A Proposition that has been perverted far beyond its initial intent
In 1978, the people of California, concerned about how rising property values and the concordant increase in property taxes that followed those skyrocketing values, passed a new law. Proposition 13 set a maximum ad valorem tax of one percent (1%) of the cash value of any real property in the state. It further restricted future increases in the assessed valuations of real property at two percent (2%) per annnum.
Someone I am currently involved in a dialogue about things political on a social media platform claims I don't understand Prop 13. I understand it all too well. I was a California registered voter when it was passed in 1978. In spite of my parents encouraging me to vote for it, I voted against it. Since I was stationed at an Air Force base in Florida at the time, I voted via absentee ballot.
The reason I voted against it has become all too true. The simple explanation is this. Picture two houses, side by side in Santa Monica, to the north of Montana. They are of approximately the same size, age and if they were both to be entered in the Multiple Listing Service used by real estate agents, their listing prices would be about the same.
But one house was purchased by its current owners in 1974. The 1975 assessment of the property's cash value was $150,000. 40 years later, thanks to that 2% cap on assessment increases, the maximum cash valuation for that property would be only $324,712. Note that this assumes the maximum 2% increase every year and there were at least six years during that 40 year period where the allowed increase was actually less than two percent. At least one year where there was actually a negative increase (2010).
The house next door was purchased by its occupants in 2010. The value of the home for property tax purposes was re-assessed to the actual purchase price of $3.2 million. Increases since then in the assessed value were also capped at 2%. So the assessed valuation of this home for property tax values now stands at $3.46 million.
Let's compare the two annualized property tax bills for these two homeowners without taking into account Mello-Roos fees, local assessments and other small variables that don't alter the main point of the comparison.
Property 1 - $3,247 is the property tax bill.
Property 2 - $34,638.
Two homes, both worth the same amount of money and yet the homeowner who bought recently is paying more than ten times as much in property taxes. This is clearly in violation of the Equal Protection Clause of the Constitution in my humble opinion, not withstanding the decision of the Supreme Court of the United States in Norlinger v Hahn. In the dissent from that decision, Justice Stevens, considered by any competent observer of SCOTUS as a liberal, wrote the following:
"The specific disparity that prompted petitioner to challenge the constitutionality of Proposition 13 is the fact that her annual property tax bill is almost five times as large as that of her neighbors who own comparable homes: While her neighbors' 1989 taxes averaged less than $400, petitioner was taxed $1,700. App. 18-20. This disparity is not unusual under Proposition 13. Indeed, some homeowners pay 17 times as much in taxes as their neighbors with comparable property. See id., at 76-77. For vacant land, the disparities may be as great as 500 to 1. App. to Pet. for Cert. A7. Moreover, as Proposition 13 controls the taxation of commercial property as well as residential property, the regime greatly favors the commercial enterprises of the Squires, placing new businesses at a substantial disadvantage.
As a result of Proposition 13, the Squires, who own 44% of the owner-occupied residences, paid only 25% of the total taxes collected from homeowners in 1989. Report of Senate Commission on Property Tax Equity and Revenue to the California State Senate 33 (1991) (Commission Report). These disparities are aggravated by ยง 2 of Proposition 13, which exempts from reappraisal a property owner's home and up to $1 million of other real property when that property is transferred to a child of the owner. This exemption can be invoked repeatedly and indefinitely, allowing the Proposition 13 windfall to be passed from generation to generation. As the California Senate Commission on Property Tax Equity and Revenue observed:"
So not only is there a disparity between the current owners, but that disparity will grow over the next few generations as long as Property One as described above remains held by the descendants of the current owners. Imagine for a moment what $529 billion in additional tax revenues would have done for the people of California from 1979 through 2009.
* * *
The argument for Proposition 13 was the concern that current owners of real property, especially those on fixed incomes like Social Security, would be taxed out of their homes during their lifetime. This is a valid concern. Passing on the accumulated wealth from the rapid appreciation of real property on to the next generation and those that come thereafter is not a valid concern. It is allowing those who did not buy a home way back when to have their fair share of the property tax burden subsidized by the recent purchasers.
Another negative is that Prop 13 valuations can be transferred from home to home under certain parameters. This flies in the face of the original purpose of the proposition since these homeowners are able to sell their home, capture the appreciation in valuation as profits and then buy a new home with the same artificially lowered tax burden. That is just wrong.
Proposition 13 has been demonstrated to force California residents, particularly those who move here, to remain on the rolls of the renters rather than the owners of homes. The absence of a large bloc of homes from the marketplace accelerates the appreciation of all homes, making owning a home in California a pipe dream for many.
* * *
So how do we fix this? Fix it without violating the original, valid reason for the passage of Proposition 13? Simple. We use a method that allows the state government, through county governments to tax all properties equally without forcing the current generation of homeowners to sell their real property in order to pay the taxes. To prevent them from borrowing at usurious rates to pay those taxes, since predatory lenders would pounce on them otherwise.
We put a new law into effect. Under it, all homes are immediately re-assessed to their current fair market value. Property taxes are assessed at 1% of that valuation. Current property owners with a Prop 13 valuation will continue to pay what they are currently required to pay. A 1% property tax based on the 1975 valuation of their property, subject to the allowable annual increase which is capped at 2% per annum. The difference between the amount they pay and the full assessment based on the current market value of the home will be recorded as a lien against the property, owed to the state. A lien that is an obligation of the homeowner to the state that does not bear interest.
When the last of the current homeowners passes away, the heirs can either cure the liens by paying the balance, or sell the property. Let's suppose for a moment that the current owners of Property One were to begin to be subject to this proposed law in 2015. Without regard to how many generational transfers there were of the property's Prop 13 valuation, since there can be no more of these.
Assuming the current owners lived another 40 years, the amount that would be recorded as liens against the property, owed to the state, would be $687,221. Given the current fair market value of the home today at $3.4 million, when one factors in the next 40 years of appreciation, the amount owed by the heirs if they choose not to sell would be an amount they could easily finance using their inherited equity. Further, since they would inherit the home at a stepped-up basis, there would be no capital gains tax on the sale of the home if they chose to sell, assuming they sold soon after inheriting so they would recognize no further appreciation.
It would work. The problem is that Prop 13 is the so-called "third-rail" of California politics and untouchable by those seeing elected office. When the "Gubinator" was running in the 2003 recall election of Governor Davis, Warren Buffett was one of his advisers. Buffett said Prop 13 needed to be repealed. Mindful of how voters would react to this idea, Schwarzenegger told him if he said it again, he owed him 500 push-ups.
In a 2014 interview, Governor Brown himself lamented that he hadn't collect enough funds to campaign to replace Prop 13. Even Governor Moonbeam thought it needed to be changed.
It does. It's unfair. It no longer serves its original purpose, that purpose having been perverted by unlimited generational transfers and transfers between properties.
But it will almost never be changed. How many more billions will not be available to spend on education. Please take note that prior to Prop 13, California's public schools were among the nation's best. Now they rank near the bottom. There is a casual connection between that lowered ranking and Proposition 13. It isn't helping anyone except a group of long-time homeowners.
Someone I am currently involved in a dialogue about things political on a social media platform claims I don't understand Prop 13. I understand it all too well. I was a California registered voter when it was passed in 1978. In spite of my parents encouraging me to vote for it, I voted against it. Since I was stationed at an Air Force base in Florida at the time, I voted via absentee ballot.
The reason I voted against it has become all too true. The simple explanation is this. Picture two houses, side by side in Santa Monica, to the north of Montana. They are of approximately the same size, age and if they were both to be entered in the Multiple Listing Service used by real estate agents, their listing prices would be about the same.
But one house was purchased by its current owners in 1974. The 1975 assessment of the property's cash value was $150,000. 40 years later, thanks to that 2% cap on assessment increases, the maximum cash valuation for that property would be only $324,712. Note that this assumes the maximum 2% increase every year and there were at least six years during that 40 year period where the allowed increase was actually less than two percent. At least one year where there was actually a negative increase (2010).
The house next door was purchased by its occupants in 2010. The value of the home for property tax purposes was re-assessed to the actual purchase price of $3.2 million. Increases since then in the assessed value were also capped at 2%. So the assessed valuation of this home for property tax values now stands at $3.46 million.
Let's compare the two annualized property tax bills for these two homeowners without taking into account Mello-Roos fees, local assessments and other small variables that don't alter the main point of the comparison.
Property 1 - $3,247 is the property tax bill.
Property 2 - $34,638.
Two homes, both worth the same amount of money and yet the homeowner who bought recently is paying more than ten times as much in property taxes. This is clearly in violation of the Equal Protection Clause of the Constitution in my humble opinion, not withstanding the decision of the Supreme Court of the United States in Norlinger v Hahn. In the dissent from that decision, Justice Stevens, considered by any competent observer of SCOTUS as a liberal, wrote the following:
"The specific disparity that prompted petitioner to challenge the constitutionality of Proposition 13 is the fact that her annual property tax bill is almost five times as large as that of her neighbors who own comparable homes: While her neighbors' 1989 taxes averaged less than $400, petitioner was taxed $1,700. App. 18-20. This disparity is not unusual under Proposition 13. Indeed, some homeowners pay 17 times as much in taxes as their neighbors with comparable property. See id., at 76-77. For vacant land, the disparities may be as great as 500 to 1. App. to Pet. for Cert. A7. Moreover, as Proposition 13 controls the taxation of commercial property as well as residential property, the regime greatly favors the commercial enterprises of the Squires, placing new businesses at a substantial disadvantage.
As a result of Proposition 13, the Squires, who own 44% of the owner-occupied residences, paid only 25% of the total taxes collected from homeowners in 1989. Report of Senate Commission on Property Tax Equity and Revenue to the California State Senate 33 (1991) (Commission Report). These disparities are aggravated by ยง 2 of Proposition 13, which exempts from reappraisal a property owner's home and up to $1 million of other real property when that property is transferred to a child of the owner. This exemption can be invoked repeatedly and indefinitely, allowing the Proposition 13 windfall to be passed from generation to generation. As the California Senate Commission on Property Tax Equity and Revenue observed:"
So not only is there a disparity between the current owners, but that disparity will grow over the next few generations as long as Property One as described above remains held by the descendants of the current owners. Imagine for a moment what $529 billion in additional tax revenues would have done for the people of California from 1979 through 2009.
* * *
The argument for Proposition 13 was the concern that current owners of real property, especially those on fixed incomes like Social Security, would be taxed out of their homes during their lifetime. This is a valid concern. Passing on the accumulated wealth from the rapid appreciation of real property on to the next generation and those that come thereafter is not a valid concern. It is allowing those who did not buy a home way back when to have their fair share of the property tax burden subsidized by the recent purchasers.
Another negative is that Prop 13 valuations can be transferred from home to home under certain parameters. This flies in the face of the original purpose of the proposition since these homeowners are able to sell their home, capture the appreciation in valuation as profits and then buy a new home with the same artificially lowered tax burden. That is just wrong.
Proposition 13 has been demonstrated to force California residents, particularly those who move here, to remain on the rolls of the renters rather than the owners of homes. The absence of a large bloc of homes from the marketplace accelerates the appreciation of all homes, making owning a home in California a pipe dream for many.
* * *
So how do we fix this? Fix it without violating the original, valid reason for the passage of Proposition 13? Simple. We use a method that allows the state government, through county governments to tax all properties equally without forcing the current generation of homeowners to sell their real property in order to pay the taxes. To prevent them from borrowing at usurious rates to pay those taxes, since predatory lenders would pounce on them otherwise.
We put a new law into effect. Under it, all homes are immediately re-assessed to their current fair market value. Property taxes are assessed at 1% of that valuation. Current property owners with a Prop 13 valuation will continue to pay what they are currently required to pay. A 1% property tax based on the 1975 valuation of their property, subject to the allowable annual increase which is capped at 2% per annum. The difference between the amount they pay and the full assessment based on the current market value of the home will be recorded as a lien against the property, owed to the state. A lien that is an obligation of the homeowner to the state that does not bear interest.
When the last of the current homeowners passes away, the heirs can either cure the liens by paying the balance, or sell the property. Let's suppose for a moment that the current owners of Property One were to begin to be subject to this proposed law in 2015. Without regard to how many generational transfers there were of the property's Prop 13 valuation, since there can be no more of these.
Assuming the current owners lived another 40 years, the amount that would be recorded as liens against the property, owed to the state, would be $687,221. Given the current fair market value of the home today at $3.4 million, when one factors in the next 40 years of appreciation, the amount owed by the heirs if they choose not to sell would be an amount they could easily finance using their inherited equity. Further, since they would inherit the home at a stepped-up basis, there would be no capital gains tax on the sale of the home if they chose to sell, assuming they sold soon after inheriting so they would recognize no further appreciation.
It would work. The problem is that Prop 13 is the so-called "third-rail" of California politics and untouchable by those seeing elected office. When the "Gubinator" was running in the 2003 recall election of Governor Davis, Warren Buffett was one of his advisers. Buffett said Prop 13 needed to be repealed. Mindful of how voters would react to this idea, Schwarzenegger told him if he said it again, he owed him 500 push-ups.
In a 2014 interview, Governor Brown himself lamented that he hadn't collect enough funds to campaign to replace Prop 13. Even Governor Moonbeam thought it needed to be changed.
It does. It's unfair. It no longer serves its original purpose, that purpose having been perverted by unlimited generational transfers and transfers between properties.
But it will almost never be changed. How many more billions will not be available to spend on education. Please take note that prior to Prop 13, California's public schools were among the nation's best. Now they rank near the bottom. There is a casual connection between that lowered ranking and Proposition 13. It isn't helping anyone except a group of long-time homeowners.
posted by me at 5:37 PM
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