Albeit Piecemeal, Prop 15 is a Long Overdue Reform
Updated: Oct 22, 2020
By Max B.
In 1978, California’s voters made the grave error of approving Prop 13, a tax measure condemning our housing markets to stagnation, our schools to inadequacy, and our infrastructure to decrepitude. Prop 13 capped the growth rate of the assessed value upon which private property can be taxed at 2% each year, roughly the rate of inflation, meaning that if you are a property owner in California, you are essentially only taxed on the value of your house when you bought it. Those who bought their houses before the meteoric rise in California real estate prices are particularly advantaged by the capping of the assessed values of their property. If they move, the clock on their housing tenure will be reset, and they will lose the tax benefits associated with their incumbency in their previous homes. Understandably, the tax incentive to stay put has discouraged long-term residents from moving out of their houses, creating stagnation in the housing market. California has experienced considerable population growth since Prop 13’s passage, meaning that there are plenty of people looking to move in while few are willing to move out. With so few existing housing units being released to the market, minimal new construction (a separate issue), and plenty of demand for housing, the cost of housing in California has gotten higher and higher.
Prop 13 is foremost a barrier to housing affordability but also bears a litany of other consequences. For one, it has wreaked havoc upon municipal budgets. When property tax revenues do not reflect the true cost of living, there is a discrepancy between how much governments need to pay civil servants and how much the tax base can support. In areas where the cost of living is high, municipal employees should reasonably be able to expect to be paid more than elsewhere, so that they can afford to live in the cities they serve. Usually, this would not present an undue burden for cities, for the same high housing costs that necessitate the higher wages would also lead to more property tax revenue with which to pay them. However, in California, Prop 13 has generated a disconnect between the cost of living and the assessed values of taxpayers’ homes. Cities still must spend more money on wages due to the high cost of living, even if they don’t receive any additional revenue due to higher property values. The inevitable result of this mismatch is that cities find themselves cutting back on services such as infrastructure and public education, hindered by their inability to fund the higher personnel costs caused by California’s high cost of living.
Special benefit districts (jurisdictions which collect taxes in a defined geographic area other than a city or county), such as many school districts, are even worse off than cities, because they tend to collect revenue solely from property taxes. While cities with unified school districts have the option to raise revenue from income and parcel taxes to supplement property taxes, school districts that don’t overlap with municipal boundaries are left with only the meager revenue from property taxes. In 1977, the year before Prop 13 was passed, California spent $7,400 on education for each pupil, above the national average, but due to the cap in the growth rate of property tax revenue, per-pupil education spending dropped to $6,700 within only five years. Over time, Prop 13’s effect has only worsened, as the cost of living, and thus civil servants’ salaries, continue to rise much faster than property tax revenues.
Prop 15 wouldn’t completely repeal Prop 13, but it would create an exemption for commercial property, raising yearly property tax revenue by up to $12.5 billion statewide, with a significant portion of that increase specifically earmarked for education, one of the public services hit hardest by Prop 13. Under Prop 15, businesses would be held responsible for the taxes they owe on the true value of their property, while homeowners would retain the tax breaks they currently enjoy under Prop 13. While an exemption to Prop 13 for wealthy individuals would likely be a better compromise between cities’ need for revenue and tax relief for homeowners in an expensive real estate market, the reforms contained in Prop 15 are a step in the right direction, restoring some of the revenue that would otherwise be lost under Prop 13 and paving the way for further reforms in the future. Prop 15’s passage on November 3rd would ensure more funding for California’s schools and infrastructure at a time when it is needed more than ever.
Photo Credit: KQED