Revisit Prop. 13 to help unleash our economy
For the last 50 years, rightof-center politics in California has been laser-focused on one subject: keeping taxes low. For these voters, the passage of Proposition 13 in 1978 was a monumental achievement that put hard caps on how much property taxes could rise for existing homeowners. Even as California politics has become dominated by Democrats, Prop. 13 has become considered an untouchable part of California politics. This is a real problem because Prop. 13 has eroded economic opportunity in California, and it’s high time we take action to reform the outdated law.
The merits of Prop. 13 are often argued along the lines of political beliefs in the size of government. Progressives in California bemoan the forgone revenue, and conservatives embrace Prop. 13 as a means of “starving the beast” and constraining the size of government. But this debate is tired and inaccurate to facts on the ground: Studies show that tax and expenditure limits like
Prop. 13 are generally ineffective at limiting spending. California is no exception: In 1978, California had the fourth-highest tax burden of any state in the nation. In 2022, California has the fifth-highest burden in the country. Why is this? California has adapted to Prop. 13 by increasing other taxes, collecting the fourth-highest personal income tax, the seventh-highest corporate income tax, the highest state sales tax, and the seventh-highest combined sales tax. Prop. 13 hasn’t kept taxes from rising; it’s shifted the tax burden to alternative taxes.
Worse yet, Prop. 13 has perverse impacts on good taxation policy. The Tax Foundation’s tax policy principles include simplicity and neutrality. Unfortunately, Prop. 13 violates both principles through one of its central features: It bars the re-assessment of a home’s value unless it is sold or re-developed. This provision has led to huge disparities in tax burdens, as many homes in California have doubled or tripled in value over the last 10 years. As someone who is house hunting, I get angry when I look at tax records and realize I will have to pay five to 10 times the tax rate of my neighbors simply because I happened to buy into the market decades later.
Let’s imagine that tomorrow, California proposes that half the residents would pay a 20% tax on their income, while half would pay a 2% tax on their income, decided by a coin flip. That would be unfair. But this is precisely the system that Prop. 13 sets up — two identical properties can be taxed at wildly diverged rates based solely on the luck of when you were able to buy into the market. In 2018, the Los Angeles Times found that actor Jeff Bridges and his siblings paid $5,700 in property taxes on the Malibu mansion they inherited, which was estimated to be worth $6.8 million in 2018. The paper estimated that at a theoretically identical house next door, a new purchaser would be paying at least $76,000 annually in property taxes, a rate 13 times greater than the Bridges.
Voters who believe in the importance of economic growth should embrace property taxes as the best way for governments to raise the revenue they need. All taxation hinders economic growth to some extent, but property taxation does far less to deter growth when compared to income or sales taxes. Since land cannot leave the state, many across the political spectrum have argued that land-focused taxation can create economic growth by encouraging property owners to respond to market incentives to develop their land, maximizing its market value. Milton Friedman famously called land taxes the “least bad tax,” while conservative urban planning guru Chuck Marohn argues that land value taxes can incentivize economic growth in under-invested communities.
Unfortunately, Prop. 13 flips this incentive around. Because redevelopment and improvements can trigger a property tax reassessment, property owners are encouraged to do nothing and become land speculators, free-riding off rising prices throughout California. Worse yet, after Prop. 13, California nudged cities to charge developer fees as an alternative source of revenue. Today, some cities’ fees are over $150,000 per unit, which drives up housing prices and discourages development. This combination of perverse incentives has encouraged California’s cities to become simultaneously stagnant and outrageously expensive, as valuable land with great economic potential sits underutilized.
A full-scale repeal of Prop. 13 would be politically untenable and highly disruptive, but that does not preclude all reform. One idea would be to eliminate Prop. 13’s prohibition on the re-assessment of property values for all future property transactions (both sales and inheritances) while allowing existing homeowners to keep their current assessment while they stay in their homes. In addition, reform could give commercial and investment properties a short grace period (i.e., five years) before reassessments begin. While this would allow tax inequities in the short-run, these would phase out over time without creating disruptions for those who bought their home under the assumptions of Prop. 13. Finally, assessment reform could be partnered with imposing strict limits on municipal developer fees to ensure that the tax burden on new buyers is limited.
The second idea would be to reform Prop. 13 to create a split-rate system, where the tax rate on improvements is limited or even eliminated, but the tax rate on land is allowed to rise (on eligible properties). Evidence from split-rate taxes in Pennsylvania showed that most homeowners would not see land taxes increase their taxes, especially in less affluent areas of California where land prices are low.
Housing policy is California’s most concrete barrier to economic growth. As the crisis worsens, the state Legislature has started to address zoning reforms, albeit far too slowly. Partnering these zoning changes with property tax incentives that promote, not penalize, building housing could unleash growth. Of course, no housing reform will fix all of California’s economic problems, but Prop. 13 reform is still a necessary step in the right direction.