SORRY, NAYSAYERS — PROPOSITION 13
IS STILL WORKING AFTER ALL THESE YEARS
In most of America, one of the worst impacts of high inflation is a sharp rise in property taxes. But that’s not the case in California. True, housing prices are some of the highest in the nation, due mostly to government policies restricting supply. But homeowners are protected by Proposition 13’s cap on annual increases in assessed value of 2%. According to the California Taxpayers Association, Californians would have seen their property taxes increase more than 7% this year without Prop. 13.
It is understandable why the political left — which wants all your money — has it in for Proposition 13, but we were surprised when the normally credible Tax Foundation, based in Washington, D.C., fell for some of the same falsehoods advanced by the “tax-and-spend” crowd. The Foundation is advising other states not to adopt Prop. 13–style reforms. We disagree and believe all states currently struggling with out-of-control property taxes should take a good, long look at California’s system based on acquisition value. It is vastly superior to one based on market value.
While the Tax Foundation admits that “Proposition 13 and other property tax assessment limits have done their job, keeping incumbent property owners’ taxes in check,” they assert that those systems result in “hidden costs.”
One clearly false claim is that assessment limits “discourage homeowners from renovating or adding onto their homes, for fear of incurring a dramatic tax increase.” In general, remodeling and repair that are part of normal maintenance or cosmetic are not considered assessable. New additions that increase the square footage of a home or add new improvements that didn’t exist before are assessable — but that’s true everywhere. The difference is that in California, the reassessment is limited to the value added by the addition, with the rest of the assessment unchanged. So, what you would pay under Prop. 13 is still less than what you would have paid in a market-based property tax system.
Next, the Tax Foundation claims that property tax assessment limits “make it less attractive for growing families to move past their starter homes or for empty nesters to downsize.” This isn’t true in California. Older homeowners (age 55 and up) can move and take their Prop. 13 base-year value with them to a new home. For younger homeowners, moving to a larger and more expensive home means higher property taxes — but again, that’s true everywhere. Before Prop. 13, the statewide average tax rate was 2.67%, applied annually to the current market value. That means a young family’s property tax bill would be more than double in the first year of homeownership without Prop. 13. All homeowners benefit from Proposition 13, which capped the tax rate at 1%.
Next, the Foundation states that assessment limits “interfere with efforts to change a property’s use.” That’s a polite way of saying that the land upon which your home rests is being “underutilized,” so perhaps you should be taxed out of it so it can be sold to someone who can build something deemed a better use, like a sales-tax-revenue-producing used car lot. No thanks.
Another myth is that acquisition value systems gradually “shift costs to newer, younger homeowners — the rising generation that [state] lawmakers want to keep in-state.” But under Prop. 13, all property taxes are based on the value at the time of purchase. All homeowners are taxed according to what they voluntarily pay for their property. Then they’re protected from unpredictable tax increases for as long as they own their home.
The worst thing that could happen to a young family is to be taxed out of a home they just purchased because their tax bill is based on the vagaries of the real estate market. Prop. 13 gives new homeowners the predictability of knowing what their tax bill will be years into the future as well as a reasonable 1% rate cap.
And the real surprise of Proposition 13 is how it helps local government. Because Prop. 13 allows increases in assessed value of 2% per year and requires reassessment of property when it changes hands, it provides a stable, predictable and growing source of tax revenue to local governments. Property tax revenue has grown virtually every year since 1978 in percentages that exceed both inflation and population growth. Moreover, Prop. 13 provides a “shock absorber” effect during recessions when market values fall precipitously but assessed values — in the aggregate — fall slightly or not at all.
The good folks at the Tax Foundation should recall the words of Adam Smith who reminded us all that “the tax which each individual is bound to pay ought to be certain, and not arbitrary.” And that is a perfect description of Prop. 13.