The Family Home Sits on an Unfair Tax Base

California’s property tax counterrevolution should have occurred one day during the last four or five years. That day was when a majority of homeowners woke up to realize that they constituted a class of citizens paying higher property taxes than everyone else. Everyone else belonged to the privileged shrinking minority able to reap the full advantage of Proposition 13 merely by not moving.

Up to now, barely a shot has been fired, let alone a counterrevolution. The major threat to the state’s Proposition 13 property tax law is a legal one, and at this moment, still relatively remote. But there is considerable anxiety about what might happen to the property tax system should an anti-Proposition 13 case make its way to the U.S. Supreme Court--and succeed--as did a recent, similar West Virginia lawsuit. For many people, the prospect of certainty--even unpleasant certainty--is preferable to chaos.

While a federal constitutional test of Proposition 13 is not just around the corner, the threat of legal challenge causes stirrings among two groups of people. First are those officials who have believed all along that something must be done to eliminate, or at least reduce, the inequity between two classes of taxpayers in California. They dared not try because of swift and sure political retribution for anyone tinkering with Proposition 13. Second are those who think California must be ready to preserve some property tax limits in case the law is overturned in court.

There never has been any lack of complaint about the inequities of the system created by the proposition passed in the June, 1978, election. Anyone who bought a home in California after adoption of Article XIIIA of the state Constitution has some sort of horror story about the disparity between his tax bill and a neighbor’s. The newcomer to the block could find a property tax bill five or more times that of a neighbor’s, even if the houses were identical and worth the same on the open market.

Everyone pays the same tax rate, 1% of assessed value. The difference is that the low-tax neighbor has stayed in the same house since 1978; thus, the home’s assessed value remains unchanged except for a 2% annual increase applied to everyone. The stay-putters now are in the minority, their numbers down to barely 40% in Los Angeles County and even lower in other fast-developing areas throughout Southern California.

The home buyer triggers a reassessment through purchase. The sale price automatically becomes the new assessment. Under Proposition 13, property in California is reassessed only when it changes ownership or undergoes substantial reconstruction. In more than two-thirds of the other 49 states, property tax assessments are reviewed every one to five years, to keep current with actual home values. But the premise of Proposition 13 is that houses should be taxed primarily on their worth at the time of purchase--and not on the paper value created by rampant housing inflation.

The problem for those who would like to foment revolution is that once the home buyer remains at the same address for a year or so, he or she is susceptible to becoming a convert. The tax on a house bought for $200,000 the first year will be $2,000, all other things being equal. The tax the next year will be no more than $2,040. The longer the owner stays put, the greater the benefits relative to those who bought later.

Still, there are two distinct classes of homeowners in California based on an arbitrary declaration of law. Even if Proposition 13 survives court challenges, that is poor public policy. One of the major tenets of a “good” tax is that it be applied fairly. The inequity of Proposition 13 is compounded in growing areas where local governments impose fees on developers to pay for streets, schools and other facilities. The fees, lumped into the new house sale price, average about $12,000. They constitute an indirect tax to help make up for the loss of property tax revenue.

Another argument for change is the widespread perception that businesses have benefitted disproportionately from Proposition 13. This theory maintains that businesses change ownership less often than homes and therefore remain at the lower tax level. State tax officials, however, claim turnover is just about the same in residential and commercial property. In Los Angeles County, 40.4% of all homes have not been reassessed since Proposition 13, compared with 43.2% of all commercial property.

But one state study indicated that in the first five years after Proposition 13, businesses realized two-thirds of the property tax relief. In San Francisco, the assessor’s office says that 1,900 business properties out of the city’s total 163,000 parcels accounted for more than $11 billion in assessments--more than one-third the total. While in pure numbers, commercial property may be turning over about as fast as homes, many large businesses benefited more in dollar volume because they accounted for a greater portion of the tax base. .

One proposed change is to create a split roll with residences on one assessment list and commercial property on another. More revenues could be raised by assessing businesses at a higher rate. Fifteen states have such a system.

This plan (once on the same ballot as Proposition 13 in a rival package proposed by the Legislature) would not by itself eliminate the disparity between groups of homeowners. While stay-putters now are in a minority, it would be politically impossible at this point to close the gap by raising their taxes significantly and/or cutting the taxes of later home purchasers. Any change in Proposition 13 requires approval at a statewide election.

To reduce all property taxes to the 1975 level (Proposition 13 rolled back assessments to that base year) would be prohibitively costly. Property taxes still raise more than $12 billion a year in California, most of it supporting city and county government. One suggestion is to increase the current homeowner’s tax exemption for newer homeowners. The existing senior citizens’ property tax relief program could be expanded to protect older Californians living on fixed incomes. Lost revenue would have to be replaced from some other tax source.

Another method would be to allow assessments of stay-putters’ homes to grow at a slightly-faster rate than the present maximum 2%, but to keep them capped at a reasonable level. This would protect taxpayers from surprise escalations of the sort that touched off the property tax rebellion of the late 1960s and early 1970s. The equity gap would be closed over the years.

Fairness and common sense dictate that some attempt be made to equalize the tax load between new home buyers in California and those who have been content to remain in the same houses since 1978--including those whose professions do not require them, or entice them, to move.

For all its faults, Proposition 13 has been immensely popular because it brings stability and certainty to the property tax system. Any reform must protect seniors and others who can least afford to keep up with soaring property taxes. Politically, the reformers will have to convince a majority of California voters that the proposed changes will give them a better deal. That will be a tough sell.