This article examines the unequal property taxes paid by Black and Latinx homeowners and the implications for homeownership rates in California.
Everyone pays taxes, but how much?
Nationally, the average Black household has a 13% higher property tax burden than the average White household. That’s mainly due to the unbalanced assessed values of homes in non-White neighborhoods. Homes in Black and Latinx neighborhoods have 10% higher values for tax assessment purposes relative to the actual sales price, according to a study by researchers from the University of Utah and Indiana University, as reported by the Washington Post.
Why do Black and Latinx households pay higher property taxes?
According to the study, two reasons stand out:
- with more generational experience in both owning homes and successfully challenging legal systems, White households are more likely to appeal their assigned property taxes; and
- higher tax rates have been used by local governments to push long-term residents out of gentrifying neighborhoods.
However, this national assessment excludes California due to the wonky tax rates produced by Proposition (Prop) 13. More on that below.
The situation
The Washington Post examines America’s deep-seated conviction, countered by sociologist W.E.B. Du Bois over a century ago, that White people are “makers” and Black people are “takers,” receiving more in public services than they contribute. But this is objectively untrue, as research shows Black residents pay higher effective tax rates than White residents — including property taxes and regressive taxes.
Generally, the bigger your paycheck, the more taxes you pay. However, the rate of taxes varies based on what type of income and what type of payments are being made.
For example, capital gains are taxed at 20% for the highest income bracket, compared to a maximum 37% tax rate for regularly earned income for this bracket. A capital gain is the profit realized from the sale of an asset or other investment, like a home sale. On top of this limit, the principal residence profit exclusion allows qualifying homeowners to exclude the first $250,000 — or $500,000 for joint filers — from the sale of their personal residence. Any additional profit is taxed at the lower capital gains rate. [26 United States Code §121(b)]
Further, owners of investment property have the option to re-invest profit from the sale of property into like-kind property. This is called a §1031 exchange and it allows an investor to defer their taxes owed on the sale of their investment property. [Internal Revenue Code §1031]
This system favors households who already own property with lower tax rates, despite the likelihood of six-figure gains on many of these transactions. On the other hand, households that do not own property don’t have access to these tax savings, thus all of their income is taxed at the higher income tax rates.
Similarly, regressive taxes are taxes that favor high-income earners by imposing a higher burden on low-income earners. For example, a high-income earner pays the same sales tax as a low-income earner, despite the fact that they earn more money and thus have more available to spend, save and invest. This means the low-income earner ends up spending a higher percentage of their income on things like sales taxes than high-income earners.
Over generations, this unequal tax burden allows wealth to build for those able to access the tax benefits, while leaving others behind.
Related article:
Prop 13 just makes things worse
Here in California, we also need to consider the impacts of Prop 13.
Some background: Prop 13 was voted into California law in 1978. It caps the amount property taxes may increase each year, limiting property taxes to 1% of the property’s assessed value, which equals the property’s base value, or the value at the time of purchase, plus an inflation factor.
For example, a homeowner who has owned their home since the law was passed pays a tax rate based on their home’s value in 1975.
The people who voted for Prop 13 in 1978 were mostly seeking to protect older homeowners on fixed incomes from losing their homes due to an inability to keep up with property tax increases. However, it has turned into a regressive tax, with new homeowners shouldering the burden. This is why Prop 13 is often referred to as the “welcome stranger” law.
Further, while this is good for neighborhood stability — it’s less tempting to move when you know your property taxes are going to jump even when purchasing within the same tier — it’s bad for turnover, inventory and home sales, which real estate professionals can appreciate.
Editor’s note — While real estate agents stand to benefit from amending Prop 13 to reduce the burden on new homeowners while continuing to protect seniors from tax increases, every year first tuesday surveys readers on the issue and the majority continue to support Prop 13 as it stands.
A study by the Tax Foundation finds that across the board, governments are forced to compensate for low property taxes (as with Prop 13) by instilling:
- higher income tax rates (California has some of the highest in the nation);
- higher sales taxes (a regressive tax on low-income earners); and
- more business taxes (bad for investment).
Discriminatory homeownership practices
On top of higher property taxes, Black and Latinx households contend with additional obstacles when trying to achieve homeownership.
For example, homeownership rates plummeted for all demographics following the Millennium Boom. But Black and Latinx homeowners were the greatest impacted, as they were favored targets of predatory lending during the Boom. This is the ugly cousin of redlining, wherein lenders refuse to provide financing or insurance to communities with majority Black or Latinx populations.
For example, one of the largest recognized cases of predatory lending was settled by Bank of America (BofA) in 2012 for their subsidiary company, Countrywide’s discriminatory lending practices. Countrywide discriminated against minority homebuyers by:
- charging higher fees to minority homebuyers, even when they had equivalent qualifications of White homebuyers; and
- steering minority homebuyers into subprime mortgage products, even though many minority homebuyers had equal or better credit histories than other White homebuyers who were not shown bad mortgages.
Since Black and Latinx households were more likely to be steered into subprime mortgages during the Millennium Boom, when it crashed in 2007-2009, this group of new homeowners was less likely to be able to continue their higher mortgage payments.
Related article:
https://journal.firsttuesday.us/civil-rights-and-fair-housing-laws-2/72186/
Homeownership as the wealth generator
In California, 39% of the population is Hispanic or Latinx and 7% is Black, according to the U.S. Census. Therefore, discriminatory practices have a far-reaching impact on our state’s housing market.
The average household wealth of White households was $114,785 as of 2011, according to an analysis of wealth, homeownership and race by Zillow. This was more than four times greater than the average Black household’s wealth of just $24,792.
This wealth gap can largely be explained by lower homeownership rates among Black and Latinx households.
Homeownership is the largest source of wealth for Americans, with a home purchase the largest financial decision most individuals will make in their lifetimes. But homeownership rates continue to be highest for White households. From the 2004 peak to 2016, the average homeownership rate for Black households dropped 4%, while homeownership for White households declined just 1%, according to an Urban Institute report. The divide is even more significant in California.
The housing market has the opportunity to benefit from more qualified homeowners entering the market. But as long as discriminatory practices in lending, taxation and real estate practices continue, Latinx and Black households will continue to be left out, and our state’s homeownership rate will continue to be one of the lowest in the nation.
Editor’s note — Stay tuned for next week’s article focused on solutions for eliminating discriminatory practices in real estate.
Pardon me for quoting some of the article.
“Some background: Prop 13 was voted into California law in 1978. Its caps the amount property taxes may increase each year, limiting property taxes to 1% of the property’s assessed value, which equals the property’s base value, or the value at the time of purchase, plus an inflation factor.”
“A study by the Tax Foundation finds that across the board, governments are forced to compensate for “low” (my emphasis) property taxes (as with Prop 13) by instilling:……..
Based on those statements it would appear to me that Ms. Reyes wants you to believe that Prop 13 has caused a severe restriction in California’s property tax revenue stream…… so we better make so changes???? …..well, not so fast. In a CALmatters Commentary, 7/18/17, by Dan Waters via KQED it is stated, “The most eye popping number, however, is the immense growth in property tax revenue — well over 50 percent during the last decade alone and about 1000 percent since 1978,….”
Not quite the impression I came away with from Ms. Reyes article. Sloppy journalism, fake news, poor research, deliberate omission of pertinent facts…, the get rid of Prop 13 agenda… or just a biased reader that has lived in his home for 40 years taking exerts to support his opinion.
More than a burden to those of us 65+ who decided 2 years ago to purchase a MFG’d home park and pay a lease, plus county taxes, it’s like elderly abuse and discrimination all at once by Sacto. Co… for the lease on a 1000 sft unit the taxes are over $1000+ a year and the ins around $500/yr…you cannot get a conventional, FHA or Vet loan and your not entitled to any home improvement programs gov sponsored….When I made my decision to purchase this unit for my home, none of this tax nonsense was a problem, then came the election and all of a sudden besides 2 ADV’s @$200 added to the tax cost for no good reason, I found that Re Fi ing was impossible….The County tax board sure did foll the hell out of us elderly when you pay as much in taxes for a leased parcel as you would a home or condo and get nothing in write off…….Good reason to sell and leave Ca to do without my contributions now…..
to the contrary, Prop 13 is the great equalizer, taxes based on purchase price, not on opinions by tax assessors
I take issue with a number of the claims made in this article, some of which have already been addressed by other commenters, so I won’t repeat them. But there is another glaring omission that should be mentioned: the way I see it, the repeal of Prop 13 has the potential to harm minorities more than whites. Minorities have a difficult enough time affording housing with their lower-than-average incomes, right? So let’s say you’re one of the few who is lucky enough to be able to afford a house, and that in the handful of years after buying that house, your property values go up by a significant margin. Now your family’s property tax bill is going to be substantially higher than it was before, and your family may be forced to sell their house and go back to renting because you can’t afford the property taxes. True, you might have made some money on the equity in the interim, but transaction costs from buying and selling will eat a huge chunk of that money, and possibly all of it.
Removing race from the issue entirely, the repeal of Prop 13 is likely to be a huge economic disadvantage to lower income homeowners, who are going to be more sensitive to increases in housing costs. Higher-income folks with disposable income will be able to absorb the added costs, while folks who are barely squeaking by are more likely to be forced to sell. IMO, the last thing we need is more income disparity these days.
There is real value to predictability in home ownership costs. Stable tax rates provide peace of mind to home buyers, and make them more likely to buy. Eliminating that stability is likely to hurt all homeowners in one way or another. Fewer buyers willing to take the gamble = reduced sale prices for existing homeowners.
Absolut crap, the author should should seek other work.
Did this company change hands?
Nothing but sophomoric-drivel coming from First Tuesday for quite awhile, but this poorly written/ poorly researched BS is the worst. I’m through with First Tuesday.
This is an embarrassing article, for most of the reasons cited here by previous posters. This is “woke” journalism and it’s not constructive. It simply serves to further divide our population. With a large share of people simply believing it, because it fits their views of injustice in this country. While others, who understand the facts, human nature, and have the ability to scrutinize information — will rightfully be angry at this clear attempt of pushing a narrative, vs informing people of the facts – without an agenda. Expect more of this crap, given what college professors are peddling to our students. It’s a large reason for very little meeting of the minds in our modern society. And it’s a shame.
Identity Politics of the WAPO … nothing more. The California Prop 13 is enjoyed by all regardless of race. Marxism will lead to lower homeownership rates for all including skin colors. Seems every generation will have to learn this lesson the hard way. Can’t you people study history? Must life always have to prove you wrong through suffering? Where is your pragmatism?
WHAAAT?! Please check your facts before writing & posting such a misleading article. I can assure you that NOT ALL WHITE homeowners contest the increase. I’ve assisted a rainbow of clients with contesting the assessments. As for Prop 13, if it was not in place it is more than certain with the way the state likes to increase taxes and spend, many ( the very same groups you’re advocating for) would not be able to afford a home due to the tax burden. The moment Prop 13 is repealed the local market will crash because will become the state’s piggy bank for everything. A state who has no idea how to manage the funds it takes in, and overtaxing is the solution. Unless you’re trying to make the case for the Pop 13, which will be on the ballot in Nov, to exclude the commercial buildings from it. If that passes let’s see how the commercial values will plummet taking the Residential values with it. They are both interconnected. Commercial is already taking a beating due to COVID 19.
Let’ remember the reason why we had the 2008 crash, was because everyone who wanted a house got one, qualified or not. Lower-income owners were the very first to be affected and last to recover.
However, this article is written to fit the current narrative of discrimination. Anyone who discriminates should loose their RE or mortgage license, bottom line.
I agree with the two previous comments. Almost all of California’s problems are caused by too much government, too much taxation, too much litigation, regulatory burdens, radical environmental policies, and the politics of grievance and entitlement. The state has been run by people with her world view and economic outlook for a generation, and things are a mess. It is disappointing to see such work published in First Tuesday.
Is this the kind of baby crap you’re printing these days? If minorities were assessed more than others for properties that had equally assessed values, then you’d have something. Since that would be blatantly illegal, that isn’t what’s happening. The writer has packaged this to look like discrimination when it’s simply some people keep their homes longer than others and therefore benefit from the prop 13 tax rate. This very often includes elderly people who otherwise couldn’t afford to stay in their homes. First Tuesday used to be a reliable source for real estate information. Not anymore.
Prop 13 was passed by the voters simply because municipalities (politicians) kept spending (the peoples’) tax money in illusory projects while enlarging the bureaucracy; as the property taxes went up Californians were forced to sell their residences because they could not keep up with the higher taxes. This subject has nothing to do with race, income, age, etc, etc. Instead of searching for tax increases, let’s start reducing the taxes and make Government a small “g” and you will see a huge number of people coming to California and consequently property values will increase.
Fisrt Tuesday, this is not the first time you have printed articles related to Prop 13 and have suggested changes. We live in a democracy and this proposition was approved by the PEOPLE. This is a mandate so let’s move to another subject such as making government SMALLER and more EFFICIENT. The cost of new housing is very expensive in part because of the government fees and restrictions associated with it. GIVE IT UP.
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Manuel, you argue Prop 13 was democratically approved, so let’s not discuss changes, even in light of unforeseen consequences. But our government, democratically elected, imposes fees and restrictions which you don’t like, so it’s OK to discuss changes to them? What a strange view of democracy. Thank you First Tuesday for this thoughtful and well written article. It’s too bad there are so many people out there, like some of the commenters above, who think there is no such thing as institutional racism or predatory practices, and who think that anti-discrimination efforts are just so much regulatory overreach.
James, variation of outcomes does not equal racism, either institutional, or otherwise. Please specifically point to anything in this article that demonstrates racism of any kind, and backs it up with any actual evidence. Thanks
James, I find it interesting you didn’t debate the article. You comment that it is thoughtful and well written, and I am sure Carrie appreciates that, but one thing it isn’t is factual. There may be institutional and predatory practices with getting a loan or buying the house (which I am not disagreeing with), but Prop 13 protects all equally once that is completed.
I would contend that it actually helps individuals with lower salaries and elderly who hold onto their home and invest in it and it can help generations after that. Wait until you repeal it and see how many low income families who are enjoying their first home due to these low rates loose it when the government can raise taxes at will. I can assure you the big G won’t look at age or race when they raise the tax rates. Who will you blame then?