop 13 and closing its blatant rentier loopholes.
A 2014 bill, for example, inadequately proposed to enforce a property’s reassessment when 90% or more of the ownership interests in the property are transferred. However, the bill died due to inactivity from the state legislature.
Other amendments were pursued by some California residents earlier this year through a prospective ballot measure that proposed an increase in property taxes on properties worth more than $3 million — but this also failed to gain footing.
A bill currently pending in the California legislature aims to change the amount of ownership interests in a legal entity vested with real estate that its owners may transfer in a single sales transaction before a change in ownership — reassessment — of the entity’s property is triggered. However, the precise amount of those interests has yet to be determined and the bill is awaiting amendments.
Still, none of these bills address Prop 13’s major flaws that harm homeowners, or attempt to provide an alternative to Prop 13’s regressive tax approach.
Despite the long list of inherent distortions, Prop 13 still holds its place as a sacrosanct pillar of California law. It will remain so as long as voters and lawmakers refuse to reevaluate property taxation to promote a more equitable societal solution to tax payments by homeowners and income property owners.