Tuesday, October 15, 2013

Prop 13: Who’s the Fairest of Them all?

To understand why Proposition 13 is fair one must understand how it works. Proposition 13 limits property taxes by limiting the maximum rate to one percent and, more importantly, by limiting increases in assessed valuation to two percent annually. - Jon Coupal/HJTA

With the latter provision, it is easy to see how, during a real estate market upswing, a property’s market value can greatly exceed its taxable value over the span of just a few years.

This difference between a property’s actual value and its taxable value disappears when the property changes hands because then county assessors reassess the property to market value. Thus, recent purchasers derive no immediate benefit from the limitation on annual increases in taxable value.

So is Proposition 13 fair, even to recent property owners? Yes. It treats equally those who purchase property of similar value at the same time. Unlike any other tax system in the country, it provides absolute certainty to homeowners and businesses as to what their tax bills will be in all future years. It prevents property owners’ tax liability from being determined by the vagaries of the real estate market -- something over which they have no control. Instead, the amount of property tax liability will depend almost exclusively on the voluntary act of purchase.

The California Supreme Court recognized Proposition 13’s inherent fairness shortly after its adoption by the voters in saying “an acquisition value system … may operate on a fairer basis than a current value approach.”

Critics might concede that Proposition 13 provides absolute tax certainty and yet still assert that the system is flawed because owners of similar property may be paying different tax amounts. (We call this the “nosy neighbor” complaint). The response to this is that it should be no concern whatsoever to a new resident what his neighbor’s tax is as long as his or her own tax is reasonable. The absolute cap of 1% imposed by Proposition 13 makes everyone’s tax reasonable.