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Prop. 13 Has Made Everyone’s Property Tax Reasonable

Proposition 13 has always had its critics. Lately, however, the criticism has been more widespread. Even some policy analysts who generally favor limited taxes and less spending have complained of an “inherent flaw” in Proposition 13.

Because Proposition 13 uses acquisition value (usually the purchase price) as a basis of taxation, it is possible for owners of identical side-by-side properties to have significantly different tax bills. In short, the system generally favors those who have owned their property longer.

To understand why Proposition 13 is fair, one must understand how it works. Proposition 13 curbs property taxes by restricting the maximum rate (1%) and, more important, by limiting increases in assessed valuation (2% annually). With the latter provision, it is easy to see how a home’s current value can greatly exceed it’s taxable value over a span of just a few years.

The substantial difference between a property’s actual value and its taxable value disappears when the property changes hands. When this occurs, county assessors reassess the property at full market value. Thus, recent purchasers derive no immediate benefit from the limitation on annual increases in taxable value.

So is Proposition 13 fair, even to recent home buyers? Yes. It treats equally property owners who purchase property of similar value at the same time. Unlike any other tax system in the country, it provides absolute certainty to homeowners as to what their tax bills will be in all future years. It prevents a homeowner’s taxes from skyrocketing as a result of the vagaries of the real estate market — something over which they have no control. Instead, the amount of property tax liability will depend almost exclusively on the voluntary act of purchase.

Shortly after Proposition 13’s adoption by the voters in 1978, the California Supreme Court recognized its inherent fairness. Justice Frank K. Richardson, speaking for a nearly unanimous court, concluded that “an acquisition value system…may operate on a fairer basis than a current value approach.”

The fairness of Proposition 13 also becomes apparent when one looks beyond the concept that property taxes should always be based on current value. Admittedly, Proposition 13 is unique. However, as a matter of law and policy, there is nothing requiring property taxes to be confined to a system that arguably has more inherent unfairness to it than does Proposition 13.

Once people discard their preconceived notions and view Proposition 13 in isolation, they will be surprised at how much sense it makes. Think of Proposition 13 as being a hybrid between a property tax and a sales tax. After all, if sales taxes can be based on acquisition value, why can’t property taxes? Even Justice Richardson noted that Proposition 13 introduced a tax system “roughly comparable” to a sales tax.

Critics might concede that Proposition 13 provides absolute tax certainty and yet still assert that the system is flawed because owners of similar property may be paying different tax amounts. The response to this is that it should be no concern whatsoever to a new resident what his neighbor’s tax is — as long as his or her own tax is reasonable. The absolute cap of 1% imposed by Proposition 13 makes everyone’s tax

Critics also complain that owners of similar properties are paying different amounts for the same public services. However, this is no more unfair than the traditional method of taxation under which owners of more valuable property pay more for the same services. This entire argument ignores the nature of taxes. If we were that concerned with proportionality between the amount of tax and the level of service, we would resort to a system of nothing but user fees. Because proportionality between tax liability and services has never been an attribute of property taxes, it is unfair to level this charge against Proposition 13 alone.

Proposition 13 is certainly fair to existing property owners because it bases tax liability on acquisition value, not on the mercurial real estate market. It is fair to local governments because it allows for periodic reassessment of property when it changes ownership (and under other circumstances as well.) Few people realize that total property tax revenues to local governments in California have increased at a rate exceeding inflation and virtually all other economic indicators.

Finally, Proposition 13 is fair to new property owners, because it gives them two things they otherwise would not have: the benefit of a reasonable maximum property tax of 1% and the absolute certainty as to what their tax bills will be in future years. In light of skyrocketing property values, this is not a minor consideration.

On the charge of “unfairness,” Proposition 13 must be judged “not guilty.”