In 1978, Californians passed Proposition 13, an amendment to the California State Constitution titled "People's Initiative to Limit Property Taxation." Before Prop 13's passage, local agencies decided their own tax rates. Property tax rate increases averaged about 3 percent -- not that much higher than the maximum allowable 2 percent under Prop 13. But rate increases were uneven and, according to California Tax Data, a politically neutral real estate data gathering organization, could sometimes range from 50 to 100 percent in a single year.
How Proposition 13 Changed Property Tax Calculations
The passage of Proposition 13 changed almost everything related to property taxes in California. Rates were no longer decided regionally but were applied uniformly across the state. At the time of passage in 1978, tax rates were rolled back to their 1976 assessments. Taxes were no longer assessed on the basis of annual increases in property value but on a basis consisting of 1 percent of the cost of acquisition. Annual increases thereafter were limited to no more than 2 percent of the previous year's assessment. Some additional, relatively small increases were allowed for such things as district bond assessments.
A Property Tax Example
Say you buy a Los Angeles County residence in 2010 for $300,000. Your basis tax rate is 1 percent of the $300,000 cost of acquisition, or $3,000. In the year following, the assessor appraises the property at $350,000 but may not increase the assessment by more than 2 percent more than the initial year, for a total 2011 property tax of 1.02 times 3,000, or $3, 060. In 2012, your property tax increase cannot exceed 2 percent of $3,060; in this example, it would be $3,121.20.
If you live in certain districts with bond obligations, your actual tax rate may be slightly higher. The California Taxpayers Association notes that these supplemental increases vary by district but that the statewide average rate including these assessments is about 2.1 percent, rather than the basic 2 percent allowed under Prop 13.
Assuming that your house is in a district that has no supplemental taxes, by 2015 your annual property tax has increased to $3,312. 24. You now sell the house for $550,000, a steep increase in the price you paid for it in 2010 but about average for Los Angeles County real estate. The new owner's property tax for 2015 is $5,500 -- a nearly two-thirds increase in the property tax you were assessed that same year.
Consequences of Prop 13
Opponents of Prop 13 say its reduction in the property tax revenue stream statewide is responsible for the decline in money spent on education in the years following its passage. This may be true; it's at least arguable. As
The National Bureau of Economic Research, however, has noted a lesser-known consequence of Prop 13 that may have a negative effect on the California economy -- the lock-in effect. As long as actual property value increases in California real estate exceed the 2 percent annual tax increase, Californians have an incentive to stay where they are rather than to sell up and move. This obviously decreases the mobility of the workforce in California and disadvantages California workers.
Another generally acknowledged consequence of Prop 13 is that it creates two classes of ownership. There are advantaged owners who have remained in their houses for a long time. Because their houses have appreciated in value at a rate far exceeding the 2 percent annual cap on property tax increases, these owners now pay property taxes at what is effectively a very low rate. For example, as the NBER reports, billionaire Warren Buffett's 2015 California state property taxes on his $4 million California house are $2,264, or 0.056 percent of its appraised value in the same year. If Buffett sells that house for $4 million, the disadvantaged new owner will pay an initial property tax of $40,000, 17 times Buffett's tax on the same house.