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What Is Prop 13 Doing for California Homeowners These Days?


By Diane Harkey
MEMBER, BOARD OF EQUALIZATION, FOURTH DISTRICT

At the age of forty, the People’s Initiative to Limit Property Taxation continues to protect both longtime homeowners and recent home purchasers from erratic fluctuations in property tax assessments.

Both Proposition 13 and those it protects are often misunderstood today. Officially named the People’s Initiative to Limit Property Taxation, this proposition protects all property owners, including those who have lived in their homes for many years and those who have recently become homeowners.

I understand firsthand the trauma associated with increasing property taxes and how they can impact home affordability. As a young woman, I worked for a major bank in Huntington Beach, where I managed more than one thousand insurance and property tax impound accounts for home loans we serviced. Each year I would reconcile the tax bills received from the county with the estimated taxes collected as part of the homeowner’s monthly mortgage payment. Inevitably, I would have to call homeowners and tell them that they needed to send in additional funds because the assessor had raised the property taxes on their home. This was never a fun conversation, and many homeowners struggled to make the necessary payments. Of course, this was before the passage of Proposition 13.

Before Proposition 13 each county could reset property tax rates annually, and even the best-run counties seemed to do so when prices rose. The average property tax rate in California was 2.67 percent. If homes in a neighborhood sold for higher prices, then other nearby homes could be reassessed based on the increased comparable values. Some properties were reassessed in value more than 50 percent in one year! Fluctuating property tax bills made it nearly impossible for people— especially those living on fixed incomes—to pay their property taxes. Grandparents and retirees were literally being taxed out of their homes.

A local Orange County business leader named Howard Jarvis saw this happening across the state and led a bipartisan fight to pass the sweeping tax reform measure known as Proposition 13. In 1978, two-thirds of California voters passed Proposition 13, which reduced property taxes on all property, including both residences and businesses.

As a result of the landslide approval of Proposition 13, sweeping changes were made in how properties are taxed. For tax purposes, most property tax values were rolled back to their 1976 level, the property tax rate was reduced to 1 percent, and future increases were limited. Proposition 13 converted the market value–based tax system to the acquisition value–based system we now enjoy. Unless a property is sold or an improvement is made, the increase in value is no more than 2 percent per year for inflation. Proposition 13 also mandated two-thirds voter approval for any special purpose taxes or bonds raised by local governments or districts.

Since the 1980s, property tax revenues for local governments have been much less volatile than personal and business income tax revenues. This was highlighted during the recent recession in 2009, when property tax revenue increased by about 4 percent while income tax revenue dropped by nearly 20 percent. Proposition 13 allows for certain and stable income for local governments.

Proposition 13, which recently celebrated its forty-year anniversary, continues to protect all California homeowners. Predictable property tax bills have helped many people on fixed incomes stay in their homes and have made it easier for new homeowners to budget for their property tax bills. This key taxpayer protection has stood the test of time and must remain in place as California continues to grapple with housing inventory and affordability.

Diane Harkey represents more than 9.5 million constituents in Southern California as a taxpayer advocate and a constitutionally elected member of the Board of Equalization. She spent six years in the state Assembly and also served as the mayor of Dana Point. Diane can be reached at Diane.Harkey@boe.ca.gov. Sign up for her newsletter at www.boe.ca.gov/Harkey.