Rethinking the Fairness of Proposition 13 After 30 Years

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Re-thinking the Fairness ofProposition 13 After
30 Years

• Steven M. Sheffrin
• UC Davis

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Outline of Remarks

• What disparities did Proposition 13 create and
  did they persist?
• What tortured argument can be made that these are
  fair?
• Why does the public react and revolt against
  market value property taxation?
• Proposition 13 in perspective

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Understanding the Disparities that Proposition 13
Created

• Rolled back Assessed Values to 1975 with maximum
  2 adjustment till sold
• Base YearLast Year Since Sold
• Disparity Ratio Ratio of Market to Assessed
  Value
• Modify a property rather than sell?

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Some Estimated Disparities Los Angeles County
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Recessions Promoted Equality
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Equity Issues

• Matched Homeowner Data (1991) for Selected
  Counties With Income Tax Records
• Elderly (over 65) heavily concentrated in 1975
  base years (over 82 in LA hurt by revenue
  neutral shift)
• As income rises, more mobility (rich closer to
  market value on average)
• Considerable horizontal inequity within any class

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Longer Term Equity Issues

• What will happen to 1975 base year percentages?
• In 1991, 50 of these properties were owned by
  seniors in LA and San Mateo
• Projecting trends, 75 base year percentages could
  decline to 15 in 2016
• Mitigating factors are less frequent sales and
  intra-family transfers
• Modified Commercial Properties Turn Over Very
  Slowly

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Life-Time Horizontal Equity?

• If initially created disparities were to
  disappear over time AND there were
• Constant real property appreciation rate
• Identical holding periods for all properties
• Then there would be snapshot horizontal inequity
  but lifetime horizontal equity. All owners would
  share in the same lifetime effective tax rates
• Not realistic, but could explain its appeal

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Stepping Back The Market Value Property Tax
Alternative is Unloved

• Worst taxleast fair of state and local taxes
• Only gasoline taxes sometimes perceived as worse
• Virtually all states (all but five) have some
  limits on property taxes
• Some limit measures (e.g., California, Florida)
  explicitly reject market value taxation

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Why So Unloved?

• Not an Ideal Benefit Tax
• Benefits (e.g. education) not localized
• Not an Ideal Wealth Tax
• Why Just Real Property?
• Surveys Show Limited Resistance to Redistribution
  Through Property Taxes
• Taxpayer Exposure to Risk

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Uncertainty of Property Tax Shares

• With a fixed revenue target and a property tax
  rate on assessed value adjusted to meet this
  target (budget-based system), a property owners
  tax bill will be proportional to the assessed
  value of her property relative to total assessed
  values.
• This means that uncertainty about ones share of
  assessed value creates uncertainty about property
  tax obligationsapart from revenue requirements.

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Taxpayer Uncertainty

• Consider
• A new mall opens outside the community reducing
  the market value of the mall within the
  community.
• A raft of foreclosures hit another part of the
  community with resulting property tax
  delinquencies.
• The EPA discloses that toxic wastes were found in
  another part of the community.
• An assessor recalibrates his statistical
  assessment model and, based on recent sales of
  cul-de-sac property similar to that of Homeowner
  A, increases Homeowner As assessed value more
  than the average for the community.

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Consequences of Uncertainty

• This is perceived as unfair! Psychological
  research supports confirms.
• Adam Smith taxes should be certain and not
  arbitrary a very considerable degree of
  inequalityis not so great an evil as a very
  small degree of uncertainty.
• Uncertainty of assessments may be the underlying
  source of tax limitation measures Anderson
  (2007)

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Back to Proposition 13

• Two types of market value property systems
• Budget-Based Systems. Property tax rates
  adjusted to meet budgetary target. Rates offset
  changes in assessed values.
• Rate-Based Systems. Tax rate in place. Any
  changes in assessment leads directly to changes
  in property tax bills.
• The pre-Proposition 13 world was a messy mixture
  of both systems

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Pre-Proposition 13 World

• Fragmented jurisdictional authority meant that
  multiple units could impose rates on property.
• Loose coordination among these jurisdictions
  within a county meant no transparent revenue
  target from property taxes
• Differences in assessment frequency for
  properties
• Result was likelihood that increases in assessed
  values would lead to
• Higher property tax bills for some time period
• Shifts in shares borne between types of taxpayers
  (homeowners vs. business)

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Now We Have

• A pure rate-based system with assessment caps at
  least until saleAdam Smiths certainty for
  property owners
• But a complete loss of local discretion for
  property tax revenueadverse fiscal consequences
• California voters have adjusted. From PPIC
  surveys
• Likely voters say P13 is a good thing (56-33)
• Half are comfortable that with rising prices
  recent buyers will pay more for similar
  properties

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Two Last Thoughts

• Equity of Proposition 13 cannot be judged in
  isolation
• What is the property tax alternative?
• How does the resulting fiscal system work
  overall?
• Simple Changes Would Help
• Increase annual assessment limits (4?)
• Restrict benefits of assessment limitations to
  homeowners