No on California Proposition 5

November 2018 election

Proposition 5 gives a property tax break to homeowners age 55 or older or with severe disabilities who move. It does this by modifying Prop 13 (1978), which capped annual property assessment growth at 2 percent per year for taxation purposes, to let these homeowners take their low property assessment with them when they move.

This is a $1 billion per year transfer local governments to the wealthy, and perpetuates Prop 13’s damages to the state.

Prop 13: California’s original sin

  1. Cap property tax rates at 1 percent
  2. Cap property assessment growth at 2 percent per year for property taxes, to be reassessed only upon transfer of ownership or construction
  3. Require two-thirds majorities in both legislative houses for tax increases
  4. Require two-thirds majority of voters for local tax increases

Each of these has been consequential, but the second clause has arguably produced the most notable outcomes. For example, in my hometown of Palo Alto, many homes have risen in value from low hundreds of thousands in the 1970s to several million dollars today. A homeowner who bought in the 1970s might have their home assessed at $500,000 or less, even when it’s worth $5 million or more. They’d pay $5,000 per year in taxes, but if they sold it, the new owner would pay $50,000 per year. It’s not uncommon for neighbors to be paying property taxes that differ by a factor of 10 or more.

It has also destroyed budgets and taxation equity. Since local governments can’t rely on property taxes for funding — as they do in most states — they often rely on state funding for necessities like schools. That’s why California has such state income taxes. Prop 13 didn’t actually reduce Californians’ taxes, it just shifted them from property to income; that is, it shifted taxation from wealth to labor. What could be more regressive?

Low property taxes could even be responsible for California’s poverty-inducing 4-million home shortage. This is largely due to restrictive land use, such as zoning restrictions preventing San Francisco from building apartments on 73 percent of its land, and approval processes that allow neighbors to halt development.

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This hasn’t just happened: these are laws that people have voted for, with some rationale in mind. It’s no coincidence that homeowners are disproportionately likely to show up to zoning boards to block new housing in their neighborhood. Restricting supply increases prices, so blocking housing raises their home values and corresponding net worth.

Property taxes can fix this incentive. If homeowners have their property value gains taxed away, they have less reason to produce those gains. Conversely, if the city government funds programs with property taxes, they have more reason to maximize aggregate property values, which means approving more new property.

Doubling down again and again on Prop 13

  • Prop 8 (1978) allowed for reassessments in a declining market
  • Prop 58 (1986) allowed parents to transfer their low property tax assessments to children
  • Prop 60 (1986) let homeowners over age 55 to keep their low property tax assessments when moving to a home of equal or lesser value in the same county
  • Prop 90 (1988) extended Prop 60 to moves in other counties, given that county allows it
  • Prop 193 (1996) extended Prop 58 (1986) by allowing grandparents to transfer their property to grandchildren whose parents have deceased

Each of these tax cuts has harmed local governments and worsened generational inequities. Prop 58 (1986) has received recent attention thanks to a Los Angeles Times investigation into its aristocratic results.

Prop 5 extends the bolded amendments: it ends the equal-or-lesser-value and county limitations of Prop 60 (1986) and Prop 90 (1988), allowing homeowners to take their low property tax assessments to any new home. When the new home value exceeds the old home value, a formula is applied such that the assessed value is in between the old and new.

It’s a discount to homeowners who have paid taxes on less than their home’s true value. Like all of Prop 13, the biggest beneficiaries are those whose homes have appreciated significantly, or who have inherited homes that have appreciated significantly, and who are therefore definitionally wealthy.

The Legislative Analyst estimates that Prop 5 will cost local governments $1 billion per year in the long run. That will either mean cutting services like schools, or the state stepping in again with greater taxes on workers to make up the difference.

Giving homeowners a tax break on their new home could also worsen the housing-blocking incentives, by insulating homeowners from high taxes when they move.

Proponents point to homeowners’ unwillingness to move when they lose their low tax assessment, positing that Prop 5 could spur retirees to downsize, leaving larger family homes for families. It’s a nice theory, but the Legislative Analyst couldn’t justify ascribing any certainty to it, and this potential benefit wouldn’t offset its many costs.

Prop 5 is a giveaway to the wealthy, a revenue cut to cities, a potential reason for more people to block more housing, and a reinforcement of Prop 13’s ills. Vote no.

Written by

Economist. Founder and president of the UBI Center. Studied at MIT and UC Berkeley. YIMBY. Former Google data scientist.

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