Proposition (Prop) 13 has been the saving grace for California’s high home values and tax rates since its inception in 1978.
But opponents of the measure point to the billions in tax revenue lost each year, money which would primarily benefit local schools and other public services. Supporters say it allows homeowners to afford to stay in their homes despite rapidly rising home values, which would otherwise make property taxes unpredictable.
This article gives a bird’s eye view of Prop 13 and examines two ballot measures attempting to make their way onto the 2018 ballot to transform the tax measure.
Prop 13: 101
Prop 13, first known as the People’s Initiative to Limit Property Taxation, was voted into California’s Constitution in 1978. It caps the amount property taxes may increase each year.
Prop 13 limits property taxes to 1% of the property’s assessed value.
The property’s assessed value equals the property’s base value (the property’s value at the time of purchase), plus an inflation factor determined by California’s consumer price index (CPI).
If the same owner has held the property since Prop 13 was adopted, then their home is taxed based on its assessed value in 1975. For reference, the average new U.S. home was selling for just over $42,000 in 1975, according to the U.S. Census.
The property’s assessed value may increase a maximum 2% each year, to compensate for annual inflation. However, it may change upon reassessment by the county assessor. A reassessment only occurs upon transfer of title, even if the property’s actual fair market value (FMV) is substantially higher than its assessed value.
Some transfers of title are excluded from reassessment, such as when a transfer occurs between an individual’s spouse, domestic partner or children. [Calif. Revenue and Taxation Code §63]
The property’s assessed value is not to be more than the current FMV, to be determined by an appraiser assigned by the county. Thus, during a recessionary period of price decline, if a property’s assessed value is higher than its market value, the assessed value is reduced to its reappraised value. The property is to be reappraised annually until the value exceeds its original assessed value, at which point the original assessment rules apply. [Rev & T C §51(e)]
Editor’s note — For an in-depth explanation of Prop 13, see: Prop 13, explained.
The good and the bad of Prop 13
Supporters of the rule say it:
- insulates older homeowners living on fixed incomes who may otherwise be unable to keep up with property tax increases;
- allows homeowners to plan for property tax payments; and
- encourages potential homebuyers to seek the tax benefits offered by Prop 13, fueling home sales.
Opponents of Prop 13 say it:
- is a regressive tax, as it disproportionately benefits established and wealthy homeowners over new homebuyers, owners of low-tier homes and renters;
- harms local economies since the lost tax revenue translates to fewer and lower quality public services;
- forces local governments to compensate for the lost tax revenue by instituting:
- more business taxes;
- higher sales taxes; and
- higher income tax rates;
- decreases turnover, since homeowners are rewarded in their tax bill for remaining in place; and
- allows for some major corporate and investment loopholes, allowing large corporations to benefit from reduced tax rates.
These drawbacks have spurred numerous attempts at overhauling Prop 13 over the decades. However, as is the problem with any tax break, it is extremely difficult to convince taxpayers to go back to paying more in taxes when necessity requires a change. Still, groups keep on trying.
Changes to Prop 13 on the table
In 2018, there are two Prop 13 ballot initiatives supporters are attempting to bring to the November 2018 ballot. These initiatives have the potential to change Prop 13 in very different ways.
The first initiative, the Tax Transfer Initiative, would broaden Prop 13 tax benefits, benefiting older homeowners more than under the current law and potentially loosening up home turnover, too.
Under the current law, a homeowner who is 55 years or older may replace their principal residence within two years of their sale without triggering reassessment. The new property needs to be of equal or lesser value and located in the same county as their previous residence, or in an accommodating county, including:
- El Dorado;
- Los Angeles;
- Santa Clara;
- San Diego;
- San Mateo; and
- Ventura Counties. [Rev & T C §69.5];
The Prop 13 Tax Transfer Initiative seeks to do away with these requirements, allowing a homeowner who is 55 or older to skip reassessment regardless of:
- the new home’s county;
- when they purchase their new home; and
- their new home’s FMV.
This would translate to a loss of around $150 million in property taxes in the near term, and grow to over $1 billion in lost tax revenue annually as the population continues to age and home values continue to rise. The majority of this lost revenue will represent a loss for school funding, according to Ballotpedia.
The second initiative under consideration — the California Schools and Local Communities Funding Act of 2018 — does the opposite and seeks to claw back tax revenue (but not from seniors).
Under current law, large businesses are actually profiting hugely off of Prop 13, avoiding reassessment and paying low property tax rates just like homeowners. The new initiative seeks to reassess commercial properties every three years, regardless of when they were purchased.
Businesses with property holdings amounting to less than $2 million and businesses with fewer than 50 full-time employees would be excluded.
If it makes it on to the November ballot and if it passes, the initiative would take effect in 2020.
The California Legislative Analyst’s Office projects a net gain of $6 billion-$10 billion in tax revenue annually. The Analyst’s Office also points out the potential for this measure to influence large businesses on whether they wish to do business in or expand in the state.
Both initiatives are still gathering signatures in an attempt to make it onto the November 2018 ballot.
The first initiative, which expands Prop 13 benefits for seniors, has already exceeded the minimum number of signatures needed, but these signatures still need to be verified by the state.
The second initiative, which would decrease Prop 13 benefits for commercial property holders, has not yet reached the minimum number of signatures needed to qualify for the ballot. But since it was introduced about four months after the first initiative, that doesn’t necessarily mean it is a less attractive proposal for voters. It has until August 20, 2018 to gain the minimum number of signatures.
Both reforms to Prop 13 have the potential to benefit California’s economy and housing markets. The first initiative may encourage older homeowners to move more often, which would increase turnover and add needed homes to California’s for-sale inventory. It also has the potential to improve the quality of life for older homeowners who wish to move out of their unsuitably large suburban homes and into something smaller, more manageable and convenient to services.
But this would also take away even more funding from schools and other public services.
On the other hand, the second initiative is exciting for all types of residents, as it adds to public funding. However, large businesses will pay the cost, as they are forced to pay higher property tax rates, a cost which may trickle down to impact employees. Detractors have been calling for Prop 13’s corporate loophole to be closed for years, and 2018 may be the year that finally happens.
Stay tuned for more information as these initiatives make their way toward California’s ballot later this year.