Raising California’s Homeowners Exemption

Mortgage lenders and others in the home finance community woke up to a jolt this month when reports indicated that borrowers were having trouble making payments on loans leading to an increase in foreclosures. That news plus some concerns with Asian markets and subprime lenders led the broader stock market to fall. These economic hiccups leave little doubt that the housing market is inextricably tied to the general economy.

For most people a home is their most treasured and valuable asset. However as the costs of homeownership continue to skyrocket the viability of achieving the American Dream becomes less and less attainable — particularly in the Golden State. To help with housing affordability both the federal government and the states have a wide variety of policies and programs.

The homeowner’s exemption is a way many states have sought to make home ownership a little more affordable. The concept is very simple. Exempt from annual property tax liability a set amount or percentage of the value of the property from taxation.

Although California has a homeowners exemption it has been "inflated away" to such an extent that it is virtually non-existent. It remains a mere $7000 — the same amount it has been since 1974. So what does a $7000 homeowner’s exemption mean for homeowners? Because of Proposition 13’s 1% flat rate exempting $7000 of a home’s value translates into a $70 tax break.

It is hard to believe that in 1972 the median home price was $34610. Today a homeowner could scarcely remodel a closet for that amount as the median home price has increased to $550000 while the exemption remains unchanged. With fees assessments and local bond debt (none of which falls under Proposition 13’s two percent annual increase cap) continuing to increase the $70 exemption taken off your property tax bill every year is wholly insufficient to maintain the level of protection Californians have enjoyed for the last quarter century.

This is why HJTA is sponsoring Assembly Bill 293 by Assembly Members Audra Strickland (Ventura/North Los Angeles counties) and John Benoit (Riverside County) heard on Monday of this week in the Assembly Revenue & Tax committee. AB 293 indexes the exemption to the Office of Federal Housing Enterprise Oversight’s House Price Index. The HPI is calculated based on millions of mortgage transactions made over the thirty year existence of Fannie Mae and Freddie Mac two of the largest mortgage holders in the United States. This is done by taking the price differential on properties where more than one transaction has occurred then merging the data to create a historical database to estimate the HPI. The sheer volume of the data available makes the HPI among the best indicators of home price increases over time.

AB 293 would set the new exemption at $22000 and index it to the HPI. Our analysis indicates that if this bill had passed two years ago the exemption today would be approaching $29000. This would result in a $220 savings for every homeowner.

The tax-and-spend lobby in the Legislature will say that we cannot afford to cut $950 million from our $101 billion budget — the amount that would be saved after just one year of AB 293. But this argument is not compelling. Even with Proposition 13 California ranks 29th out of 50 states in per capita property tax collections according to the Tax Foundation. We are spending a larger portion of personal income on taxes than at any time in our history with homeowners in particular bearing the brunt of hundreds of dollars of additional bond and assessment taxes each year.

By helping to offset these costs AB 293 will provide some well-deserved relief to those who are struggling to keep a roof over their heads while trying to keep up with constant additions to their property tax bills.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.

This column appeared in The Orange County Register on March 29 2007.