Prop 13, explained | firsttuesday Journal (2024)

Prop 13 is a regressive tax by any standard. This means wealthy property owners benefit from Prop 13 disproportionately. In application, property taxes place the greatest tax burden on new homebuyers and current renters, those typically least financially able to bear it.

Renters pay market rent, while their landlords’ property taxes — and thus operating expenses — are held down by Prop 13 to increase the spread of their margin of net income. Further, renters pay their landlords more of their household income to cover housing costs than homeowners pay on their mortgages and property carrying costs. Homeowners spend an average of 36% on housing costs (one-quarter less than renters).

On average, renters spend 48% of their household income on housing costs, as of 2012. This rent expenditure hinders them from saving for a down payment on their first home. This trend causes future homebuyers to put off homeownership — not good for sales volume and California’s housing market.

New homebuyers also miss out on the best tax breaks Prop 13 offers. Their property tax bills are based on today’s assessed value of their home, whereas their neighbor’s home may still be assessed at its pre-Millennium Boom value. Thus, their tax bill is likely more than twice the amount of their neighbor’s, an inequality in taxation that inhibits home acquisition.

Supporters of Prop 13 may say this is the neighbor homeowner’s right; they’ve resided in their home for over a decade and they deserve to pay a lower property tax rate. However, this government subsidy of long-established homeownership harms the local economy due to the lost tax revenue needed to provide services demanded by all homeowners.

New homebuyers – typically young families with less wealth – pay a larger share of the revenue collected by local governments to pay for public services (that’s why Prop 13 is called the “welcome stranger” law). Property taxes are crucial to a local government’s ability to provide public services their population demands. In turn, government services (if sufficient) increase property values.

For example, living in a good school district can raise property values significantly. School district performance and home values have a symbiotic relationship:

• good schools correspond to a higher demand for homes (and higher prices) in that district; and
• higher home prices lead to higher property taxes and thus more revenue available to make schools even better.

However, Prop 13 caps property taxes after acquisition, thus placing a lowered ceiling on the quality of public services (like schools, other infrastructure and services) the local government provides its residents.

A study by the Tax Foundation finds that across the board, governments are forced to compensate for low property taxes (as with Prop 13) by instilling:

• higher income tax rates;
• higher sales taxes; and
• more business taxes.

This is evidenced in a report by the Federal Reserve Bank of San Francisco, in which California comes in an abysmal 46^th (out of 51) on their tax and business costs index.

Worse, Prop 13 makes room for some major corporate and investment loopholes. Investors and businesses are allowed to reduce their property taxes to miniscule amounts. For them, reassessment is only triggered if one person or entity gains a majority ownership interest in the transferred property (or an entity such as an LLC which owns the property). Thus, as long as no one investor takes a majority stake when a commercial property is transferred, an investment group can buy property today and still pay property taxes at the old assessed value with minimal tax planning.

Thus, the benefits of Prop 13 for the few long-term property owners in the community are to the general detriment of the local government, the local economy and its housing market.