Prop. 5 worsens already-broken California property tax system

California voters should reject Proposition 5, a regressive measure that would provide additional property tax breaks to long-term homeowners — especially those with pricier houses — who already pay significantly lower tax bills.

The initiative would significantly expand an existing option for residents age 55 or older to transfer the taxable value of their homes to another when downsizing later in life.

The revenue loss resulting from the tax breaks could eventually cost schools and local governments about $1 billion a year, according to the nonpartisan state Legislative Analyst’s Office. Consultants for the initiative campaign say the net effect for state and local government would be roughly neutral.

Prop. 5 backers say it would free up more larger homes for families to purchase by incentivizing older people to downsize. But the initiative also provides tax breaks for those age 55 and older to buy larger homes.

Backers also claim the initiative would stimulate construction of more badly needed senior housing. But it’s uncertain how many more homes would be built and how many homeowners would downsize because of the initiative.

What’s clear is that many of those who do downsize would add to the competition for a short supply of more-affordable smaller homes, squeezing out first-time buyers.

This isn’t a solution to our housing crisis. In fact, it might make it worse.

History traces to Prop. 13

The underpinnings of Prop. 5 trace back to 1978, when state voters passed Proposition 13, the controversial property taxcutting initiative.

Under Prop. 13, values of homes for property tax purposes, called the assessed value or tax value, increase no more than 2 percent annually even though market values can escalate more rapidly. When a house is sold, the property’s tax value is reset to match the sale price.

Consequently, Prop. 13 has resulted in huge disparities in tax bills. The annual levy for a house purchased three decades ago is just a fraction of an identical one next door purchased three years ago.

In 1986, voters exacerbated the inequity by passing Proposition 60, which allowed property owners 55 and older one opportunity to purchase a cheaper home in the same county and transfer the tax value of the property they were selling. This usually benefits longtime homeowners with low tax values.

The concern was that, because of the oddities of Prop. 13, longtime homeowners seeking to downsize for retirement or when their kids move out could face higher property taxes when buying a cheaper home. In later years, the benefit was extended to severely disabled homeowners. And counties were given the option to accept tax value transfers from other counties.

Of California’s 58 counties, 11 — including Alameda, San Mateo and Santa Clara — allow a buyer to transfer a tax value from another county.

But one of those, El Dorado County, will stop accepting transfers in November because the tax loss has been too great. And seven other counties — including Contra Costa, Marin and Monterey — that previously participated also have pulled out of the program.

Details of current initiative

Now, with Prop. 5, the real estate industry, which has thus far poured $7 million into the initiative campaign, is looking to greatly sweeten the deal for eligible homeowners. The initiative would make four major changes:

• Apply the program to moves anywhere in California. Counties would no longer have the choice to opt out of the program even though it could reduce their funds available for public services.

• Sweeten the deal for eligible homeowners buying less-expensive property. Rather than just transferring the same tax value from one home to another, they could receive a reduced tax value when they move.

(The tax value would be reduced by the ratio of the purchase price of the new house to the sale price of the old one. Thus, someone who bought a home for $450,000 after selling one for $600,000 would have a new tax value of 75 percent of the old value.)

• Allow the purchase of more-expensive homes. Gone is the original premise that the program was for downsizing to a cheaper home. This would offer a tax break for eligible homeowners who upsize.

(The difference between the sale price of the old home and the purchase price of the new one would be added to the old home’s tax value. So, someone who sold a $600,000 home and bought a new one for $700,000 would have a tax value on the new home equal to the old home’s tax value plus $100,000.)

• Allow eligible homeowners to transfer the tax value of a home as many times as they want. Currently they can only do it once.

In each case, Prop. 5 expands a generous program that already perpetuates the inequities of Prop. 13. Our current system is broken. We should fix it rather than incrementally making it worse.