Households benefitting from Prop 13: The estimated number of California households that purchased and retain their homes at a price lower than current fair market value (FMV) and thus pay a smaller amount of property taxes than they would if they purchased today
Households not benefitting from Prop 13: The estimated number of California households that purchased their home at a price higher than its current value (from the years 2003-2008), plus all non-homeowners (renters)
Prop 13 renders homeownership less attainable
Property taxes are crucial to a local government’s ability to provide public services to maintain and give value to the community. In other words, property taxes support a healthy and desirable local housing market.
Most homebuyers, if asked, cringe at the thought of paying annual taxes on their home. The requirement might even make them reconsider becoming a homeowner in the first place. This is where Proposition 13 comes in.
Proponents of Prop 13 claim fixed tax rates are good for the housing industry, as homeowners avoid annual increases in property taxes based on cyclically inflated California home prices. It also purportedly increases neighborhood stability, as homeowners have a financial reason to stay in the home longer. The longer one stays in the home, the more likely they are to experience property tax savings compared to more recent homebuyer arrivals.
Those who purchased their home prior to 2003 are paying a property tax rate sheltered from the outrageous triple asset price inflation of the mid-2000s housing market. Further, those who bought at the bottom of the trough, 2009-2012, are at a much greater property tax advantage than those who bought during the 2013 speculator price wars.
Fewer taxes, fewer services
Keeping taxes low sounds like a great idea. However, Prop 13 presents a major drawback for the local community at large. It is, at its heart, a regressive tax scheme. Prop 13 subsidizes established homeowners with a transfer of wealth from younger, less wealthy families entering the neighborhood. These new homebuyers contribute a disproportionately large share of the revenue collected by the local government to pay for public services. That’s why Prop. 13 is called the “welcome stranger” law.
For instance, consider a homeowner who bought their home in 2009 and is now paying their 2013-2014 tax bill. Due to aggressive price appreciation since the trough of the recession, the home’s current FMV is now 30% higher than when it was purchased. However, under Prop 13, the assessed value of the homeowner’s property has only increased by 2% a year since 2009.
Thus, despite the gain in the homeowner’s household wealth (which, by the way, they can now extract through an equity loan rather than sell and replace that home with a higher assessment and property taxes), they are paying substantially less tax than if they purchased today.
As a regressive tax, Prop 13 places a disproportionate share of the tax burden on those least financially able to bear it: new homebuyers and renters.
This is why the injustice of regressive taxes really hurts others.
Renters are already at a disadvantage; on average they pay landlords more of their household income for housing costs than homeowners, seen in the second graphic. Unlike homeowners, renters don’t have an annual mortgage interest tax deduction to offset their housing costs. Renters pay market rent, while their landlord’s property taxes — and thus, their operating expenses — are held down by Prop 13.
The landlord reaps all the tax benefits, while the renter — future first-time homebuyers — plods on, saving for a down payment without any government support.
Many, many subsidies exist to promote homeownership, nationally and in California. However, renters are left out to dry. Further, they face 25-30 years increasing interest rates which diminish the amount of mortgage money they can borrow to buy a home.
Zoning restrictions drive up prices further as builders cannot meet the demand for additional shelter. Add it all together and you get an extreme issue of inequality in each of California’s communities, particularly in the low-tier areas typically sought by first-time homebuyers.
Get the big picture
Prop 13 benefits the few at the cost of the many. For long-term stability in California’s economy and housing market, a balance of opportunity must be struck between the haves (homeowners and landlords) and have-nots (renters). The 2008 financial crisis and reboot of the mortgage market based on long-term lending fundamentals has focused attention on the deprivation of the less affluent among us.
Builders, brokers and all other providers of services to homebuyers benefit from regular turnover of renter and homeowner occupancies. But they are affected by distortions of volatility and long-term cyclical instability brought on by government through unequal taxation. Worse, lenders benefit additionally from government-induced shifts in long-term wealth as income tax subsidies absolutely encourage buyers to mortgage the property they acquire.
Currently, Prop 13 tips the scale in favor of pre-2000 long-term homeowners benefitting from unequal property taxes. These conditions spell trouble for growth in California’s long-term housing market, part of the ill effects you will sense in 2014 home sales volume and pricing.