Part One: Why is Proposition 13 so Attractive to so Many Californians?

In examining and analyzing tax relief from Proposition 13 property tax transfer, as well as the financial and political drama surrounding the initiative – with all the on-going conflict between detractors and supporters; between critics and advocates – it is important to note that prior to Proposition 13 in California, from one end of the state to the other, property taxes were pretty much out of control, and tended to increase arbitrarily, whenever it was deemed appropriate to do so, for the benefit of one local city or town government or another.

Anytime local townships and city governments needed extra money to fund this or that, they felt free to increase property taxes, and take large amounts out of “redevelopment agencies”, or RDA – particularly when it involved commercial land development, questionable funding for certain school programs, and possibly tax rebates for certain business verticals aligned politically with local government. Frequently spearheaded by special interests.

Specifically, property tax revenues were, and still are, distributed to K-12 schools and community colleges; various counties, cities & “special districts”, generally with redevelopment agencies at the bottom of the list.

The irony was that redevelopment agencies that were the most critical for local residents received the least amount of money from property tax revenues… And this trend still continues, to this day. We’re talking about redevelopment agencies that purchase property for local government; that raze and build non-residential structures; that provide municipal infrastructure like bridges, city or town streets, rural roads, and lighting, for public safety; that develop affordable housing (at the very bottom of their list) as well as renovating local commercial areas.

Before Proposition 13 property tax transfer tax relief was in effect it was particularly obvious how paltry funding was from property taxes that were supposedly going, in equal parts, to support local infrastructure needs – generally to help middle and lower middle income residents with public safety, health and welfare.

Finally, years later, the excellent organization PPIC.org provides in a recent study – four recommendations to local California law-makers that should help resolve the controversy surrounding redevelopment agencies:

a) The legislature should formally clarify the goals of re-development.
b) The definition of blight should be aligned with the goals of redevelopment and should be made more precise.
c) Some form of oversight authority should be established to monitor RDA behavior.
d) If the legislature intends redevelopment to be self-financing rather than heavily subsidized, the pass-through rate should be increased significantly.

At any rate, these issues obviously continued to breed resentment prior to 1978, from residential property and small business owners… and eventually that collective resentment morphed into a rush of significant public support for a solution – and that solution turned out to be Proposition 13, promoted and driven forward mainly by Howard Jarvis’ Taxpayers Association.

California Proposition 13

California Proposition 13

California Proposition 13 is also known as “The People’s Initiative to Limit Property Taxation”.  Prop 13 is an amendment to the Constitution of California that became law in 1978. When voters in California passed Proposition 13, the maximum amount of tax on real estate no longer could exceed 1% of the total cash value of your home, or additional real property you owned.  Moreover, Prop 13 limited yearly increases of assessed value of real estate to an inflation factor not to exceed 2% per year.

Another component of Proposition 13 is that it prohibits reassessment of new base year value, except when there is a change in ownership of real property, or new construction. This permits homeowners in California to refinance a mortgage without being concerned that their home, or real  property, will be reassessed for market value. This is often of particular concern to elderly homeowners, who frequently reside in the same home for decades; and therefore have many opportunities to re-mortgage, with a long-term payment schedule in place.

In 1986 California voters passed Proposition 58, which, in a sense, works in concert with the limits that Proposition 13 places on your home’s tax base.  In other words, Proposition 58 excludes transfers of real property, between parents and children, from current market value tax reassessment. Prop 58 allows property to be transferred from parent to child, or vice versa, with the use of a Trust.  For example, this enables an adult child to inherit a home from a parent, and keep the parents’ low Proposition 13 tax base. The ability to do this  frequently saves beneficiaries receiving property from parents literally thousands of dollars per year, and in many cases tens of thousands of dollars, in property taxes.

There are some restrictions when it comes to proposition 58.  Properties held in a Trust must meet certain requirements in order to qualify.  For instance, one  requirement states that no funds from an acquiring beneficiary can be placed in the Trust.  In that particular circumstance, a loan is often received from a third party, and placed in the Trust. You can learn more about third party loans for California Proposition 58 qualification here.

There have been some discussions in the media, and among the political class, in California, about repealing both Proposition 13 and Proposition 58.  However, as you can imagine, both Propositions have a great deal of support among California homeowners.

In fact, 42 years after California Proposition 13 went into law, it still enjoys popular support among most California homeowners.  It’s interesting to note that a survey by the Public Policy Institute of California revealed that 57% of  adults polled support the measure.  However,  58% would prefer to allow  homeowners keep Prop. 13’s tax relief and property protections (particularly for seniors) while imposing higher property taxes on business owners.  33% of those polled oppose that sort of taxation on business owners in California.

What do you think? Let us know… We’ll be publishing the results of this survey, so your participation is valuable, and greatly appreciated!  (Your name and contact info will of course remain confidential and private, and will never be shared with any third party entities)…