By Judy Lin | CALmatters
Perhaps no other measure has defined California taxes like Proposition 13, the famous 1978 property-tax cap driven by a taxpayer revolt. Instead of taxing properties at market value, Prop. 13 is based on a property’s purchase price. For each year after that, a property’s tax can increase by only 2 percent or the rate of inflation, whichever is lower.
Politicians like to explain how this law has created unequal tax burdens and other unintended consequences. Yet few have been willing to initiate change.
For example, while Prop. 13 helps people on fixed incomes stay in their homes, it has created significant disparities among neighbors, depending on when they purchased a home, condo or some other building or land.
There are two ways Prop. 13 has driven inequality. First, the tax benefits have disproportionately gone to the wealthy. Second, because local governments are increasingly using development fees and assessments in lieu of property tax, Prop. 13 is helping to drive up the cost of new housing.
For homeowners, the amount of tax relief is proportional to the value of their homes. And since high-income households tend to own homes with higher values, they receive the majority of tax relief.
“About two–thirds of tax relief goes to those with incomes higher than $80,000, with the bulk of that relief going to homeowners with incomes in excess of $120,000,” according to the Legislative Analyst’s Office.
Billionaire investor Warren Buffett used his own situation to discuss these aspects of Prop. 13. Back in 2003, he said there was a ten-fold difference in property tax on two of his multimillion-dollar properties in Laguna Beach simply because of when he purchased those homes. Both those property tax bills were less than the one on his Omaha home.
He added that a typical family buying a house for $300,000 in Chico would pay more in property taxes than he does. “This family, because of Proposition 13, has been selected to subsidize me,” Buffett wrote.
Local governments are also missing out on billions because of a homeowners exemption to the law that allows children and grandchildren to inherit up to $1 million in property without its having to be reassessed.
Over the past decade, the analyst found that around 650,000 properties, or 5 percent of properties in the state, have been passed down without triggering reassessment—and many of their beneficiaries have used those properties as rentals. That trend is expected to grow as baby boomers age.
The second unintended consequence of Prop. 13 is how it has added to the cost of building and owning new homes.
With property-tax revenue capped, local governments have imposed more sales, hotel and utility taxes. They have looked to home builders and land developers for impact fees, a charge for bringing public services to the new development. Impact fees have been easy to impose because they don’t require voter approval.
As a result, California has the highest average impact fees for construction of a single-family home, at $23,455—almost three times as high as in other states, according to a survey conducted by impact-fee consultants Duncan Associates.
Local governments have also increased the use of Mello-Roos assessments to pay for new infrastructure, a cost that’s often passed on to new homebuyers. Mello-Roos is a special tax district approved by two-thirds of voters in the district, often in a new development. The money is used to finance everything from roads and street lights to water and sewer systems.
Many factors drive the cost of housing, but as CALmatters data reporter Matt Levin found, homeownership is becoming increasingly unattainable for Californians between 25 and 34 years old:
In 1969, the median sales price of a California house was about $166,000 in today’s dollars. That was about three times the average income ($55,400) of younger California families at the time who might be in the market for a starter home. Today, the average California home sells for over $500,000–seven times a younger family’s earnings.
Prop. 13 offers protection for homeowners, but young families are having a hard time getting in.
Four-term Gov. Jerry Brown has said he has no plans to tackle Prop. 13 before leaving office. “It’s a little late for that now,” he said in January.
CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics. This reporting project was produced in partnership with the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism.