James de Bree | Proposition 13: Is Repeal on the Horizon?

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I am concerned that, in the next decade, we may witness the repeal of Proposition 13. I realize that this sounds sacrilegious to many, but please hear me out.

In the weeks leading up to the November election, I gave numerous nonpartisan presentations explaining the propositions, who supported them, who opposed them and how much money was spent on each proposition.

You may recall that Proposition 5 would have expanded a portability concept to Proposition 13. When I explained Proposition 5, I inevitably had to also explain the mechanics of Proposition 13.

For those of us who are not old enough to remember Proposition 13’s origin, it was sponsored by Howard Jarvis and Paul Gann in response to a property tax system that was out of control in the mid-1970s. 

In those days, real property was reappraised every three years and the tax rate varied by county. 

In Los Angeles County the rate was close to 3 percent. Housing values tripled between 1974 and 1977. The resulting property tax increases meant many families could no longer afford to stay in their homes.

The increase in property values outpaced inflation. County governments loved the windfall. Instead of implementing tax reform, local governments went on a spending spree. 

Proposition 13, which was approved by the voters in June 1978, changed all of that.

Under Proposition 13, the tax rate is 1 percent of the property’s appraised value plus any amounts due for special assessments (such as school bonds) that are approved by two-thirds of the voters. (The two-thirds threshold was subsequently reduced to 55 percent for school bonds.)

Real property is generally appraised at its purchase price. The appraised value increases by an annual inflation adjustment not to exceed 2 percent. 

Thus, a property owner has the ability to stabilize his or her property taxes as long as the property is not sold or improved.

Since the average home is owned for seven years and a substantial portion of commercial property is also held for a similar period, as a practical matter, most real property appraised values are reset periodically.

Nevertheless, critics of Proposition 13 claim that it unfairly reduces tax revenues, causing county governments and school districts to suffer. 

In November 2020, a measure supported by Gov. Gavin Newsom will be on the ballot in California that would partially repeal Proposition 13. The measure would split the property tax base into commercial and residential components. 

Proposition 13 would be repealed for commercial properties and those properties would automatically be reappraised every three years. The measure is expected to raise $11 billion annually statewide.

Historically, I would have said that such a measure stands little chance of passing, but now I am not so certain. People who feel the sting of writing large checks to the county assessor’s office every December and April, don’t want to go down the slippery slope of repealing any part of Proposition 13.

But in the current environment, renters comprise a greater segment of the population. Although renters indirectly pay for property taxes, they do not experience the painful process of writing large property tax checks semi-annually.

Our federal tax policy is removing home ownership tax incentives. Thirty years ago Australia and New Zealand eliminated their home mortgage interest deduction, and in the ensuing quarter-century, home ownership fell from 65 percent to about 40 percent. 

Since World War II, about 60-65 percent of Americans have historically owned their homes. Given the contemporary cost of housing, coupled with reduced home ownership tax incentives, our home ownership percentages may eventually mirror those of our friends in the southern hemisphere. 

When I gave my pre-election presentations to groups that consisted primarily of millennials, most in the audience did not understand Proposition 13 or why it was implemented. Many were amazed that people living in identical houses, in the same neighborhood, could pay different amounts of taxes. Several said that was inherently unfair.

As our society shifts away from home ownership, there will be less incentive for voters to support Proposition 13. A generation that did not experience inflation in the 1970s may not support a tax regime they don’t understand.

Ironically, the split roll ballot measure that will be on the ballot in 2020 may result in reducing property taxes for homeowners, giving them an incentive to vote for the measure. 

The portion of property taxes used to pay for school bonds, etc. (i.e., the portion of the property tax exceeding 1 percent of appraised value) is paid by taxpayers based on their proportionate share of the total assessed value of all properties in the district. If the relative appraised value of commercial property is increased, residential property owners will pay a smaller portion of that overall tax liability.

In recent years, our election patterns have changed from historical norms. It is not inconceivable that Proposition 13 may fall victim to these changing patterns.

Jim de Bree is a semi-retired CPA who resides in Valencia.

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