California Election Update: What Is Prop 19, Anyway?

If you were following the tax assessment beat during California’s 2020 election, chances are you heard plenty about Proposition 15. As a bill that would unfreeze assessments for commercial properties, it was flashy, impactful, and activated political blocs both For (teacher unions) and Against (the California Business Roundtable).

Unfortunately (from a tax equity perspective), Prop 15 was defeated by a razor-thin margin. But another 2020 California proposition about tax assessments did, in fact, pass: Proposition 19.

Prop 19 was a controversial bill, for the very reason that even good-faith tax and land reformers didn’t know whether it was worth supporting or opposing. (I personally saw a 50/50 split among friends and colleagues.) To understand why, let’s break it down, and understand how weird it is.

But first, some history.

California’s landmark Prop 13 (1978) has frozen tax assessments for all properties, which are only changed when a property is sold. (Assessments are allowed to increase 2% maximum each year, roughly keeping pace with the Consumer Price Index.) Prop 13 has devastated public programs in California, created a scarcity of housing stock, and also led to an interesting problem for its beneficiaries: lock-in. As California real estate has grown in price, those granted a diminished assessment have the additional incentive not to move, as they’d have to pay market value assessment on their new property. All of these factors work to freeze seniors in their home, even when downsizing or relocating would be in their favor.

This was ineffectively remedied through a number of additional propositions (60/90/110), which attempted to make assessments portable through both intra and inter-county moves.But, these only applied to a few counties, and required the new property to be effectively as cheap as the original property was (which, given increasing real estate prices in California, is far from likely).

The new amendment Prop 19 achieves three things:

  • Allows assessments to transfer up to three times for seniors, the disabled, and fire victims, with a system of prorating the assessments of more expensive properties
  • Re-assesses inherited property for non-primary residence, and also primary residence if the value has accrued more than one million dollars (effectively a partial repeal of Proposition 58, which extended Prop 13 to heirs)
  • Funds are allocated for wildfire relief

Understanding the controversy:

THE PROS:

  • The re-assessment for inheritance is unambiguously great, from a value capture/land equity angle
  • The portability of assessments will lead to more mobility
  • When an older resident moves out, the resulting re-assessment will be a win for revenue

THE CONS:

  • When an older resident moves in to a new county, it’ll be a loss for revenue (there’s a revenue-sharing scheme built in, but it’s far from obvious that it’ll work to avoid unintended consequences)
  • The initiative was designed rather cynically by Realtors ($47M was spent on the campaign on both sides. 99.3% of all money was  on the Pro-19 side; .7% on the Con-19 side; essentially all of the money in support from the California Association of Realtors and the National Association of Realtors)
  • The components of the initiative don’t really make sense together; in fact, just the portable assessments component was put alone on the ballot in 2018 as Proposition 5, where it failed. The realtors used the re-assessment component of the bill to sweeten the deal, when in fact it would have been preferable to see the Prop 58 repeal stand on its own.
  • Ditto the wildfire relief, which is an apparently focused-group way to give the campaign a more positive brand. The connection between local assessments and wildfire funding is tenuous at best
  • The California Constitution is bloated with dubious, confusing, and ill-written amendments through the initiative process, which are impossible to remedy through normal legislation, and very difficult to reform through the ballot. The level of stringency one should have is as a result high.
  • Did I mention how weird and cynical Prop 19 is? (Official opposition to the bill was a bizarre group, containing both the ACLU of Southern California, the League of Women Voters of California, and the Howard Jarvis Taxpayers Association)

In any case, it’s now the law of the land, though it’ll take quite a while for the effects of its reassessments to become known. Realtors (based upon online activity highlighting the benefits of Prop 19) are already enthusiastic about its ability to drum up business.

As for the necessary work of reforming California’s land taxation schemes for the public benefit, it falls far short of the necessary (but politically difficult) work that must be done. We’ll presumably see Prop 15 return in the future, and possibly more as budget crises loom.

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