Proposition 13 (Prop 13) may undergo changes from a proposed ballot initiative for the 2018 statewide elections.
The measure sponsored by the California Association of Realtors (CAR) seeks to amend Prop 13 by allowing all home sellers to apply a portion of their existing property taxes at the reduced rate to a replacement property, no matter the value. This method carries over a homeowner’s property tax, plus the difference between the property tax bill for the old and new properties based on their current market values.
For example, consider a homeowner whose current property tax bill is $4,000. They sell their home for $500,000 and purchase a replacement home for $600,000. Under the proposal, the new property tax paid by the homeowner is $5,000. This is determined by adding the difference in the assessed property taxes on the two properties ($6,000 – $5,000 = $1,000) to the property tax amount carried over from the previous property ($4,000).
Currently, only homeowners over the age of 55 in some California counties may transfer their present property tax rate to a replacement property of equal or lesser value. Unlike the proposal, this transfer maintains their existing property tax bill as is.
The measure intends to encourage sellers to relocate without fear of drastically increased property taxes, adding much needed supply to the high-demand real estate market, according to the authors.
Is the proposed amendment enough?
Though the CAR-sponsored ballot initiative provides some benefits to sellers, it is lacking in scope and efficacy.
The amendment may encourage homeowners to move more frequently, no longer locked in by the property tax savings afforded by their current ownership. However, extending reduced property taxes to all sales is done at a significant cost to local governments, worsening the present shortage of local tax revenue created by Prop 13.
Further, the proposal’s main function is to add turnover to the market — a benefit primarily for real estate agents who will increase their sales — but it does nothing to effectively increase inventory, as the authors suggest. This is an issue to be resolved by amending zoning regulations and boosting residential development.
Prop 13 can be amended more efficiently by focusing on ways to maintain property tax revenue but protect vulnerable homeowners. For instance, the tax law could cover only those in a certain income tax brackets.
Why Prop 13 needs fixing
Prop 13 was voted into California’s Constitution in 1978. It limits annual property taxes to 1% of the property’s assessed value, calculated by adding the property’s base value (the value at the time of purchase) and an inflation factor determined by California’s consumer price index (CPI).
The assessed value is limited to a 2% increase each year. A property is only reassessed at its full market value on a change of ownership.
Prop 13’s creation began as an attempt to protect elderly homeowners on fixed incomes from losing their homes due to growing property values and excessive property taxes. Though it has served this purpose and remains popular among California voters, the tax law does have considerable drawbacks for California’s economy and homeowners.
Some of the negative effects of Prop 13 include:
- reduced sales volume and decreased mobility, as homeowners are encouraged to remain in their current homes to avoid increased property taxes on a sale;
- disproportionately higher tax rates paid by new homebuyers, while more established neighbors pay less and benefit from the same government services supported by property taxes;
- lost revenue for local governments that subsequently drive up other taxes (i.e., income, sales and business taxes);
- the significantly lower amount of property taxes paid by investors and businesses due to major loopholes in Prop 13, shifting the majority of the state’s property tax burden to homeowners; and
- lower quality government services resulting from lost tax revenue.
Of course, Prop 13 does not need to be eliminated completely — and likely cannot be due to its untouchable status as a revered tax law. However, amending Prop 13 will reduce its negative footprint on the economy and close corporate loopholes, while simultaneously safeguarding vulnerable homeowners from excessive property taxes.
Thus far, those who seek to amend Prop 13 have been faced with legislative challenges and backlash. Any changes to California tax law which result in an increase in taxes are required to be passed by a two-thirds majority in both legislative houses. [Calif. Constitution Article XIII Sec. 3(a)]
However, a recent decision by the California Supreme Court determined a citizens’ ballot initiative to increase taxes need only require a simple majority vote — a significant change that may open the door to passing amendments like those proposed recently.