The trickle-down effect of Proposition 13 continues to be felt in California.
When the state voted to limit its property taxes in 1978, most figured there would be some tradeoff in the effort to save money. And there has been.
The good news for California taxpayers is the law has worked to keep property taxes down. According to this Bloomberg Report, the average real estate tax rate in California is about 60 percent lower than when Proposition 13 was passed, and while the state is the most populous in the country, it ranks No. 28 in combined state and local property tax collections per person.
But while homeowners have been able to save because of the law, it’s also been blamed for California’s constant state of crisis when it comes to budgets and funds. There’s also the unbalanced tax bills amongst neighbors, leading to plenty of anger and confusion.
Some tax experts say other states have looked at Prop 13 as something to avoid rather than embrace.
The law was the result of a movement by California citizens who filed a petition to get it on the ballot, where it passed with 65 percent of the vote. The measure rolled back and froze assessments for commercial and residential properties to 1976 levels. The tax rate was set at 1 percent of that valuation, and limited annual increases of that value to 2 percent. Property in California is now reassessed only when it is sold, when an addition is put on or when it changes hands.
Those provisions mean that someone who has owned the same property for a long time will have a much lower tax bill than a neighbor who recently bought a similar home. In the first year of the law, property tax revenue dropped from $10.3 billion to $4.9 billion, a 52 percent reduction. That led the state to encourage businesses – in particular strip malls and auto dealerships – to move to the state and add to the sales tax revenue. At 7.25 percent, California has the highest sales tax rate in the country.
Proposition 13 also took the power of setting tax rates away from local municipalities – as well as the power to allocate those funds – and gave it to the state to decide. That means rather than simply spending on a project that they believe they need, localities have to ask the state for the money. Any increase in the tax has to be approved by a two-thirds vote by each chamber of the Legislature rather than being a local issue, making it more difficult to get things done.
The biggest loser in the wake of Prop 13 may be the state education system. Since it was passed, California has dropped from seventh to 27th in spending per student as the law has sapped what is traditionally the main source of educational funding.
One solution bandied about was creating a system to assess commercial and industrial property owned by publicly traded companies every three years rather than when it changes hands, establishing a semi-regular stream of revenue. That would continue to keep taxes on residential homes down – protecting citizens – while also helping the educational system.
Governor Jerry Brown – also the Governor when Prop 13 was established – has said he believes his inability to win support to extend $11 billion of now-expired taxes and fees could spur an adjustment to Prop 13 to begin charging commercial property while maintaining the strength of the law for homeowners.
Proposition 13 clearly is a divisive issue. On the one hand, there’s no question many California homeowners have benefited in paying lower property taxes than they otherwise might. On the other hand, it has cost many other people – in particular the education system – a great deal of money. So is it a good thing for the state, or bad?
And just because the law has kept property taxes down doesn’t mean everyone is being treated fairly. It’s still just as easy for a home to be overassessed. If you think you may fall into that category and are paying too much in property taxes, check out ValueAppeal and see if you might be able to get your payments more in line with what you should be paying.