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

Thursday, October 17, 2013

Page 6

IN MY OPINION (Column)

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

By JON COUPAL

Almost twenty years ago, Money Magazine sponsored a debate and panel discussion at UCLA on Proposition 13. When one of the panelists, with ties to the public sector, began to assert vigorously that the tax cutting measure was unfair, he was challenged by Craig Stubblebine, Professor of Political Economy at Claremont McKenna College. Stubblebine said he would be happy to discuss fairness, but charged that the critic’s true motivation was simply the desire for more revenue. The Proposition 13 critic sheepishly conceded the point.

I thought of this last week when we of the Howard Jarvis Taxpayers Association caucused with about a hundred Southern California taxpayer advocates and activists to discuss attacks on Proposition 13. After the event, a longtime homeowner approached me and told me that he had had words with a new neighbor over the fact that he was paying less in property taxes and the recent homebuyer thought this was unfair.

While Professor Stubblebine’s opponent refused to continue the fairness debate, knowledgeable taxpayers are always glad to address the issue.

Because Proposition 13 uses acquisition value (usually the purchase price) as a basis of taxation and not current market value, it is possible for owners of identical side-by-side properties to have significantly different tax bills. Critics claim that this is an “inherent flaw.” But this criticism flows from a mind-set accustomed to market-value-based taxation.

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. 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.

Critics also complain that owners of similar properties are paying different amounts for the same public services. However, this is no more unfair than the traditional method of taxation under which owners of more valuable property pay more for the same services. This entire argument ignores the nature of taxes. If we were that concerned with proportionality between the amount of tax and the level of service, we would resort to a system of nothing but user fees. Because proportionality between tax liability and services has never been an attribute of property taxes, it is unfair to level this charge against Proposition 13 alone.

Most important of all, Proposition 13 recognizes the human element. Taxes are based on what the home buyer could afford at the time of purchase, not on what someone else is willing to pay for it years later.

Before Proposition 13, homeowners would shudder in fear when their tax bill arrived after a home down the street sold for a record high price. The Proposition 13 tax system makes taxes predictable for all property owners and allows them to budget for their taxes. This tax certainty makes Proposition 13 fair to all, no matter when they bought their homes.