The Property Tax Panacea

One of the biggest targets of liberal acrimony in California is Proposition 13, the 1978 ballot initiative that capped property taxes at 1% and requires 2/3 of legislative approval to increase most tax rates. It also caps the reassessment of real estate value by 2% per year, barring new construction or a change in ownership.

During the major last budget crisis many suggested repealing this cap as a solution. “I don’t know how we can talk about reforming the California budget without reforming Prop. 13,” said San Francisco Assessor Phil Ting, who advocated raising rates on commercial properties.

According to the U.S. Census Bureau, as of 2005, California ranked 45th nationwide in property tax rates as a percentage of real estate value. But in terms of per capita income, Californians rated 17th, paying the state an average of 3.17% of their income for the privilege of living in their own homes. Since housing prices were grossly inflated over the last few years—and this author thinks they still are—millions of middle-class Americans with new homes forked over quite a bit. Many landlords barely break even, once they pay tribute for the continued right to own their own property.

States without a cap on property assessments have suffered skyrocketing taxes with the housing boom. Rates have gone up 100% in some Florida markets. Along Lake Tahoe in Nevada, property taxes went up 135% in a period of four years. For those on fixed incomes or retirees with little more than their home to their name, Proposition 13 has been a lifesaver in today’s volatile housing market.

Despite Prop 13, Sacramento’s property tax revenue ballooned during the housing bubble—increasing 22.11% from 2000 to 2005, about the same rate that general per capita revenue increased over the same time, even as per capita income only increased 13.8%, according to the Center for Governmental Analysis. Indeed, property tax revenue rose 30 years in a row after Prop 13’s passage and has now declined for only one year.

With the housing bust, property tax revenues declined, to the consternation of Prop 13 critics. They believe that as houses have been immensely discounted, they will now change hands and be capped in their reassessed value, meaning that “even after the economy recovers, state and local government budgets will not recover fully,” as Jean Ross of the California Budget Project wrote. But this presupposed that real estate will reenter a bull market and continue to climb. It has hardly done so. And given that government has been growing faster than the economy, couldn’t it be time for that trend to reverse?

Moreover, how much money are we really talking about? The San Francisco Chronicle lamented that declining property taxes means a $1.5 billion cut in education spending. That sounds like a lot, but given the huge changes in the housing market and the size of the budget, $1.5 billion is almost rounding error—smaller than the disparity between the true budget shortfall and the shortfall finally closed after months of heated debate.

While California rakes in about 20 billion yearly in property revenue, it is one of the highest taxed states in America overall. The problem is too much spending, not that taxes are too low.