2 California Propositions Focus on Property Taxes—Here’s What’s at Stake

A construction crew digs a new pool behind a house in Tustin, Calif., on May 20, 2015. (AP Photo/Gillian Flaccus)

Commentary

Two measures regarding property taxes are up for a vote in California on Nov. 3. Both have the power to change society.

Under Proposition 15, property taxes for many large businesses (more than $3 million) would be increased to reflect the property’s current—and probably higher—market value a change from the current statute, in which owners pay property taxes based on the price they originally paid for that real estate, plus an annual increase that’s capped at 2 percent. Proposition 19 would provide a form of tax relief to people who lose their home in a fire or some other form of natural disaster but would eliminate a provision whereby real estate can pass from parents to children and have the property taxes continue to be based on the purchase price paid by the parents.

Both of the ballot measures discussed here—Prop. 15 and Prop. 19—would change certain aspects of the famous Proposition 13 accepted by the state’s voters in 1978. That 1978 measure said that property taxes could be no more than 1 percent of the assessed value and that the assessed value couldn’t increase by more than 2 percent per year from the original purchase price.

Of course, every time a property changes hands, the basis is reset based on the new transaction price.

The long-term positive benefits of Prop. 13 have included: keeping older people in their homes much longer than they otherwise would, properties staying within the family or family business much longer than they otherwise would, and not forcing businesses to move because of increasing property taxes. It means that property developers have less access to properties to be able to create a large contiguous tract of land, to redevelop it into something more in keeping with current market conditions. That favorite Mexican restaurant will stay a long time but it also means that a new high-rise office building or fabrication center or distribution center doesn’t get built.

Of course, Prop. 13 has also meant that young people have fewer options when looking for a home (because older homeowners aren’t forced out by rising taxes) and that, over time, real estate likely isn’t being utilized for its “highest and best use,” as we economists like to say.

Trade-Offs

Prop. 15 would only impose a market-based tax basis on commercial and industrial properties. However, there are many places in California, especially in high-density places in San Diego, Los Angeles, Anaheim, San Jose, and San Francisco, where a family-owned business with a low basis for property taxes might be forced to move or close, and the “benefit” would be a new mixed-use building with commercial or retail on the ground floor and residential on upper floors.

Another trade-off to consider regarding Prop. 15 is whether Californians want small and family-owned businesses that occupy their property to be able to stay in the family and remain a “fixture in the neighborhood”? Think of all those Italian, Chinese, Mexican, and other restaurants that have been able to stay in the same location for decades. One of the key reasons why families can keep those restaurants in those locations for so long is that their property taxes are capped at 2 percent per year. If Prop. 15 passes, real estate would likely become more efficient but many of those long-standing family businesses would likely have to move or close.

Prop. 19 would also have some effects on families, with its primary purpose appearing to be to allow families who lose their homes in a fire to get to take their original basis with them to their new home. So, a family who had bought a house in Paradise for $20,000 and lost a home valued at $100,000 doesn’t have to pay taxes on the new house using a $100,000 basis. They can keep that original $20,000 basis—meaning the appraised value on which property taxes are assessed can still be $20,000, plus no more than 2 percent per year after that original home was purchased.

This seems like a good thing; however, Prop. 19 would do away with the provision that allows a property to stay within a family by keeping taxes at the original purchase prices, plus an increase of no more than 2 percent per year. Many people wouldn’t be able to afford the taxes if their family home is assessed based on current market value rather than their parents’ purchase price.

On the other hand, the property would become available to the property market either to be redeveloped or for a different family to buy.

The Bottom Line

Passage of Props. 15 and 19 would make the California property market more efficient, creating a situation in which real estate will more likely be used for its economic highest and best use.

Voters will need to decide whether these gains are worth the likely cost of some families losing their small businesses and others possibly losing the homes where they grew up.

Tim Shaler is a professional investor and economist based in Southern California. He is a regular columnist for The Epoch Times, where he exclusively provides some of his original economic analysis.