Is Proposition 13 Unfair to First Time Buyers?
Random Thoughts
August 21st, 2008
Is Proposition 13 a good or bad deal for home buyers? This is another topic that largely depends on your perspective. Passed in 1978 Proposition 13 was intended to protect homeowners from soaring tax bills as their homes appreciated in value. It certainly succeeded in that goal and by and large has been considered a good deal for homeowners. Even the mention of reforming Proposition 13 causes quite a stir and because of this it has been called the untouchable “third rail” of California politics.
Since I am not a politician I guess I can point out that it does have some unintended consequences that warrant discussion.
What is Proposition 13?
Essentially, Proposition 13:
- Limits property taxes to 1% of assessed valuation with fiscal 1975-76 as the base year.
- Limits assessment increases to 2% per year.
- Allows reassessments to market value only when a property is sold.
- Prohibits state lawmakers from imposing new taxes without a 2/3 vote of the legislature.
- Prohibits local governments from enacting most new taxes without a 2/3 vote of the electorate.
If you have owned your home for a long time this is a great thing. But what if you are a first time buyer? Is it fair to you that you may be paying two or three times more in taxes then your neighbor on a home of equal value? The response to this is generally “you will make it up over time”. Perhaps you will. If you stay in your new home long enough someone else is bound to move in next door who will be paying even more in taxes then you. The idea that we could all benefit from a system that spread the tax burden equally among all owners of real estate would appear to be practical enough but no politician will go there. Warren Buffet was ran out of town for even suggesting that the system be tweaked to allow for adjustments to be made based on a combination of property value and the owners income. I am certainly not suggesting we give up the protections of Proposition 13 but there are some other interesting things to consider such as;
Does Proposition 13 stifle entrepreneurship? Commercial real estate is also subject to Prop 13 so a new company may have significant costs not shared by it’s more established competitors.
Does Proposition 13 favor large sophisticated corporations over home owners and small businesses ? Unlike residential real estate when a corporation is sold the transfer of the real estate owned by the corporation may not be subject to reassessment.
Does Proposition 13 influence Cities and Counties planning in a negative way? With Sales Tax as the most robust revenue source for Cities and Counties there has been a tendency to promote high yield retail development at the expense of housing, manufacturing and other job creating businesses.
These are just a few of the questions that would be worthwhile to discuss. Don’t look for it to happen anytime soon though. In Sacramento they won’t touch this with a ten foot pole.
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