Proposition 13 was passed by the voters in 1978 to curtail runaway property taxes. I am a huge supporter of Proposition 13 because it affords much-needed protection against property tax increases, which can make living in your home unaffordable.
The idea behind Proposition 13 was to allow homeowners to control their own destiny. For most homeowners, the assessed value is based on the purchase price of their residence. As long as they do not move, their property taxes increase by no more than 2 percent annually.
Before Proposition 13, properties were generally reappraised every three years and the property tax rates were often as high as 3 percent. In the 1970s, when property values were doubling every few years, homeowners — particularly those who were retired and on fixed income — were no longer able to live in their homes because they could no longer afford the property tax.
In 1979, the first year that Proposition 13 was in effect, property tax collections dropped by nearly 60 percent. While school districts and other branches of local government called foul, it needs to be remembered that property tax collections had tripled between 1974 and 1978 and government spending increased commensurately.
Proposition 5 on the November ballot expands the scope of Proposition 13 by allowing certain homeowners to transfer the assessed value of their residence to a replacement residence.
Proposition 13, as originally enacted, did not provide for portability of assessed values if someone sold their home. Several years ago, however, a few counties began allowing homeowners who are 55 or older to sell their home and carry over the assessed value of their old house to their new house.
Forty years after the passage of Proposition 13, Proposition 5 seeks to expand this treatment statewide and to homeowners who lost their house due to destruction in a disaster or to contamination.
The idea, which was concocted by the California Association of Realtors to encourage housing sales, is to entice older homeowners who are considering downsizing to sell their homes. Many folks have owned their homes for a long time and the cost of a new smaller home exceeds the appraised value of their existing residence.
Let’s consider the following example. You are 55 years old and you purchased your house 30 years ago. Today your home is worth $600,000, but its assessed value is only $200,000. If you sell your home and purchase a smaller home for $300,000, it will be assessed at $300,000 and your property taxes will increase by 50 percent.
However, if Proposition 5 passes, it will allow you to carry your existing assessed value over to your new home so you won’t pay any additional property tax.
This is a great deal for the homeowner, but it also represents a significant expansion of Proposition 13.
The legislative analyst states that this measure will cost local governments and school districts about $300 million annually. That amount will grow to $2 billion annually over time.
The California Association of Realtors claims that Proposition 5 will remove a property tax penalty for moving. This presumably will encourage empty nesters to sell their houses, thereby freeing up housing for younger families. Of course, more housing sales are good for Realtors’ business.
In reality, Proposition 5 does not create new housing and will likely drive up the demand for (and the price of) empty nester housing.
From a policy perspective, why should people over the age of 55 be the only ones to enjoy portability of their assessed values? What about the family that has outgrown its existing house and needs to move into a bigger, more expensive house? Shouldn’t they get a similar benefit?
At some point the concept of making your assessed value portable by allowing you to take it to your next home is going to become too expensive.
In the tax world we have a saying that pigs get fat and hogs get slaughtered.
Unlike 1978, when property taxes were out of control and forced people out of their homes, today property taxes are manageable. We live in an era when the federal government is seeking to push programs (and their cost) to state and local governments. A reduction in property taxes of up to $2 billion annually does not make sense in this environment.
Proposition 13 is going to face some well-funded challenges in coming years. The first is a measure slated for the 2020 ballot that would repeal Proposition 13 for commercial properties.
If the scope of Proposition 13 is expanded to include portability, at some point its opponents are likely to get enough votes to repeal Proposition 13 in its entirety. That is increasingly likely if the Democrats continue their super-majority in the state Legislature. Proposition 5 is a bad idea that should not be supported.
Jim de Bree is a 65-year-old semi-retired CPA who lives in a substantially appreciated residence in Valencia.