Is It Time to Amend Prop 13? – The Real Estate Property Tax

Prop 13 was passed in 1978 as a means to thwart increasing property taxes that were a result of rising property values. It limited the tax to 1% of the assessed value of the property and limits the increase in assessed valuation to 2%. Proponents of Prop 13 claim that this is a fair tax since it is based upon acquisition value and not the ups and downs of the real estate market. Also they argue that purchasing a new property is an indirect approval of the property taxes that coincide with it, irrespective of what your neighbor may pay.

A New Year, A New Budget Crisis

California is faced with another budget deficit. Is anyone surprised? This time it appears it is in the neighborhood of $14 Billion. We had a budget deficit as we approached the year 2000. However the bulls ran on Wall Street and produced a windfall for Sacramento allowing a reprieve. Then in 2004 the booming real estate market and all of its tax generating revenue once again provided a treasure chest full of money diverting another legislative showdown. Somehow, someway the economy has been able to mount a ninth inning rally and come to the aid of an irresponsible assembly. Not this time. It’s the bottom of the ninth and there are two outs. Budget deficits seem to come about from rosy projections that the good times will just go on forever. I don’t think anyone could have imagined the downturn in the real estate market would have been so quick and so severe.

Fairness In The Tax Code

I will be the first to say “I am opposed to taxes”. Give me Arthur Laffer and supply side economics any day. What I am opposed to more is an inequitable tax system. Prop 13 is the most unfair of any and all the taxes we pay. It is time we realized that we cannot continue to feed this massive state budget at the expense of new property owners. There is no fair justification for one homeowner to pay 10 times the property taxes simply because they just recently purchased a home in 2007 as opposed to their next door neighbor who has lived in the same house since 1978. Tax code should not be based on seniority, the sales tax isn’t and neither is the state income tax.

Taxes, A Revenue Panacea?

Local and state governments facing a shortfall seem to think no problem, we will just raise taxes. Nothing seems to raise the public ire faster than a tax increase. In Texas the Governor has signed legislation to reduce the property tax bill by one third. In Indiana and other states across the country residents are staging protests about their rising tax bills. If people have to consider selling their home because they cannot afford to pay their property taxes, something is terribly wrong.

Meanwhile, Back at the California Ranch

Government should address inequity before they recommend new sources of revenue. Prop 13 in its current form will only serve to widen the tax disparity as long as we base policy on some ill conceived plan that was formulated almost 30 years ago. To make the property tax fair we could do one of two things: (1) cut a property owners taxes by 50% if they purchased within the last 10 years or (2) reconstruct the system to make it more analogous to the federal income tax. Start with a base amount on the first $200,000 and then apply an additional increment based upon every $100,000 of additional value.

With financing for real estate harder to obtain along with the current price of homes (albeit falling prices), taxes take a big chunk out of the monthly budget. How will people ever afford that first house? They won’t. With about 24% of Californian’s able to afford their first home (compared to 61% nationally), are we destined to become a state of just “tenants”?

It’s time we equalized property taxes according to neighborhood home values and rid ourselves of an antiquated tax policy that rewards longevity in property ownership while increasing the burden on more recent purchaser’s.

4 thoughts on “Is It Time to Amend Prop 13? – The Real Estate Property Tax”

  1. I’m all for overhauling our property tax system, for the reasons you mentioned and also to allocate more money to our schools. Here’s a quote from californiaschoolfinance.org:
    “California remains well below the national average in per-pupil expenditures. In a state that has a high cost of living, that translates to a school system with some of the largest class sizes in the country, and the second worst ratio of total staff to students among all states.”

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