Wednesday, December 9, 2015

California’s property tax rates won’t reflect soaring real estate values next year thanks to controversial Prop 13

Over the past four years, Californians - and especially Sacramentans - have enjoyed soaring property values, and yet property tax rates have just been fixed at a meager increase for next year. Property 13, the controversial ballot measure that was passed by voters in 1978 and limits yearly property tax increases, is either to blame or to thank, depending on which side of the fence you sit on.

Two important reports referencing Prop 13 and property taxes came to light this week, released on the same day, though that is probably only a coincidence. The first was a report by the California Legislative Analyst’s Office that that since hitting bottom in 2011, California’s median house price has increased a whopping 45 percent as of September 2015 – an increase north of 10 percent per year.

 At the same time, The State Board of Equalization released their own report that confirms that those huge increases in value won’t be felt by homeowners when it comes time to pay their property taxes. In fact, Dean Kinnee, the Board’s property tax overseer, sent a letter to county assessors instructing them to raise the taxable values of properties by only 1.525 percent next year, in accordance with Property 13.

But to be accurate, that 1.525 percent cap on property valuation increases is still less than what was possible under Prop 13, which limits such raises to the rate of inflation with a 2 percent ceiling every year.

Prior to Prop 13’s passing in 1978, property taxes were subject to large hikes just as significant as the rise in property values themselves. The state of California only had about a half-trillion dollars of taxable property at the time but the average tax rate was more than 2 percent, generating about $10 billion a year for state coiffures. At that pace, tax revenue would have increased to about $200 billion yearly over the last 37 years. However, the grand total for expected property tax revenues is only projected somewhere just over $55 billion for the 2015-16 fiscal year.

But with Prop 13 set to mirror inflation, the 2 percent cap was put in place and tax rates were initially fixed at 1 percent plus voter-approved bonds. This year, the property valuation increase was set shy of 2 percent because the Department of Industrial Relations calculated California inflation between October 2014 and October 2015 at just 1.525 percent.

That means our tax adjustment will be slightly less than in 2015 and one of the lowest since Prop 13 was born in ’78. We’ve seen that max 2 percent increase most years, including in 1980-81 when inflation hit a whopping 17.32 percent.

It’s important to note that Prop 13’s limits are neither for properties that have changed hands nor new construction, which are added to the tax rolls at their initial price. Taxpayers may also see their property tax valuations increase by more than 1.525 percent if their local agencies issued new bonds or their taxable values were lowered during the Great Recession, as State law allows values to be increased once housing market conditions improve, and also subsequently adjusted for inflation.

Under fire seemingly every year, Prop 13 is may be altered next year, as a proposed ballot measure would remove the 2 percent cap for properties worth more than $3 million, allowing them to be taxed at a higher rate, with the new windfall allocated to fund children’s programs in the state. While that won't impact a significant number of homeowners in the state's capital city, high-priced areas like San Francisco, San Jose, certain Los Angeles suburbs and central coast communities will feel the sting - and certainly fight for status quo. 

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