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.
