A Proposition On November’s Ballot Renews The Prop. 13 Debate
Kenneth Wilkins is walking down the block in North Oakland where he bought a home 42 years ago. As he strolls up to the front of his home, he talks about the single-family home he purchased in 1976.
“Actually this house cost less than this car,” Wilkins said, pointing to a modest white Toyota parked in front of the house.
“This car cost $21,000, I think. And this house was less than that. I never dreamed that a house would sell for over a million in this neighborhood. But they do.”
Two years after Wilkins became a homeowner, California voters overwhelmingly passed Proposition 13, rolling back property taxes and putting a strict limit on annual increases. Wilkins isn’t sure, but he thinks he voted for it.
“But still you know even with Prop. 13 your taxes go up every year,” he said. “I mean it is limited, but over time it adds up, especially for people who are on fixed incomes.”
There is no question homeowners like Wilkins have benefited tremendously from Prop. 13.
According to a 2016 analysis from the Legislative Analyst’s Office, Prop. 13 has led to vastly different property tax assessments within counties, or even blocks, depending on how long the home has been owned.
Our own analysis of real estate data from Zillow found significant disparities across the state, as well. On Wilkins’ block alone, we found that if everyone was taxed at the current value of their home, the block would have paid an additional $130,000 in property tax last year.
Wilkins’ tax bill, for example, is much lower than a nearby neighbor in a similar home who bought more recently.
That kind of disparity can be found even among homeowners with similar ages, incomes and overall wealth.
“Looking at 45- to 55-year-old homeowners with homes worth $575,000 to $625,000 and incomes of $80,000 to $90,000, property tax payments in 2014 ranged from $1,350 to $7,500,” the LAO report found in examining the San Francisco Bay Area.
That difference is based mostly on how long a property has been “protected” by annual tax increases by Prop. 13.
An unintended consequence is that the longer people benefit from lower property taxes, the harder it can be to afford a new home with taxes based on its new assessed value.
Indeed, the LAO report found that “the share of properties sold each year in California has been on the decline since the passage of Prop. 13.” While 16 percent of California properties were sold in 1977-78, this share declined to only 5 percent in 2014-15.
Expanding Prop. 13
California voters have modified Prop. 13 twice since they voted it in. In 1986, voters passed Prop. 60. The measure allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home. There are conditions: The new home needs to be located in the same county and it has to be of equal or lesser value than the original home.
Two years later, voters amended Prop. 13 again. Prop. 90 expanded on what Prop. 60 allowed, letting eligible homeowners keep their lower tax assessment if they buy a home of equal or lower value in another county, as long as county supervisors allowed it. Currently about 11 counties, including Los Angeles, Orange, San Diego and Alameda permit that lower assessment to be carried into their county.
What’s allowed under Prop. 13 is back on the ballot again this November. Proposition 5 seeks to expand Prop. 13 even further and eliminate the requirement that county officials be on board before a lower tax assessment transfers across county lines. Under Prop. 5, that portability would extend to all 58 counties in California, whether or not local elected officials want it.
Under Prop. 5, a formula would be used to calculate the new property tax based on the difference between the current assessed values of the old and new home.
It’s an idea that appeals to real estate agents like Linda Eisenman, whose territory is primarily north Orange County, including Brea, Placentia, Yorba Linda and Fullerton. According to state campaign finance reports, the real estate industry has pumped more than $7 million into supporting Prop. 5.
Prop. 5 “would allow those people who have been in their homes for many years and have been able to benefit from Prop. 13, it would help them be able to transfer their property tax bases to the next property,” Eisenman said, adding it would be a huge benefit to baby boomers who want to move into a smaller place.
“It’s also going to help younger people because it’s going to get some of the baby boomers who are staying put … out of their homes, freeing up their existing home for future homebuyers,” she said.
And not incidentally, more homes bought and sold mean more commissions for real estate agents.
Renewing the debate
But the measure has plenty of detractors who think Prop. 13 has been bad for California, and Prop. 5 does nothing to address that.
“This new measure is the son of Prop. 13,” said San Francisco Assemblyman David Chiu, who strongly opposes Prop. 5.
The LAO reports that if Prop. 5 is approved, schools and local governments would lose property tax revenue–over $100 million each per year at first, growing over time to $1 billion each per year in today’s dollars.
However, the state will have to replace the $1 billion lost in revenue to schools to make them whole. So cities, counties and special districts would take the brunt of the financial hit if Prop. 5 passes, leaving them less money for everything from public safety to health care and libraries.
“This is simply going to allow longtime, wealthier homeowners to continue to receive additional tax breaks while doing nothing for millions of Californians who are struggling in our housing crisis,” Chiu said.
This includes people like Bryan Blythe. The 36-year-old renter has lived in a 1,000-square-foot apartment in San Francisco for nine years, all the while benefiting from the city’s rent control law. Now Blythe and his partner are thinking about buying a home in San Francisco or Oakland, if they can afford it.
“We grew up in the Bay Area,” Blythe sayid. “We both have family who are still here. And all of our friends are here. Our jobs are here. We don't have any real desire to leave. We'd love to stay if it was possible financially.”
Blythe said he and his partner earn good salaries, and they’ve saved for a down payment. But he said that buying instead of renting will triple their monthly costs for housing.
“Mortgage, property taxes, homeowners insurance, HOA fees — it’s gonna be a huge jump for us,” he said.
There’s really nothing in Prop. 5 to help wannabe homeowners like Blythe afford their first home.
Backers of Prop. 5 say it will help first-time buyers by freeing up homes sold by aging baby boomers.
“If you sort of envision housing as a kind of ladder, you know the first rung of the ladder is rental housing,” said Alex Creel, senior vice president for government affairs with the California Association of Realtors, the main backers of Prop. 5. “As you move up the ladder, then pretty soon you’re into home ownership.”
So-called “empty nesters” might want to downsize and move into a smaller place, but Creel said, “under the current property tax rules you can’t do that. So you’re stuck and people are staying put.”
Backers of Prop. 5 hope to convince voters that by giving older homeowners economic incentive to move, young families and first-time homebuyers will have more supply from which to choose.
But as almost everyone acknowledges, the real impediment to purchasing a home is cost, which is largely driven by supply and demand.
“Supply is the real problem,” said Creel. While acknowledging that Prop. 5 does nothing to increase supply, “it moves us in the direction of making more housing available to families who need it.”
Even if Prop. 5 passes, don’t count on Kenneth Wilkins’s home to be on the market anytime soon.
“I don’t think we’ll sell the property,” he said. “I’d like to live here until I’m 99 or so,” he jokes. “Then I’d like to pass it on to the grandkids and their grandkids.”