Prop 5 will allow homeowners to keep old property taxes when buying a new home. Critics fear essential services will bare the brunt of lost revenues.
How screwed up is California’s housing market? A billboard advertisement erected in August by a local Realtor in Rockridge, an upscale neighborhood in northern Oakland, told the story in stark terms.
There’s an arrow pointed down: between 2013 and 2018, the number of homes sold each year in Rockridge plummeted from 104 to 29. And there’s an arrow pointed up: the average sales price surged from $601,000 to $940,000 over the same time period. Put the two arrows together and the message is clear: the combination of low availability and skyrocketing prices make it a tough time to be a Realtor in the San Francisco Bay Area.
The standard explanation for California’s housing mess is that the state isn’t building enough affordable housing to satisfy demand. But Realtors are targeting a less obvious problem that they hope to address at the ballot box this November: The legacy of California’s 40-year-old landmark property tax legislation, Proposition 13.
In 1978, Prop 13 limited property taxes to one percent of the purchase price of a home, and restricted consequent property tax increases to no more than 2 percent annually. The result, across a California where home values have appreciated at extraordinary rates, are neighborhoods filled with residents paying wildly different property taxes for similar homes. A homeowner lucky enough to buy 20 or 30 years ago will enjoy property taxes that are a fraction of the recently moved-in next-door neighbor.
The result, says Chris Carlisle, a lobbyist for the California Association of Realtors (CAR), is that older homeowners ready to downsize “are confronted with a moving penalty” that is freezing them in place. They may be eager to find a new home more appropriate to their lifestyle, but not if that means their property taxes will triple.
CAR has a solution: Proposition 5 — “The People’s Initiative to Protect Proposition 13 Savings.” Proposition 5 will allow homeowners 55 years and older to keep their old property tax when buying a new home.
This won’t be the first time California’s voters have been asked to rejigger Prop 13 to attack precisely this problem. In 1986, Proposition 60 allowed homeowners 55 years and older a one-time-only opportunity to transfer their existing property tax assessment to a new home, provided they stayed in the same county and moved into a house of equal or lesser value to their original home. In 1988, Proposition 90 expanded the transfer right to homes in other counties, provided those counties passed an ordinance permitting participation in the program.
If passed, homeowners 55 years and older will be able to take their property tax assessments with them to any county in the state.
Proposition 5 opens the spigot much wider. If passed, homeowners 55 years and older will be able to take their property tax assessments with them to any county in the state; they will be able to buy any home — no matter how expensive — they want, and they will no longer be limited to the number of times they can exercise their property tax transfer right. Supporters of the initiative say passage of the bill will be a big step to unlocking a frozen housing market.
“Prop 5 is absolutely essential for making the housing market work,” says Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas Business School. “We need to get the housing market going again, we need more sales, and more listings. A lot of people won’t list and won’t sell because they can’t take that property tax basis with them.”
But opponents of the bill, many of whom hold Prop 13 accountable for gutting government funding of important services over the past 40 years, believe that Prop 5 will just be more of the same. Property taxes are how California’s local governments and school districts fund themselves. According to a study conducted by the state government’s non-partisan Legislative Analyst’s Office, passage of Prop 5 will reduce property tax revenue dramatically.
“In the first few years, property tax losses would be a few hundred million dollars per year, with schools and other local governments (cities, counties, and special districts) each losing around $150 million annually,” says the LAO’s report.
“Over time these losses would grow, likely reaching between $1 billion to a few billion dollars per year (in today’s dollars) in the long term, with schools and other local governments each losing $1 billion or more annually.”
The LAO’s grim numbers have spurred opposition from organizations representing California’s teachers, firefighters and county and local government employees.
“We oppose Prop 5 because we feel that at a time when we need to restore money to schools and local services, Proposition 5 would take away over one billion dollars from schools, healthcare services, infrastructure and public safety,” said Virginia Carrizales, the policy and campaign development director for California Calls, a coalition of grassroots organizations across California.
“We also feel that it does nothing to solve California’s housing crisis. What it does is give new tax breaks to a select few Californians to buy bigger and more expensive houses.”
“It’s not an easy pill to swallow,” said Dorothy Johnson, a legislative representative for the California State Association of Counties who specializes in government finance.
CAR’s Chris Carlisle and Berkeley’s Rosen say the LAO’s numbers are based on bad assumptions. Citing a study conducted by the Berkeley Research Group, a consulting firm, Carlisle says that the LAO assumes that no new housing will be built in response to the new incentives created by Prop 5, and ignores the ancillary economy activity that will be generated by a newly vibrant housing market — including increased sales tax revenue, job growth related to new construction and remodeling, and an assortment of real estate transaction-related fees.
“I’m pretty sure that this will be a net positive for tax revenues at every level of government,” Rosen said.
But Johnson points out that it can be difficult for local governments to measure these ancillary income streams — many of which go directly to the state, and not to the counties or school districts. Meanwhile, the drop in property taxes is staring them directly in the face.
That’s why, Johnson says, California’s El Dorado County decided in November 2017 to stop allowing homeowners from outside the county to take advantage of Proposition 90’s property tax swap program. Facing potential property tax losses of up to $400,000 a year, the county’s board of supervisors voted to opt out.
Opponents of Prop 5 are also skeptical of the attempt by the California Association of Realtors to promote the initiative as likely to increase the availability of affordable housing. CAR is arguing that making it easier for empty nesters to sell their homes and make room for younger families will ease a clogged pipeline, but aside from local Realtor associations, none of California’s myriad housing advocacy organizations supports the bill.
“What this bill doesn’t do is actually build more housing, so it’s not clear to me that the net supply of homes will increase in any way,” says Brian Hanlon, president and CEO of California YIMBY (Yes In My Back Yard), an advocacy group pushing for greater access to affordable housing.
While sympathetic to the plight of Realtors in a difficult housing market, Hanlon thinks that there has to be a better way.
“I wish that rather than trying to juice up some new sales transactions through tweaking Prop 13 that the Realtors would instead focus on increasing housing access for the millions of Californians that actually need it,” Hanlon said.
“Because then it’s win-win: you build a lot more housing, local governments get a lot more tax revenue, and the Realtors will be able to make more commissions because they’ll be selling more homes.”