My parents closed on their home in Walnut Creek, California in August of 1966. For 13 years they saw their home reassessed every year as California property values steadily increased. In 1978 Howard Jarvis led California in what was characterized as the “tax revolt”. The idea was that retired Californians facing an ever rising property tax bill, would be forced to sell. Proposition 13 limited California’s property tax to 1% of the purchase price with a cap of a 2% annual adjustment. So a revolution was born.
Properties purchased prior to 1978 were frozen for tax purposes at 1978 levels. Subsequent purchases were frozen at their respective sales price. So not only did the tax level stay at just 1% (contrast that with Long Island for example at 3%), but the value was also frozen. The repercussions have been felt ever since.
When Arnold Schwarzenegger ran for reelection in 2004 he solicited advice from none other than The Oracle of Omaha, Warren Buffett. At that time Buffett rankled Schwarzenegger backers by suggesting it was time for California to revisit the viability and fairness of Proposition 13.
Back to my mom… so Prop 13 has helped to keep my mom in her home by capping her property taxes at 1978 levels. Her home, perhaps worth $700,000 today, is taxed as if her home was worth around $100,000, or roughly $1,200 per year. Next door where her neighbor purchased at the height of the market, they pay roughly $12,000 per year. While it’s true my senior citizen mom, no longer benefits from the schools as she once did, she still reaps the benefits of all other County services yet she pays just 10% for those services that her neighbor pays for the same services. Prop 13 is not fair taxation. Didn’t the Boston Tea Party raise a similar issue?
California is the world’s 6th largest economy and is essentially bankrupt in part because of the obvious waste in Sacramento that plagues state governments everywhere, but in large part because it’s been saddled by two horrible bits of populist legislation: Proposition 13 and the related 2/3% majority to raise taxes and pass budgets. The 2/3 Legislature vote requirement to raise taxes was actually a component of Prop 13 and 1979 brought the same requirement for a budget’s approval. This past November saw the end of that rule in favor of a majority approval for future budgets.
So what would the impact be on changing Proposition 13’s 1% tax limit? I believe that a modest change, maybe a 1/8-1/4% increase, would have limited effect on most homeowners and generate the huge revenues the state requires to balance their sick budget. After all, the 1% rate was an arbitrary number to begin with. A 25% increase in property taxes – $400 a year in my mom’s case, would likely not break any senior citizen, the original folks the legislation was designed to protect. Of course it would have an impact on her neighbor who is already paying $12,000 and the additional $3,000 is not pocket change. Yet this would fatten local coffers allowing Counties to address the many needs they have, especially in light of new Governor Brown’s suggested shift from the state’s handling of most services back to the local governments. It would benefit all levels of education, perhaps taking California universities back to the days when they educated Californians rather than out of state and international students who pay higher tuition. It would help put more police on the street. It would allow the state to better handle mental illness by providing the necessary funds, and it will bring us back, along with fiscal responsibility, to the forefront of the nation. Interestingly, I believe it would also allow the state to ease taxation on small business and corporations which in turn would bolster employment, growth and the overall economy.
So mom, clearly the time has come to redress property taxation in California, and I know you agree with me.