Passed by voters in 1978, California Proposition 13 remains one of the most significant and contentious pieces of legislation in the state’s history. The proposition fundamentally transformed the state’s property tax system, providing substantial benefits to long-term property owners while sparking ongoing debate about its broader economic and social impacts. This article discusses the history and detail of Prop 13, examines its pros and cons, and compares California’s property taxes to other states.
Introduction
Proposition 13, officially titled the “People’s Initiative to Limit Property Taxation,” was passed by California voters on June 6, 1978, with an overwhelming majority of 65% in favor. The proposition was spearheaded by Howard Jarvis and Paul Gann, two prominent tax reform advocates who argued that skyrocketing property taxes were driving Californians out of their homes. Before Prop 13, property taxes in California were assessed based on the current market value of properties, leading to significant increases as property values soared.
Proposition 13 introduced several key changes to the state’s property tax system:
- Assessment Limitation: The proposition rolled back property assessments to their 1975 values. Property taxes were capped at 1% of the assessed value, plus any voter-approved local taxes and bonds.
- Annual Increases: The annual increase in assessed value was limited to a maximum of 2% per year, regardless of how much the market value of the property increased.
- Reassessment Upon Sale: Properties would only be reassessed at market value when sold or transferred, establishing a new base year value.
- Supermajority for Tax Increases: Proposition 13 required a two-thirds majority vote in both legislative houses for state tax increases and a two-thirds majority of local voters for local tax increases.
Benefits
- Predictability and Stability: Proposition 13 provides homeowners with predictable and stable property taxes. This stability helps homeowners budget more effectively and prevents unexpected tax increases that could jeopardize their financial stability.
- Protection for Long-Term Homeowners: The proposition protects long-term homeowners, particularly seniors and those on fixed incomes, from being priced out of their homes due to rising property taxes.
- Incentive to Stay Put: By limiting tax increases to 2% annually, Proposition 13 incentivizes homeowners to stay in their homes longer, contributing to stable communities and reducing the frequency of housing market turnover.
- Taxpayer Savings: Homeowners benefit from substantial tax savings over time, as their property taxes remain relatively low compared to the market value of their homes.
Drawbacks
- Reduced Revenue for Public Services: Proposition 13 significantly reduced property tax revenue, leading to budget constraints for public services such as education, infrastructure, and public safety. Local governments often struggle to fund essential services due to limited tax revenue.
- Inequities in Tax Burden: The proposition creates disparities in the tax burden between new and long-term homeowners. New homeowners pay property taxes based on the current market value, while long-term homeowners enjoy much lower taxes, leading to inequities.
- Disincentive for Mobility: The significant tax savings for long-term homeowners create a disincentive to move, contributing to a lack of housing availability and affordability issues in California’s housing market.
- Shift to Other Taxes and Fees: To compensate for lost property tax revenue, both the state and local governments have increasingly relied on other taxes and fees, such as sales taxes and special assessments, which can disproportionately affect lower-income residents.
Comparison to Other States
California’s property tax system, shaped by Proposition 13, contrasts sharply with states where property taxes are continuously adjusted based on current market values. In states without such protections, property taxes can increase significantly as property values rise, leading to higher tax burdens for homeowners.
For example, states like New Jersey, Illinois, and Texas have some of the highest property tax rates in the nation. In these states, property taxes are typically reassessed annually or biannually based on current market values, resulting in higher tax bills for homeowners as property values appreciate.
In contrast, California’s property tax rate is capped at 1% of the assessed value, with limited annual increases. This cap provides substantial savings for long-term homeowners. For instance, a homeowner who purchased a property in California 30 years ago would still be paying taxes based on an assessed value from decades ago, with only modest annual increases, while a new homeowner in the same neighborhood would pay taxes based on the current, significantly higher market value.
To compensate for the reduced property tax revenue caused by Proposition 13, the state government has implemented higher income and gas taxes. California boasts one of the highest state income tax rates in the nation, with top earners subject to a rate of up to 13.3%. As a result, numerous businesses and many of their employees have left the state.
Significant taxes and fees have also been levied on gasoline, with prices that consistently rank among the highest in the country. These measures have arguably been essential for funding public services and infrastructure, but whether other, unrelated legislation helped or hindered this effort is a matter of debate.
Long-Term
One of the most significant benefits of Proposition 13 is the increased financial advantage for long-term homeowners. As property values in California have soared over the decades, the disparity between the market value of a home and its assessed value for tax purposes can be substantial.
For example, consider a homeowner who purchased a home in Los Angeles in 1980 for $100,000. Under Proposition 13, the assessed value of that home would have increased by no more than 2% per year. Fast forward to 2024, and the assessed value might be around $220,000, despite the market value being closer to $1 million. This homeowner would be paying property taxes based on the much lower assessed value, resulting in significant tax savings.
This brings up one of the arguments listed as a drawback above—unfairness to new homeowners. The problem with this stance is that new homeowners can eventually become long-term homeowners, and they will experience the same benefits on the same timeline as those who purchased 40 years ago. These benefits were never intended to be felt immediately, with the possible exception of those who purchased their properties between 1975 and 1978 and so had their assessed value rolled back.
The tax savings accumulate over time, allowing long-term homeowners to build equity and financial security. This is particularly important for retirees and those on fixed incomes, who might otherwise struggle with rising property taxes.
The Real Downside
California businesses once paid a majority of property taxes. Thanks to Prop 13, that has since shifted to homeowners, with the additional gas and sales taxes adding to the burden.
Businesses, especially large corporations, can hold onto properties for decades, resulting in substantial tax savings due to the cap on increases. This means they actually stand to benefit more than homeowners—who typically sell every seven years. It also creates an uneven playing field for other businesses, disproportionately favoring established corporations and stifling competition.
Frequently Asked Questions
Q: Can I transfer my low property tax base to a new home if I move within California?
A: Yes, under certain conditions. Propositions 60 and 90 allow homeowners who are 55 or older to transfer their property tax base to a replacement home of equal or lesser value within the same county (Prop 60) or participating counties (Prop 90). Additionally, Proposition 19 (passed in 2020) expanded these rights, allowing eligible homeowners to transfer their tax base up to three times anywhere within California, even to a more expensive home.
Q: What happens to my property taxes if I inherit a home from my parents?
A: Under Proposition 19 (which modified Proposition 13’s original rules), children who inherit a home from their parents can keep the property tax base only if they use the home as their primary residence and the difference between the assessed value and market value is not more than $1 million. If these conditions aren’t met, the property will be reassessed at current market value.
Q: Does making major improvements or additions to my home trigger a reassessment?
A: Yes, but only for the new construction portion. When you make significant improvements (like adding a room or remodeling), only the value of the new construction is assessed at current market rates. The original portion of your home maintains its Proposition 13-protected base year value.
Q: How do property taxes work for co-owners if one owner buys out another’s share?
A: If co-owners are on the original deed and one buys out the other’s share, this generally doesn’t trigger a reassessment under Proposition 13. However, if a new co-owner is added who wasn’t on the original deed, their portion of the property may be subject to reassessment.
Q: What happens to property taxes in cases of divorce or legal separation?
A: Property transfers between spouses or registered domestic partners, including transfers resulting from divorce or legal separation, are exempt from reassessment under Proposition 13. This means the property maintains its existing base year value.
Q: Can local governments add special assessments or fees beyond the 1% property tax cap?
A: Yes. While Proposition 13 caps the base property tax rate at 1%, local governments can add special assessments, Mello-Roos fees, or other voter-approved bonds for specific purposes like schools, infrastructure, or emergency services. These additional charges appear on your property tax bill but are technically not part of the 1% tax rate.
Q: How does Proposition 13 affect property taxes for residential income properties like duplexes or apartment buildings?
A: Income properties receive the same protections as single-family homes under Proposition 13. The assessed value is still capped at 1% with maximum 2% annual increases, regardless of the number of units. This applies until the property is sold or undergoes a change in ownership, at which point it would be reassessed at current market value.
Conclusion
Proposition 13 has had a profound impact on California’s property tax system, offering predictability and stability for homeowners while sparking ongoing debate about its broader implications. The proposition provides substantial benefits to long-term homeowners, shielding them from rising property taxes and contributing to financial security. However, it also creates inequities in the tax burden and challenges for funding public services.
The legacy of Proposition 13 remains a pivotal and controversial issue in the state’s fiscal policy. Should it go away? The short answer is no, but it could use some updates. Reform is needed to ensure a fairer distribution of tax burdens between long-standing commercial property owners, new businesses entering the market, and homeowners.
