Tiny Island Shows Legacy of Prop. 13’s Tax Limits

John M. Franco voted against Proposition 13 in 1978. The Los Angeles city employee feared the sweeping tax measure would wreck local government finances.

Twenty-five years later, he still thinks the property tax-limiting law is bad for government. But Franco, now retired, can appreciate the benefits better than most: Because of Proposition 13, he pays only $2,240 in property taxes on a two-story home he bought in 1968 on Lido Isle, a quiet jewel of a community surrounded by Newport Harbor. A neighbor who bought a smaller home only yards away in 1999 pays nearly seven times as much.

Franco, 65, is well aware that his good fortune means a loss for cash-hungry local governments. “I can be a living example of why I thought this was a bad idea,” he says.

But the flip side of Proposition 13, Franco and many of his neighbors say, is that it has allowed them to stay on Lido Isle as home prices soared. “Taxes would have gone up to the point where, for heaven’s sake, three-fourths of the people couldn’t afford to live there,” said Jane Howlett, 81, who until recently lived on Lido Isle. “You have mansions on one side and old people in small houses on the other.”

Prompted by tales of Californians being taxed out of their homes as property values rose in the 1970s, Proposition 13 capped increases in the assessed value of property at 2% per year, thereby limiting property taxes, which are generally about 1% of the assessed value.

Though partial reassessments can occur under some circumstances, homes are usually reassessed at market value when they are sold. This means that in a rapidly escalating market, a home that recently changed hands will be taxed far more heavily than an identical nearby property that has had the same owner for decades.

Even now, Proposition 13 continues to spark debate -- most recently in the campaigns of candidates hoping to be governor if Gray Davis is recalled Oct. 7.

Some candidates have suggested the state’s fiscal crisis shows that the law should be altered, perhaps by exempting commercial property. But the law’s central mission -- protecting homeowners from escalating taxes that go with California’s perennially hot real estate market -- is considered sacred.

Perhaps nowhere in the state are the law’s effects more dramatic than on the coast.

“What you could buy 12 years ago for $400,000 or $500,000 is now $1.1 million if it’s in good shape,” said Newport Beach real estate agent Sharon Grimes. “And it’s not the house that has gone up so much -- it’s the location. It’s the land.”

Lido Isle is a prime example. Once considered marginal property, it has evolved into a desirable neighborhood. And because of Proposition 13, multimillionaires here live alongside middle-class retirees.

County records tell the tale: out of about 900 homeowners, nearly a quarter pay $2,000 or less -- as little as $714 -- in property taxes a year. Another 10% pay $20,000 or more, with the highest -- more than $100,000 -- levied on a $10-million beachfront home.

Jane Howlett’s late husband made good money as a chemical engineer, but she doesn’t know if the couple could have afforded their lifestyle without Proposition 13. She sold her house for more than $1 million last year to move into a nearby retirement community. But she was paying taxes on the assessed value of only $141,538.

“When we moved in, these houses were nothing,” Howlett said. “Now, my God, we couldn’t have moved there on a plot. You hold on to that property if you have any brains at all.”

Residents say there’s something special about Lido Isle -- once a haven for movie stars, though only Rat-Packer Joey Bishop still resides there. In this neighborhood, there are no gas stations or grocery stores, just homes, a few tennis courts and a sense of community -- and tranquillity.

Designed after a beach in Venice, Lido is criss-crossed by streets with such names as Via Lido Nord and Via Genoa, and tree-lined walkways. Boats, from dinghies to yachts, drift at anchor behind the homes close-packed along the shore. Tiny parks dot the island’s periphery.

Drive over the bridge that connects Lido Isle to mainland Newport Beach and time stops -- or, at least, pauses. Children ride their bikes in the streets. The women’s club organizes fashion shows and Easter parties. During the summer, residents sip wine and mingle at the Yacht Club during Friday-night barbecues.

That’s a long way to come for a place once so undesirable that owners held a “disposal sale” in 1932 to sell lots as cheaply as $550. By 1935, most of the 800-plus lots remained unsold. Agnes Blomquist, who contributed to the book “Newport Beach: The First Century,” wrote that she looked at the acres of salt grass and weeds and said, “Why do you want to come to this God-forsaken spot?”

But over time, Lido evolved -- first as a vacation spot for Angelenos and inlanders looking for a weekend escape, and later, in the 1970s, to a residential community where people settled year-round. It is also a place people do not leave: one-third of Lido Isle’s residents have lived there for more than 20 years.

“In recent years, compared to the rest of Newport Beach, I think Lido Isle has been undervalued,” said real estate agent Alison McCormick, a third-generation Lido resident.

“But in the last two years, people go, ‘My gosh -- beaches, a yacht club, playgrounds. You’ve got docks, tennis courts.’ It’s like a year-round vacation, really. It’s become quite popular.”

The median sale price is about $1 million, according to the 2000 U.S. Census, with an accompanying property-tax bill of about $10,000. Homes on the water sell for significantly more.

The isle, once a collection of single-story beach cottages, has become somewhat “mansionized,” Howlett said. These days, homes are knocked down to make room for bigger ones.

Milton Spielman, a retired patent attorney who sold his home for $1 million, rocked on a patio chair in back of his two-story, four-bedroom home just days before moving and mused: “This isn’t much of a house, I don’t think.”

He bought it as a summer home, rented it in the winters and moved to Lido full-time in 1985. Strolling through the neighborhood, Spielman said he believes he’s “at the bottom of the scale on Lido Isle.”

“I can walk down the street and see a brand-new mansion, probably cost four or five million, modeled after an Italian castle or something,” said Spielman, 79. “You feel pretty lucky to be here.”

If taxes had increased along with market value, Spielman said he probably would have sold and moved somewhere more modest. “Property’s done nothing but go up in the beach areas,” he said.

In the last year, the median home price statewide jumped 19.1%, according to the California Assn. of Realtors.

That’s evidence, officials from the Howard Jarvis Taxpayers Assn. said, that Proposition 13 is as necessary as ever.

“It resulted in the stabilization of neighborhoods and allows people to stay in the neighborhood where they bought homes and not be forced out by increasing tax,” said Kris Vosburgh, the group’s executive director.

“The basic benefit to both new and old home buyers is that you know what your taxes are going to be from year to year. One doesn’t have to shudder in fear.”

Cameron Quinn, 56, another Lido Isle resident, is also a beneficiary of Proposition 13. His parents bought his house in 1966 for $45,000. After they died, the house -- and the benefits of Proposition 13 -- passed to him.

The criminal defense attorney lives there with his wife and 18-year-old daughter. They pay $966 in property taxes for the home assessed at $95,403.

“Where else could we go where it would be less?” Quinn said. “The fact that the taxes are low is a salvation.”

He calls it a financial security blanket and a far cry from the Costa Mesa condominium where the couple first lived, with not much more than a television, a bed and an old piano.

To the Quinns, this Lido Isle home is more than just a bargain. It’s where he brought his wife after their first date, where his piano-teacher mom and family friends greeted them with a serenade.

It is also a legacy, passed from mother to son. And it will be passed on again, from father to daughter.

“We wouldn’t move,” said his wife Neeta Quinn, 57. “This is where we’re going to die.”