Proposition 13 Revisited

"Proposition 13 was intended to protect taxpayers from unanticipated increases in property taxes."

It seems like a worthwhile thing to do - federal and state governments do their best to provide visibility into future tax rates. And income taxes increase only as someone's income actually increases. Property taxes reflect imaginary gains and eat away at incomes that may not have increased commensurately.

Proposition 13, which limited annual property tax increases to 2%, made sense as long as housing prices were continually increasing. But when property values fell, as they did from 2006 to 2009, taxpayers were no longer protected from unanticipated tax increases. This chart shows two values: 1) the present value of California's median home (in blue); and 2) the maximum taxable value that can be used by a county assessor to set property taxes (in brown).



This means most people who bought homes in California in the last decade have nothing resembling tax certainty. People who bought homes in 2005 and are 50% underwater can see their property taxes rise significantly at the whim of local assessors. In the past, Proposition 13 obviously benefited long-time homeowners, so someone who bought a home in 2003 could expect to pay higher taxes than someone who bought a home in 1988. The unintended consequence of Proposition 13 is that people who bought homes in 2009 also pay lower property taxes than 2003 buyers. As property values recover over the next decade, long-time homeowners will bear the brunt of property tax increases while newer homeowners will be protected by Proposition 13, completely subverting the law's perceived benefit.

Proposition 13 is California's "Third Rail" because many people believe they benefit greatly from it. In fact, the buyer of a median home in the last 22 years receives less than $500 in annual benefits from Proposition 13.



If Proposition 13 were replaced with a flat 0.5% property tax that could increase 5% per year - as opposed to a flat 1% tax with 2% annual increases as in Proposition 13 - it should be clear that most California homeowners under age 50 would find themselves with substantially lower taxes.