Forty-five years after the passage of Prop 13, property tax reformers on all sides prepare for another battle in 2024.
Protecting your home—and the loved ones in it—touches primal instincts in all humans. So, it’s perhaps no wonder that California voters in the 1970s overwhelmingly voted for Proposition 13 after years of watching property tax rates increasing to an average of about 2.7%. Furthermore, because local governments determined the rates, the property landscape became an unstable patchwork of varying rates. Playing on fears of homeowners being forced out of their homes because of ever-increasing rates, populist gadflies like Howard Jarvis led a tax rebellion to nip them in the bud with Proposition 13.
The bill—passed in 1978—promised to set property tax rates at the state level and cap increases at 1% of the value per year, with re-assessments coming only upon sale or significant renovation. This essentially transformed the property tax system in California from a market-based system to an acquisition-based one. For those caught up by “a combination of fear and anger”—as Jon Coupal, current president of the Howard Jarvis Taxpayers Association noted—the passing of Prop 13 seemed a godsend. For California governments, schools, and public institutions that relied on the tax revenue, however, the reaction was quite the opposite, as the funding dropped dramatically and equity gaps grew wider.
Forty-five years after passage, Prop 13 remains a serious bone of contention that seems set to a repeat cycle. Opponents find a loophole or other path to circumnavigate the law and increase funding, prompting an immediate response by supporters to patch the hole and strengthen the foundations. Over the years, that’s led to about two dozen amendments, with more are on the way in 2024.
Intentions and consequences
California homeowners in the 1970s certainly had something to worry about. Home prices had nearly tripled, and property tax bills were soaring alongside “What was happening,” said Coupal, “is you had some people, particularly in Southern California, who had long since paid off their homes and yet when they got an annual tax bill, it could have been double or triple from the previous year.”
The passage of Prop 13, according to supporters, allowed neighborhoods to stay intact and kept elderly residents on fixed-incomes in their homes rather than being forced out by increasingly high tax bills.
Opponents of Prop 13, such as Mark Mollineaux, host of the Henry George Program at Stanford University’s KZSU station and board member of the Robert Schalkenbach Foundation, disagrees strongly with the supposed altruism. “Honestly, I think it was rotten from the beginning,” he states, “Prop 13 was, from the beginning, a taking and dividing of society.”
Most certainly, it took millions from public institutions, particularly schools. In fact, property tax payments plummeted 60% in a year after passage, cutting $7 billion from city and school district budgets. Urban infrastructure was hit hard, too, fueling more flight to the suburbs and increased blight in the cities.
Taking the brunt of the punch were minority communities, which continue to suffer the results today. In fact, one study by the Opportunity Institute showed that because of Prop 13, white homeowners essentially get an annual property tax break that’s 80% higher on average than Black homeowners and more than twice the tax breaks Latino homeowners receive. In hard numbers, that translates to an average break of $3,507 on average for white homeowners, $1,900 for Black homeowners, and just $1,530 for Latinos. Native Americans fare even worse, at just $1,321.
This has helped sustain and exacerbate the segregation of neighborhoods, which then spills over into school districts, as students generally attend the school in their district. Furthermore, because California’s education funding today draws from more changeable income taxes, the amount of money available becomes unstable and susceptible to economic fluctuations. If there’s a recession, income plummets, and so does the school budget. This impacts districts in minority communities disproportionately—a fact proved once again during the pandemic. School districts in wealthier areas of California, with a more stable income base, can better weather an economic storm.
Prop 13 also raises the hurdle for new Californians to buy housing, especially as the majority now arrive from Latin America and Asia. Not only will they have to pay market rate for the property, they’ll also have to foot a hefty property tax bill. Not only does that fuel ongoing issues of segregation and red lining, it’s created wildly different tax rates in the same neighborhood for the same kind of house. For example, someone who bought property for $100,000 in year one would reach an assessment value of $110,408 in year six. Someone who purchased a similar property next door in the same year six would pay market value, say $150,000, and see taxes assessed according to that value.
California renters—who tend to be non-white—suffer disproportionately, too, as the savings goes to the landlord, not the tenant. For Mollineaux, this basically amounts to a bait-and-switch. “In the run up to prop 13, landlords would tell their tenants, ‘If this passes, this essentially means I save money on taxes, and you will see the benefit; you will see your rent cut.’ What we saw afterwards was this did not happen.”
The New Fight against—and for—Prop 13
Efforts to hobble—if not destroy—Prop 13 come with nearly every election cycle in California. Its most recent major challenge came in 2020 with Proposition 15, which aimed to remove commercial properties from Prop 13’s jurisdiction. It was narrowly defeated. In 2024, opponents are taking a new tack that stems from a 2017 ruling by the California Supreme Court.
In a lawsuit by Cannabis companies against the city of Upland, the companies challenged the city’s refusal to allow the petition for repeal of the local ban on medical marijuana dispensaries to be put to a special election despite receiving the necessary signatures. The California Supreme Court sided with the Cannabis companies and inadvertently poked a hole in the 2/3 majority required by Prop 13 to pass new taxes.
Senator Scott Wiener (D-San Francisco) noted the implication to Prop 13 in a statement celebrating the ruling:
“The California Supreme Court just issued a profoundly important and positive ruling: going forward, when local communities place tax measures on the ballot via voter signature, the measures can pass with a simple majority, rather than a 2/3 vote. It’s hard to overstate how important this ruling is. Communities will now have a much easier time funding schools, transportation, and other critical needs. The ruling begins to undo the damage that Prop 13 inflicted on basic government services.”
In concept, that opened the door for more tax revenue votes based upon a simple majority, rather than the 2/3 majority. That led to Assembly Constitutional Amendment 1, introduced in September 2023 for a vote in the 2024 general election. If passed, it would lower the bar for new taxes from the 2/3 super majority to 55%. On the flipside, Prop 13 supporters introduced “the Taxpayer Protection and Government Accountability Act” for the 2024 ballot to, among other things, restore two-thirds voter approval for all new local special tax increases. Indeed, the newsletter for the Howard Jarvis Taxpayers Association specifically cited the Cannabis lawsuit as motivation:
“One such State Supreme Court ruling, in a 2017 case known as California Cannabis Coalition v. City of Upland, has led to decisions in lower courts declaring that some local taxes for special purposes had passed, even though they received less than the two-thirds vote required by Proposition 13. If the Taxpayer Protection and Government Accountability Act is approved by voters, many of these taxes would have to go back on the ballot again and would expire unless approved by a two-thirds vote.”
The Land Value Tax Option
A land value tax—or some form of it—may offer another approach to property tax rates, and it’s gathering more support in California. Most notably, the uptick manifested in bill AB 362 introduced in February 2023 by Assemblymember Alex Lee. “The bill would require the California Department of Tax and Fee Administration to study the efficacy of a statewide land value taxation system as a potential alternative to current appraisal methods for real property taxation,” stated Lee in a press release. Currently, the bill remains stuck in committee.
Nevertheless, it’s gathering some champions, including Common Ground California, an advocacy group that aims for reforms that allow state and local governments to efficiently finance public services and infrastructure while protecting natural resources. Pointing to Prop 13, the group noted, “AB 362 offers a chance to shift the conversation towards an even more equitable form of taxation that encourages increasing housing supply, discourages real estate speculation, and collects enough revenue for needed investments in our cities.”
Any implementation of a land value tax, however, has an extremely steep hill to climb in California, including the repeal of Prop 13—or at least a portion of it—explains Mollineaux. “A land value tax is by definition ad valorem taxation [a tax based on an item’s assessed], and prop 13 makes any type of ad valorem taxation illegal.”
One option that might be possible under Prop 13, notes Mollineaux, is a land value tax on capital gains. This would essentially be a land increment tax, which means that when a property changes hands, it would be taxed on the increment of how much your base rate has increased in the reassessment. “If it’s one house that sold for 100,000, then it sold for 2 million, That’s essentially a land value basis increase of about 2 million. So, you’d see more capital gains on that.”
As for the original fears that spawned Prop 13, the impact of a land value tax depends a lot on the given situation. For example, if a property is worth more than the land it is on, then a land value tax would benefit the owner significantly. However, in affluent places like Palo Alto, where the land value can far outstrip the building value, a land value tax would be much less appealing or practicable.
Other options to allay fears and increase revenue might include applying different rates to primary and secondary residences. Another could be deferring payment of any property tax increase to a future moment, most likely the sale of the property or death of the owner. “If granny’s being taxed out of her home, she owns a very valuable property,” points out Mollineaux. “She could actually transfer some of the equity she owns as a tax basis. So, after one year, she owns 90%, and the city owns 10%,” for example.
The ultimate defeat of Prop 13 and implementation of a more equitable property tax system may simply come down to the political maxim that it’s far harder to take something away from people than to give it to them. That means major efforts need to be undertaken to educate California voters on what they’d receive upon removal of Prop 1, especially considering what Upton Sinclair, the Pulitzer Prize-winning author and one-time Democratic nominee for governor of California, famously stated, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”