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Years of Proposition 13 Reveals Flaws

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By Lowell L. Kalapa

More than two decades have passed since California voters approved the now infamous Proposition 13 which put the brakes on spiraling property tax bills.
The Proposition gained widespread support because property values in California in the late 1970’s were into a meteoric rise as more and more people moved out to California, putting more and more demands on a limited amount of housing throughout the state. This phenomenon was something akin to what happened to Hawaii in the late 1980’s when foreign investors entered the market of limited housing supply in the islands.
And while the rise in property values was not even across California, the only way people felt that they could put a stop to rising property taxes in their area was to go to a statewide ballot. Thus, every local, county or city government was subject to the provisions of Proposition 13. Certainly, at the time, taxpayers hailed the Proposition as the answer to the growing real property tax burden.
But Proposition 13 was not without its downside. What Proposition 13 actually did was to cap the increase in a homeowner’s tax bill at a growth rate of not more than 1% per year beginning in the year after the Proposition was approved. Hey, that sounds like a good idea, at least to the homeowner. If the property tax bill was $3,000 last year, the most the property tax bill could be this year is $3,030.
That was the “good part.” Proposition 13 took care of long-term homeowners because it was a response to the common complaint that the rising real property tax burden was driving people out of their homes. What people did not realize was that the 1% cap applied as long as you stayed in that same home. So what happened in the years immediately following the adoption of the Proposition is that inequities became very obvious.
For example, because the cap begins from the time the taxpayer owns the property, two identical houses sitting right next to each other on the same block could have two very different values. One house is owned by a couple that bought the house before Proposition 13 for about $75,000. The other house was just purchased last year by a young family for $200,000.
Even though the market value of both houses should be the same as the houses are identical, the property tax bill for the older couple will be based on the tax bill they paid in 1978 plus 1% per year since then. Say their tax bill was $3,000 back in 1978 and with a 1% annual increase, their tax bill this year would be just under $4,000.
On the other hand, the house that was just purchased by the young couple will have its property tax based on its most recent sales value. As a result, that property tax bill could be three or four times as much as that of the older couple. Yet both houses are exactly the same in structure and age and will need the same types of services from the local government.
Thus, Proposition 13 took care of long-term owners while penalizing newer homeowners. Although some changes were made over the years to mitigate this inequity, inequities continue to exist.
The other major drawback of Proposition 13 is that it jeopardized the borrowing ability of local governments in California. Because local lawmakers were hamstrung in the amount of money they could raise from years to year, bond analysts downgraded the debt of local governments. Thus, local governments had a difficult time floating debt or bonds to fund public infrastructure like roads and sewers.
In response to this dilemma, local government pushed for legislation at the state level to establish a new means of financing public infrastructure at the local level. While it was not called a property tax as it would have subjected the financing tool to the limits of Proposition 13, it — the cost of the levy — remains deductible on the federal income tax as a tax. Thus, since it was not based on the income of a homeowner, it had to be a replacement for the property tax which is the only other state or local tax that is deductible on the federal return.
More importantly, Proposition 13 drove local officials to the tax of the Nineties — the user fee. It was in California where the idea of charging fees for certain public services first took hold in the early 1980’s as local government officials searched for a way to fund local government in light of the lid on property taxes imposed by Proposition 13.
Instead of reducing the overall burden on taxpayers, Proposition 13 merely shifted it to other forms of taxation. In the end, the taxpayer continues to pay for the high cost of government.

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