Taxpayers’ group debunks local criticisms of Proposition 13

Local media recently claimed that Proposition 13, California’s successful 1978 initiative which protected property owners from runaway tax increases, was “uneven,” “skewed,” and put disparate "burdens" on new homeowners. Jon Coupal of the Howard Jarvis Taxpayers Association explains why these complaints don’t withstand scrutiny.

Opportunity Now: Let’s start with the basics: How does Proposition 13 work?

Jon Coupal: 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 its 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.

ON: So it sounds like it turns a property tax into something more like a sales tax, where you pay a tax on what something is worth at the time you buy it.

JC: 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 of the California Supreme Court noted that Proposition 13 introduced a tax system “roughly comparable” to a sales tax.

ON: So people can buy similar properties at different times, and as a result they will pay different rates on it.

JC: 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.

ON: If I’m a new homebuyer, why does Proposition 13 make sense for me?

JC: 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.

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 reasonable.

ON: So you are arguing that Proposition 13 promotes fairness on a number of levels.

JC: 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.”

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.

More on Proposition 13 can be found here.

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