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.
*Graphics calculated using data and analysis from the U.S. Census Bureau.
This latest attack on Prop 13 is absolutely ludicrous. Many parents and grand parents got to raise their children, keep, and maintain their homes because of Prop 13.
If you want a horrible example on how property taxes can go for homeowners I have one word….TEXAS…ouch. Their property taxes are so regressive, they literally KEEP
prices depressed statewide. If the state needs more money, find another way. With the
lending rules, mortgage write off attack, and now prop 13, individual home ownership
and the middle class is at more risk than ever. DO NOT DRINK this Koolaid!
There’s nothing to prohibit one from forming an LLC or other Corporation so long as the benefits are greater than the cost of maintaining the structure. And, so, it most likely will benfit apartment owners because the values are normally higher than single family residences.
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If you lift the lid on Prop 13 there is nothing that will prohibit the government from increasing the assessment or the tax rates. Everyone must help to maintain taxation at a level that all of us benefit from. Keep 13 intact!
One only needs to turn their eyes to New Jersey for the results of high property taxes. The current population is decreasing due to residents fleeing the tax system. The attach on prop 13 is directed by government unions to fund those outrageous benefits and pensions they have voted for themselves. There are less than enough remaining taxpayers to fund these perks and now the unions are coming after your equity.
What a totally moronic perspective. Clearly the author does not understand the State’s history basic principals of business. Californians are already one of, if not the most, heavily taxed constituents of any state in the Union. Thank god for Prop 13 and the restraints it places on the out of control and irresponsible legislature. Removing Prop 13 would allow the counties to reassess home values are they rise “on paper” so that people would no longer be able to afford their homes because of the enormous cost of the property taxes. It would be like expecting people to pay taxes on their stock portfolio based on market price even if they didn’t sell their stock. Prop 13 also benefits renters by keeping their landlord’s costs down. If their property taxes went up, so would the tenants’ rent!
This article really makes me think differently about First Tuesday and the lack of intelligence they possess in the area they profess to be expert!
I have to distance myself from First Tuesday as I see the Staff and the editorialist leaning further and further to the left. California and Jerry Brown have carried on expanding CA Govt. spending as though there never would be an end. The reason Sacramento needs to expand property taxes is directly related to the cozy relationship that the politicians have with union money for their reelection campaigns. The Pensions and the Benefit packages for Public Employees will never be paid. There is not enough money to make them work.
So look out if you agree with the author of this piece on Prop 13. Property taxes would soar if you give sympathy to this hogwash author.
What would be fair would be to do a “Prop 13” every 5 or 10 years. But the politicians are in trouble and are just looking for a chance to get into the property taxes and spend some more money.
Look hard at the reasons we are showing a fiscal surplus. If we really are.
The author’s claim of “no benefit” isn’t even accurate given that if your property value decreases your property tax base is reassessed to adjust to that decline. And an added benefit to BOTH groups is also that if/when house values skyrocket property tax was not accordingly increased. Now if we want to be fair and balanced about things, shouldn’t the tax go up the same as it goes down? Well, it doesn’t so that’s one less advantage for the county, and one greater perk for the homeowner. Values can slowly climb back up to your original purchase price tax base and then increase annually — a max of about 1-1.5% — but they cannot go haywire if house values go up dramatically. And when all other reasoning fails, it’s like my 6th grade teacher said to me (Hi, Mrs. Haynes): “No one ever promised life was fair.”
I agree with Mr. Davis. As a real estate professional I have found there to be great advantage for a buyer knowing what the property tax will be now and later, and allows them the ability to plan accordingly. So if you can afford the payment when you purchase, then you can also afford it later.
I have also experienced the other side, having bought properties outside of CA where taxes “adjusted with values” and found that as the market went down our property taxes went up. Apparently because the economy got bad and the cities had to get their money to run from somewhere, so they adjusted the property taxes accordingly… UP! We disputed it, but it did not go anywhere.
So I am very thankful that my house I own here in CA does not have that problem.
ps. with prop. 13 the government knows how much money is coming in. It does not change. They know what they can count on every year (with slight variations due to market conditions). So what is the big deal? Unless you plan on reassessing everyone’s taxes as prices go up and not reassessing them when they go down, like happened to me.
Proposition 13 was the result of politicians and government using property taxes like a blank check. They were out of control. I was involved in some of the early movement and quit when I couldn’t make any ground on getting it written as a straight maximum of one percent of the current market value as the maximum tax. Thus even income properties could be controlled as rents rose and the property value rose taxes would go up accordingly. Wouldn’t matter about incorporating as one poster stated. Or even change in ownership. The flaws are now apparent and can be corrected but control of government recklessness in spending and using property taxes as a blank check so bureaucrats and politicians can build self-serving empires still must be controlled.
The chief beneficiaries of Prop 13 are not homeowners, but apartment building owners who incorporated, then passed their property down to successive owners by simply changing the shareholders, but not the name of the corporation. In these cases the property is not reassessed. They are working the system to the detriment of the rest of us. NOT, I might add, the intention of those of us who worked so hard to put 13 on the books.
That may be true, but anyone likes to find an actual legal advantage in a law that benefits them. Why should anyone be upset that “apartment owners, inc.” found one? I’m sure if you were an owner of apartments and wanted to pass down to your children or some other transfer of ownership, you would be very happy about the benefit. It’s all a matter of one’s perspective, really. I don’t think it’s unfair, especially considering all the truly unfair dings and traps that businesses and individuals get from local, state and federal government agencies and processes ad infinitum.
That’s absurd. The chief beneficiaries are homeowners and renters that would be paying higher rents if the property owners had to pay higher property tax. Very few commercial (apartment or otherwise) are sold in the manner that you described. In fact, in my entire professional career in real estate, I have NEVER seen a building’s ownership transferred in this manner. Incidentally, if one was, it would be subject to reassessment under Prop 13.
With respect to owners of a house with a lower value than when purchased: In 1978, California voters passed Proposition 8, a constitutional amendment that allows a temporary reduction in assessed value when a property suffers a “decline-in-value.” A decline-in-value occurs when the current market value of your property is less than the current assessed value as of January 1
The cost to rent a single family home in Palos Verdes, where I live, and other affluent areas is a fraction of the amount of mortgage payments and property taxes to own the same house. Not to mention making a down payment of several hundred thousand dollars in a illiquid asset.
I submit that new homeowners are in the same place as those of us who scratched to by a house years ago and they too have the opportunity reap the benefits sticking it out. So, in the interest of people who want theirs now, shall we get rid of Proposition 13 and force out retirees and others who planned their housing around a predictable expense? As Mr. Davis points out above our real problem is excessive spending, caused by irresponsible legislators who are accountable only to the special interests that keep them in office.
Comment Author Jeffery Davis, correctly articulated the soundness and reasons for continuing this Tax Bill (prop 13 otherwise known as The Jarvis – Gann initiative). Folks who oppose or want to change it, are either too young to remember what the tax environment environment was back in the 1970’s, or have been brainwashed by the “Tax & Spend” politicians in Sacramento.
Obviously, the author must have been too young to remember the how many homeowners in the 1970’s were forced to sell their homes due to the outrageous property taxes in California or those who could not own a home due to the high taxes. Property taxes increased yearly at a far greater pace than the income of the homeowner.
Prop 13 has allowed stability for the homeowner because they can predict year to year what the taxes will be and can plan accordingly. The author also fails to forget the value of prop 13 to retired folks on a fixed income. Prop 13 allows them to plan and continue to live in their homes without worrying about massive increases. I could go on about the benefits but there is not enough room.
Also, to say that landlords reap all the benefit at the expense of renters is simply not true. Any additional costs to the landlord, i.e. increase in property taxes, will passed along to renters in the form of higher rent! it doesn’t take an economist to figure that out. It amazes me how the “economists” can sit in their offices and make these assumptions and get away with it because ” they are the experts”. It is quit obvious most of them have never owned a business or practiced their theories in the real world.
The state of California has a spending problem, not a revenue problem. Our taxes are among the top in the nation, and somehow politicians never seem to have enough money. Placing additional burden on homeowner by modifying or eliminating prop 13 is simply wrong!
Amen!