Library: Fixing Prop. 13

This article was originally published in the San Francisco Chronicle on Friday, January 16, 2004.

With state budget analyst Elizabeth Hill predicting a doubling of the state's deficit to $6 billion in the coming year, it's time to take a calm look at Proposition 13. The initiative initially imposed solid fiscal discipline on local governments. But after 25 years, our property tax arrangement is inequitable and inefficient, and these effects only amplify over time.

It's time to address our structural deficit, and a key strategy should be the fine-tuning Prop. 13.

Because it caps property tax and assessment increases at levels below the appreciation rate, Prop. 13 provides cash assistance each year to owners who bought their homes (or commercial and industrial properties) when prices were lower. The resulting inequity can be dramatic: The owners of 25 randomly selected homes now on the market for about $450,000 in Los Angeles pay annual property taxes ranging from $750 to $4,730 -- a 650 percent variation. In effect, longtime owners receive substantial subsidies at the expense of more recent purchasers, even though they have amassed far greater wealth based on their equity. Beyond the poorly targeted cash assistance, and the bind Prop. 13 places on cities trying to balance their budgets, what other inequities and inefficiencies does Prop. 13 generate after 25 years?

• Stymies new homeowners: Prop. 13 is a barrier for those trying to buy a house. New homebuyers pay disproportionately higher tax bills -- in my East Bay neighborhood, as much as 13 times higher than longtime owners of comparable homes -- as a result of Prop 13. California needs new homeowners who want to invest in and protect their neighborhoods and build financial equity and financial independence. Yet Prop. 13 raises the bar for those new would-be owners.
   
• Decreases turnover: Prop. 13 encourages older residents to stay in larger homes long after it makes common sense. On a cash-flow basis, that Los Angeles homeowner paying $750 a year in taxes would have to find a new home under $100,000 in order to keep his or her tax bill in check. With the house paid off and taxes so low, too many homeowners choose to stay in place rather than move to a home that fits their current needs. In other states, more of those homeowners would downscale, making their homes available for growing families.
   
• Discourages mobility: Prop. 13 provides disincentives for home-owning workers to move to where the jobs are. Homeowners know they have a good deal on property taxes if they stay put, and will pay a high "tax" on top of real- estate agent fees if they buy a similarly priced house in another part of the state. This labor market "stickiness" adds to other burdens the state's businesses already perceive.
   
• Favors white households: Prop. 13's benefits disproportionately accrue to white households over California's "minority majority." When Prop. 13 passed, two-thirds of Californians were white, and they were 75 percent more likely than black and Latino Californians to own homes. But things have changed. Today, a minority of Californians are white, and African American and Latino Californians are more likely to be homeowners than they were in 1980. So even though Prop. 13's rules were applied equally, those getting the largest benefit from Prop. 13 over the years have been disproportionately white.
   

Gov. Arnold Schwarzenegger should consider a compromise, perhaps by locking in existing benefits, while tapering off the inequities into the future. If the intention is to protect senior citizens on fixed incomes, consider offering Prop. 13's cash assistance based on need, as is the case in many other cities that offer property-tax "circuit breakers," with payment due at the time of eventual sale of the home.

Neither California's budget nor its private economy can support the continuation of Prop. 13's constraints and market distortions over the coming 25 years. Change will require strong leadership, and the governor may be just the man for the task.

Maureen Kennedy, a policy consultant who lives in the East Bay, was deputy assistant secretary for policy at HUD during the Clinton administration.

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