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 author is typical of the liberal entitled generation who feels that Californians can continue living off the government by increasing taxes instead of de-funding PERS and social programs. I know of folks living in million dollar homes collecting food stamps. How is it that Public Employees receive pensions whereas private companies eliminated pensions 20 years ago? Prop 13 will never go away because our legislators all own tons of real estate. Sorry! Time to take ownership of the resources you have.
I agree with you. The political crooks are always trying to corrupt prop 13. Before prop 13 whenever the government needed money, which is always, they just hit the homeowners for more property tax money. That was the reason for prop 13 – was to take the hands of the corrupt gov out of our pockets. To read about some fool wanting to “reform” (corrupt) prop 13 is infuriating. Besides, she wants higher taxes on corporations rather than the people – that is incredibly stupid since all corporate expense is passed along to us, the taxpayers. Stopping the corrupt government spending is the solution. People should be incentivized to work and not collect free stuff.
I’d have to agree with you.
Yes, we have a Snowflake vs a Despicable . You haven’t made any money until you sell the property———–so the taxed go up when that happens. All sales prices are turned into the Assessor’s office so that you pay your 1% PLUS ALL OTHER FEES AND TAXES. Local elections determine those extra fees
The political crooks are always trying to corrupt prop 13. Everyone should join the Howard Jarvis website to support prop 13. Before prop 13 whenever the government needed money, which is always, they just hit the homeowners for more property tax money. That was the reason for prop 13 – was to take the hands of the corrupt gov out of our pockets. To read about some fool wanting to “reform” (corrupt) prop 13 is infuriating. Besides, she wants higher taxes on corporations rather than the people – that is incredibly stupid since all corporate expense is passed along to us, the taxpayers. Stopping the corrupt government spending is the solution. People should be incentivized to work and not collect free stuff.
And another thing, there is no state in the US that needs this protection as much as California because CALPERS is underfunded to the tune of over $!00,000 per household – and that grows every day. Where will they get this money? Well, real estate is the only asset you can’t move out of the grasp of the robber barons. Its bad enough that they have a checkbook to write against your home. Can you imagine what they would do if there were no limitations? We don’t need to imagine because once there were no limitations. The government thievery that took place is exactly why Prop 13 was created.
I predict that the legislature will be forced to kill Prop 13, which they can do without a vote of the people. CALPERS will bankrupt the state. But the state can’t file bankruptcy unless they fully exploit all revenue sources. That means they can’t cry bankruptcy unless they kill Prop 13 and tax real estate to death.
Hey Fred, fire this author before you lose customers.
Whenever new agents ask about materials for their exam, I would always refer first tuesday without even thinking about it. No more.
Only a young, brainwashed, snowflake could write an article like this. Total propaganda. She cites one of the reasons Prop 13 is broken is that it reduces sales. Perhaps this so-called author needs to research the entire history of Prop 13 before she tries to BS experienced professionals with her own political agenda. She is from a generation that was taught we should give our assets to government and let them spend it for us. In prior challenges, the courts already decided that it doesn’t need to be perfect in order to be fair. Ad hominem attack? Yep! And fully justified because this is d hominem writing.
Total propaganda by this agenda driven ‘writer’. Great job First Tuesday for printing this garbage. Property Tax should be kept to the very lowest possible amount at all times and ideally should be determined by size of the lot NOT assessed value which is totally arbitrary. Just another way the few pay for the many.
Carrie B. Reyes apparently did not read her own referenced source material. The article linked about Michael Dell includes a CORRECTION that it was the BOE code regarding division of property, not a flaw in Prop 13, that Dell’s attorneys used to sidestep tax penalties. Click the link!
“Prop 13 has failed to rein in California’s public sector. ” From the linked Tax Foundation article, which also states that California in 1978 (pre-Prop 13) and TODAY, California still has the 4th highest tax burden of all the states in the US. So without Prop 13 protection, the logical conclusion is that California would be HIGHER on the national TAX BURDEN scale. Would that be a blessing for taxpayers? Homeowners? Renters?
How does that make Prop 13 a failure? Why did this writer reference articles that she either did not read, or did not understand? The failure of “California’s public sector” to rein in expenses is not a taxpayer failure. Nor is it the “failure” of one of the few successful laws in generations to attempt to do so.
Prop 13 has been a significant success. That’s why 82% of people surveyed support it.
Without this “failure”, we would all be paying MORE for housing expenses, not less.
One thing the author left out, how about the state reduce spending?
What a click bait title this article is. Does the author live in California or even own property? Investors and businesses in California need all the loopholes they can get in order to operating in this anti-business state.
The only reform I would support would be the complete elimination of the extortion called ‘property taxes’. Property taxes tell us there is no such thing as ‘private property’. A property tax is the State declaring that it owns the land, and worse than that, it is the state attempting to usurp your God given right to do what you want with your own land, by saying it owns the land. This arrangement is known as serfdom to a feudal lord which is now called the State.
Despite what I said earlier, probably some “gentle” reform would be a good thing. Commercial property does not turn over as quickly as residential property, so perhaps increasing the inflation index on these properties may be appropriate. It is also true that homeowners who have been in a property for an extended period are encouraged to stay put, but this is mitigated by the laws allowing those over 55 to downsize and keep their tax base. Perhaps an expansion of this policy combined with an increased allowance for inflation would make moving easier, not that staying put is a bad thing. I do think it bears pointing out that the CA state government and federal government seem to come up with never ending ways to suck more money out of taxpayers and it does seem odd that our elected officials always seem to have more money than the rest of us.
Not true regarding the commercial property turnover. I am a commercial RE broker and I have sold many properties over and over within a short amount of time. Some people purchase commercial properties assuming it is the path to easy street. They soon find out there is great risk and work involved to manage and end up selling and sell shortly after purchasing. Turnover is no different than residential where some people purchase and hold and some people buy and soon sell.
The government needs to stop spending money they don’t have. The schools need to stop feeding people, their job is too teach.
Cut government spending and all of the freebies.
Since the inequality in percent tax paid is pretty much based on location, it might be worth considering tying property zip code to the tax rate. This would serve to up the rates on those that have been avoiding paying their commensurate share of property tax and also free up the tight markets by incentivizing owners with locked in rates to sell. There could also be carve outs based on income to protect retirees on fixed income.
The problem with “carve outs to protect retirees on fixed income” is this; We are not retirees or on fixed income when we buy our “forever” home, or we would never qualify for a home loan. If the “carve outs” are only done retroactively, we may have already been forced to move to cheaper housing based on rising taxes. How is that fair or even ethical? Good Neighborhoods are built on Homeowner Stability. Forced transience damages everybody involved.
Under existing Prop 13 rules, those “retirees” have ALREADY BEEN PAYING ANNUAL TAX INCREASES of about 2% since the day they bought their home. In many cases, even “new” homeowners who have the “benefit” of high appreciation rates, bigger TAX increases would mean the dream home they scrimped to purchase would become no longer affordable. How many of us get regular annual raises greater than 2%? Unless, of course, we work for the government.
Prop 13 is well written. It has stood the test of time. The government is NOT having financial issues because stable homeowners have stable property tax rates. Most of government’s financial issues stem from ridiculous retirement entitlements to government employees that impoverish the rest of us actual taxpayers. The rest is just bad money management.
When and until politicians stop green lighting ridiculous projects like the high speed rail we should oppose any discussion of change. The reason for Prop 13 was greedy, wasteful politicians buying votes with our money. Enough!
They collected the money for repairs to the Oroville Dam and squandered it elsewhere. Now what?
Time to change the laws and jail politicians for defrauding taxpayers in wasteful schemes like these!!!