What is Proposition 13? Why Does It Matter?

Proposition 13 is under attack in California. Current supporters of repealing the bill claim that reform would be a big step towards solving the state's affordability crisis. Repeal would also have an adverse effect on real estate investors in the state.

Background:

Passed on June 6, 1978 Prop 13 amended the state Constitution, carrying 65% of the vote and all but three counties. Proposition 13 has, as promised, has protected homeowners from sharp increases in their property tax bills.

Designed by businessman-activist Howard Jarvis and his supporters, Prop 13 aimed to do two things: ease the overall tax burden and protect a stable culture of homeownership. To that end, it set tax rates at 1% of a property’s sale price and capped annual increases at no more than 2%. Then it required future tax hikes of any form to pass the state Legislature by a two-thirds vote. “The most important thing in this country is not the school system, nor the police department nor the fire department,” Jarvis declared after his ballot box victory. “The right to have property in this country, the right to have a home in this country, that’s important.” (Source)

Prior to Proposition 13, California re-assessed property every few years to figure out its market value, and taxed owners based on that updated price. Those taxes could double from one year to the next, and then dip with the market. (Source)

What Happened:

Meant to protect homeowners, Prop 13 also protects commercial real estate and real estate investors. Critics claim that sales, parcel and income taxes have had to be raised because we're not getting as much property tax as we should since the property tax 'revenue rises relative to the cost of living, population growth, and inflation'.

Critics claim that property owner's are rewarded to sit on vacant land and refuse to sell. They also claim that housing development takes a back seat to commercial development, since local government's need the sales tax commercial businesses generates.

What is happening now?

Critics of the bill have proposed a 'split roll' measure, which would allow commercial property to be reassessed while keeping Proposition 13 protections for residential properties and small businesses (less than 2m in revenue). They plan to try and put the measure on the ballot during the 2020 elections.

What does this mean?

Besides the fact proponents are asking Californian's to raise taxes on themselves, a repeal of Prop 13 would be disastrous for the state's ability to attract new businesses. Small business owners who lease property would also be affected since property owners would be incentivized to raise rents on their tenants to make up for high taxes.

Additionally, investors who rely on their property to generate cash flow would be affected. Since California real estate does appreciate at higher rates than the rest of the nation many hard working investors who have based their investment decisions on previous tax law could face disastrous consequences to their portfolio if their portfolio is worth over 2m.

Proposition 13 has faced challenges throughout its lifetime and so far cooler heads have been able to prevail. During the '16 election cycle Jerry Brown voiced his opposition to a 'split roll' system - and hopefully owner's and investors will be able to push back on this insanity again in 2020.

John Alden