How much property tax did you and your clients pay last year?
Roughly 70% of California homeowners pay an effective tax rate of less than 1%, as of the 2015 tax year. 40% of California homeowners pay less than 0.5%, according to Trulia.
The piece of legislation behind California homeowners’ low property tax rates is Proposition 13 (Prop 13).
Prop 13, also 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).
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Places of the state with the highest home values have the lowest effective property tax rates. The lowest average property tax rate in 2015 — 0.42% — is in Palo Alto, where the median home value was over $2.2 million that same year, according to Trulia.
On the other hand, the highest effective tax rates are found in areas of the state with low home values. Beaumont has the highest average property tax rate — 1.37% — and here the median home value is just $260,000.
Average property tax rates are consistent with an area’s:
- home value growth;
- long-term resident population; and
- new housing construction.
Therefore, a place with rapid home price growth, a large number of long-term residents and little new home construction — like Palo Alto — will have a lower effective tax rate.
California lost over $12.5 billion in 2015 to reduced property taxes. Is this a problem? It depends on who you ask.
The pitfalls of Prop 13
For wealthy homeowners who have lived in their homes for many years, Prop 13 is terrific. In fact, the very reason for Prop 13’s creation was to protect elderly homeowners living on fixed incomes from losing their homes due to escalating property values/taxes.
Over the past few decades, Prop 13 has accomplished this — and more — at the expense of new homeowners and renters.
Some of the negative effects spread by Prop 13 include:
- reduced sales volume, as current homeowners are incentivized to stay in their current home to keep their low tax rate;
- new homebuyers — typically young families with less wealth than their more established neighbors — pay higher tax rates than their neighbors, who benefit from the same government services their property taxes support;
- local governments need to make up for the lost revenue from property taxes by requiring:
- higher income tax rates;
- higher sales taxes; and
- more business taxes, according to the Tax Foundation;
- major loopholes allow for investors and businesses to take advantage of reduced property taxes — not the law’s intention; and
- all of this lost tax revenue leads to lower quality government services.
The thing is, the law could be changed to protect older homeowners from property tax increases, while eliminating the negative effects mentioned above. For instance, the law could cover only those in a certain income tax bracket, and/or those over a certain age.
But it’s extremely unlikely the law will ever change. Once people get used to a tax break, they won’t vote to eliminate it. Further, any changes to California tax law which result in an increase in taxes (of any kind) are required to be passed by a two-thirds majority in both legislative houses. [Calif. Constitution Article XIII Sec. 3(a)]
Finally, first tuesday is in no doubt of its readership’s feelings on the matter. A recent poll showed 82% of our readers were in favor of Prop 13.
We aren’t proposing California eliminate Prop 13. But reforming it to eliminate corporate loopholes is the least California can do to regain some of the lost revenue that harms local infrastructure. For example, consider the 2013 revelations that Michael Dell was able to avoid paying over $1 million in annual property taxes on a hotel purchase by using Prop 13’s corporate loophole.
Ought California homeowners and renters continue to subsidize large corporations? Tell us what you think in the comments.
The article indicates “California” lost 12.5 million in property tax revenue. I disagree. Californians kept 12.5 million of their money. They used it to increase savings, or spent it as they decided to use it. They undoubtedly started business paid for education of their families or spent the money locally, which I’m sure the local businesses appreciated. I am old enough to remember the burden of run away property taxes. Prop 13 is good policy. Leave it alone.
12.5 billion not million
Unfortunately that’s the trouble with “pendulums” and the way most legislation is arrived at, the attempt to cure the immediate problem without looking into the future when there is a reversal. The new home buyer, the least able to) has been carrying the brunt of this legislation and modifications should have been written into law to avoid the situation as it now stands. Prop 13 got voted in 1978 after the first significant upswing in home prices. In the last 39 years. We have experienced at least 3 major downturns and 3 significant reversals. Fortunately the tax assessor has the provisions to allow for property taxes adjustments when property values are reduced in a universal downturn, whatever length. as well as to be reinstated along with the 2% maximum per year. Perhaps adjusting for some Zip Codes could be a start working to redistribute both those carrying the load (first time home buyer,and new buyers) in mostly more affordable areas with a reasonable increase rate for the ones benefiting from their long term residency status whose income levels surpass the “norm”.
YES ! ! !
The author ignores the basic fact that if, for example, some one bought an item many years ago when things were cheaper they paid quite a bit less in sales tax than the sales tax on that same item would be today. The same is true for Prop. 13. Should the State retroactively go back and collect today’s sales tax on all items sold throughout the years? Of course not. Give up on this attack on Prop. 13!
Ben, my YES !!! above was intended for YOUR comment. I clicked wrong.
Discriminating in the application of the law should be considered a violation of the law. The suggested “Zip Code” adjustments above would be rightfully overturned by the courts, based on Fair Housing laws.
Ugly-and expensive- can of worms with no happy ending for anybody.
There is no reason why only real estate should be singled out for rent control and a proxy for collecting tax revenue. In California a 1.25% property tax rate may be fine to generate sufficient revenue and in some other states it is as much as 5 to 7% … the home prices are lower. SO the bottom line is to generate review one way or the other.
But just think about this .. by allowing long technology monopolies in the name of ‘intellectual property’ … yet we do not come up with the proxy of ‘rent’ control … example there may be limit on profits in relation to the monopoly granted.
By the same token … the tax revenue is collected on the real estate property … instead why not collect tax revenue on the intellection property…
I
I have lived in the same residence for over 40 years and am now retired. If faced with pre prop 13 tax rates, could not afford to live in the home I own. Would most likely have to relocate to Florida or some other lower cost State and no doubt many other retired homeowners would have to do likewise. So if many of we retired Californians had to leave the State, who would be left to provide the funds necessary to pay for the excessive services granted the do nothings living here ? One must remember that we retired also pay income taxes, sales taxes and so many other taxes that go upstream to pay the salaries and benefits of the Sacramento Swamp! One wonders why all the money from our lottery, gas taxes, income taxes and soon drug taxes still is insufficient to provide the services deemed necessary by our State legislators? Soon our State will feel the sting of lower Federal funding caused by those so called sanctuary cities that hopefully will wake up those very unproductive Sacramento swamp dwellers! More tax and bond money has obviously not provided the services needed or promised, just seems to provide more benefits and salaries for the swamp dwellers and their do nothing supporters!
Taxation is nothing other than theft by the government. Eliminate property taxes, income taxes, and watch the housing market and overall economy sore. Some people will then say, “who’s going to pay for the services and roads?” That is another argument, but the short answer is it can all be paid for privately. It will cost less, and be more efficient as well.
If you increase property taxes solely on commercial property owners many will be put out of business and those that are not will pass the increase onto tenants (businesses and apartment dwellers) that in turn will increase their pricing thus adding to the publics cost of living in general. It is unreasonable to use extreme examples of a few or to assume just because certain people own commercial property they are wealthy monsters that somehow did not earn the right to their assets. In general and by far in most circumstances when commercial property is sold, it is reappraised to market value just like any other property and the taxes are raised to market value. Currently prop. 13 is helping many home owners and commercial businesses keep the cost of living down for us all.
Prop 13 is often falsely blamed for local funding shortfalls. A few years ago an interesting study compared funding for schools K-12 for a 20 year period before and after Prop 13. That showed that funding on a per-student, inflation-adjusted basis DOUBLED after Prop 13. When I asked an old teacher [then principal] about the seeming contradiction with the schools’ complaints about underfunding, he explained that total funding had indeed increased, but state government mandates for “special programs” had taken away more than the increase, leaving less for teaching. This is just another example of the cynical practice of politicians to fund pet projects first, then cry poverty and seek bonds for e.g. education and law enforcement, when those should have been fully funded as first priorities.
Do you have a citation for that study? Because that sounds like total BS.
It was published in the Santa Rosa Press Democrat. And as I said, the misallocation was confirmed by a local principal. sorry if it conflicts with your preconceived notions.
Can you please provide a link to per pupil spending study, please? I can’t find it. The state is in another budget crisis, and so school districts are seeing some low per pupil spending from state. Would like to expand my knowledge. I found an interesting article too. Thank you!
https://edsource.org/2017/how-does-california-rank-in-per-pupil-spending-it-all-depends/577405
Here we go again. First Tuesday attacking the very proposition that has allowed people to afford to purchase homes to begin with. There is a built-in provision that allows for a 2% annual increase in valuation, so revenues from individual properties are not stagnant. So what if someone purchases their home and lives in it long term? The only reason my grandfather lived in his home until he died at 99 was because of proposition 13. If he would have paid taxes each year base on the increased value, his property taxes alone would have consumed over half his income. He would have been forced to sell the home that he had lived in for almost 60 years. The author states California had lost over $1.25 billion in 2015 alone. That is a mere pittance of our overall budget. If the current liberal legislature exercised fiscal restraint and we were not supporting illegal aliens, lazy people living off of social programs, and paying excessive salaries and lifetime pensions to government workers, California would be fine.
If Proposition 13 is messed with in any way, it will be, as always, the average middle class worker and their families who will suffer the most. Low income families that rent apartments will suffer as well, since landlords will pass along any increases in property taxes in the form of rent increases. Remember what happened with the minimum wage increase? Your $5.00 meal combo at the local Mc Jack burger now costs $8.00. Pretty soon you will not be able to get through the drive through for less than $10.00 per meal. Business owners have adjusted their prices upward in order to pay the new wage. How has that helped our economy? Unfortunately, most of the people who endorse new tax schemes have never owned a business nor experienced the effects first hand. California is on the path to implode at any time. I am certain our current majority legislature will see to it. More wealthy Californians will be exiting the state soon-then what??
If you open the door for politicians to ‘reform’ 13, you’ll lose it all together.
Perhaps the author is too young to comprehend what preceded prop 13?
The fact was that the tax used to be 3% of market value with a reappraisal done by (prejudiced) county assessor staff every four years. The reappraisals were aggressive and people on fixed incomes were abused by the process.
I was employed at a consulting group that provided services to local government, and I saw the wheeling and dealing using tax dollars in redevelopment areas, and the abuse was legal, but profound. Cities were awash with cash, and using the money to play property speculation rather than providing local government services.
Prop 13 was a blessing. Jerry Brown campaigned against it, saying that the state would go broke. It didn’t. In fact, businesses moved into California because the prohibitive expense of housing instantly became less, and economic activity thrived.
The quoted USC report (mentioned by Ian) is a typical NIMBY opinion, promoting that someone else pay taxes and that the little guy should vote for it because it doesn’t affect them. I dispute the concept since taxes are passed on in the cost of goods and services and to imagine that corporations are bad people is a fantasy. Corporations spend earnings in many ways – income taxes, salaries, dividends, so to pretend that corporations are evil people is a fantasy.
We need to agree that the system that existed prior to Prop 13 being enacted was unworkable. We don’t want to go back to that, and it helps to realize that major retailers are leaving (due to falling sales) so where does it make sense to call commercial property owners, large corporations, needing ‘reform”? I disagree.
Thank you for a much needed history lesson.
Your amusing article ignores the tremendous taxpayer burden created by the inflated retirement pensions of government workers.
Yes, Prop. 13 should absolutely be reformed to make corporations pay their fair share while maintaining protections for homeowners. It is outrageous that Chevron is undertaxed by $500 million because of this law that was passed to protect seniors in their homes. Corporations like Chevron and wealthy commercial property owners like Michael Dell should not be taking advantage of Prop. 13 and forcing the rest of us to pay more in other taxes. A USC report says that just reforming the commercial side of Prop. 13 (not touching homes or apartments) will restore over $9 billion per year in local revenue to California schools and public services. This is a commonsense solution that everyone should get behind.
I am pretty sure corporations already pay more then their fair share with some of the highest corporate tax rates in the nation if not the world so let’s make them pay more and promptly drive those business who employ hundreds of thousands out of the state all together. I am so tried of hearing the rich should pay more argument.
Often forgotten is the fact that corporate profits are taxed twice, once at the corporate level and later when distributed to the individual share holders. Although California does have a lot of high net worth individuals it is no accident that many live in states with lower or zero income tax. I noticed that Tiger woods jumped ship and moved to Florida very early in his career. When CA has it’s “shortfall of revenues” it is partially because the tax structure encourages people to live and do business elsewhere. If the climate wasn’t so wonderful LA would be Detroit…
Ian, you have good intentions. But your youth and inexperience does not make your defective logic “commonsense”. Chevron is NOT “undertaxed”. But if you increase Chevron’s expenses, you better count on it that all of us who struggle to pay insane increasing prices for groceries, will pay Chevron’s new expenses by paying higher prices at the pump every day. Plus a little for inconveniencing them with accountant and attorney fees for managing mountains of new paperwork. Plus higher prices on groceries and EVERYTHING YOU BUY!
How do you think stuff gets to the stores? In trucks. Trucks use gas. Thinking logically to an end flow is almost the definition of common sense.
WE DON’T SAVE MONEY BY INCREASING TAXES. We just underwrite more spending abuse by government, out of our own pockets. Doing that voluntarily would absolutely DEFY common sense. Don’t believe everything the government tries to sell you. They lie.
Ian, You have good intentions, but fail to understand that commercial and industrial property does not move in the same manner as residential property. An old oil field cannot be used for anything else unless it is cleaned up at great cost. If Chevron or any other company let these properties go to TAX AUCTION the government would have to pay millions. There are other examples similar.
So it is best to leave Prop 13 intact