New homeowners pay significantly more taxes than long-time homeowners

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When California voters approved Proposition 13 in 1978, its supporters presented the voting measure as a much-needed means of keeping people, particularly seniors on fixed incomes, in their homes. It was intended to provide stability in times of inflation by capping property taxes annually – but also shifting the burden of paying for public services onto future generations.

A national study by the Lincoln Institute of Land Policy, a Massachusetts-based think tank, attempted to quantify this gap. In June, she concluded that new homeowners in the city of San Diego pay 37 percent more in property taxes than long-time homeowners for an identical home.

The researchers examined cities across the country with tax bases and found that the disparities created by Prop. 13 were stark.

New homeowners in San Diego spent an average of more than $9,000 in property taxes in 2021, which was $3,400 more than longtime homeowners — a gap well above the national average in all cities surveyed. Researchers said the average home ownership tenure in the city is 14 years, which is the definition of “long-time” homeowners. Her effective tax rate was 0.8 percent, compared to 1.3 percent for newer homeowners.

But because Prop. 13 limits annual increases to the value of the property at the time of purchase, and because the median home price is skyrocketing, the gap is also widening rapidly. The discrepancy in tax bills for new and longtime homeowners grew by $600 in the last year alone. The discrepancy has grown by more than $2,000 in five years.

A row of single family homes in Rolando near San Diego State University. / Photo by Jesse Marx

In San Diego and beyond, caps on property taxes are intended to serve as “insurance” against soaring real estate values, said study author Adam Langley, associate director of North American programs at the Lincoln Institute of Land Policy. However, his research concludes that tax bases such as Prop. 13 create significant injustices that governments have a responsibility to address.

Still, one of the fundamental obstacles to reforming or abolishing Prop. 13 is that as new homeowners age, the incentive to give up their benefit decreases.

Prop. 13 limits property taxes to 1 percent of the appraised value and annual increases over the base value of the home at purchase to no more than 2 percent. But once the owner sells the property, the appraised value is reset to market value.

Over time, as the value of a home increases, its owner receives an increasing tax break.

“Valuation boundaries, they create a lot of winners and losers,” Langley said.

But even when homeowners are on the winning side, there can be unintended consequences.

Alan Underwood, a 40-year-old music teacher in the Temecula Valley Unified School District, was a San Diego County renter for a decade. Four years ago he and his wife bought a house in City Heights.

Alan Underwood, a music teacher, stands in front of the City Heights home he and his wife bought in 2018. / Photo by Jesse Marx

He said he was grateful for the tax benefit but acknowledged that luck is a matter of timing. If someone buys the house next door to theirs, they’re paying significantly more property taxes for no other reason than that they found the money later.

“Even though we make more than when we bought it, we couldn’t afford the house we live in now,” Underwood said.

The average home price in his neighborhood was around $400,000 in 2018. Now it’s $700,000, but his annual property taxes remain relatively low.

“I can’t sell my house now and move somewhere – where should I go?” said Underwood. “I would not find an apartment that I can afford.”

Many commentators over the years have argued that Prop. 13 stood in contrast to liberal reforms of the 1960s and a more diversified population, and anticipated the rise of Reaganism in the United States. Others claim that the tax revolt was rooted in middle-class frustration with the cost of living and fear of displacement.

Whatever the cause, the long-term impact of Prop. 13 on the public sector is hard to overestimate.

As CalMatters has noted, property taxes used to account for 90 percent of all local government revenue. Prop. 13 cut property tax revenues by 60 percent, forcing officials to look elsewhere for revenue. In many cases, that means raising sales taxes, which are disproportionately hitting the poor, or hotel taxes, which have fallen sharply during the pandemic.

The Lincoln Institute of Land Policy is by no means the only group analyzing the long-term implications of Prop. 13. Another study released earlier this year in the Bay Area found that Oakland’s property tax windfall was much greater for white, affluent neighborhoods where home prices have risen faster than black, Asian and Hispanic neighborhoods. Their taxes stayed the same while their equity exploded.

That raises another question often buried in the Prop. 13 debate, namely who can even raise capital.

Beth Demmon, a journalist who bought a home with her husband in North Park a decade ago and later moved to a proposed community in La Mesa, agrees with the argument that living on a steady income is a relief to retirees earn. But as she pointed out, the housing market 40 years ago and today are not in the same universe.

Wages have stagnated for decades, effectively shutting out ordinary people who have regular jobs from the things that previous generations enjoyed.

“Even having a house in San Diego is just bananas,” she said.

She was only able to do it because her husband, an electrician, was in the army and secured a VA loan.

Another complicating factor is that Prop. 13 has expanded over the years to include transfers between family members. The Los Angeles Times reported in 2018 that many of the people who inherit property with the tax breaks don’t live locally and instead use the homes as investments. The newspaper found that up to 63 percent of inherited homes in Los Angeles County were used as second homes or rentals.

A residential street in Pacific Beach. / Photo by Jesse Marx

Such was the case for the owners of the North Park home where Kevin Wood now resides with his wife and two children. Wood said the previous family had owned the home since the 1950s and paid up to $1,000 a year in property taxes, but they didn’t live there.

When Wood bought the home nine years ago, he was paying about $5,000 a year in property taxes, which is now more than $9,000 after being re-evaluated for an addition to the home.

“It’s definitely a shock when you first see the total and then understand how little the previous homeowner paid,” Wood said.

Despite the problems Prop. 13 has caused for governments, politicians are seldom willing to attack it. It remains popular, particularly among older homeowners, and resilient to legal and regulatory challenges.

“Prop. 13 is helping to insulate people from the current housing crisis,” Wood said. “It makes it more politically difficult to do something about housing prices because so many people aren’t affected when you’re a longtime homeowner.”

While it’s often said that older people on fixed incomes are the primary reason for Prop. 13, businesses benefit enormously as well. For example, prior to its passage, commercial real estate in Los Angeles County accounted for almost half of property taxes, but that number has fallen to 29 percent. Meanwhile, single-family homes made up 40 percent in 1975 and now make up 57 percent.

In 2020, another voting measure, Proposition 15, would have removed the property tax cap on commercial real estate to fund local government and education. But even that was a step too far. Voters across the state slammed it.

As a cyclist and father, Wood sees a greater need for funding to improve the quality of the roads and improve the public school system, which was one of Prop. 13’s “big losers.”

He, like others we spoke to, would have a hard time buying another home today, not just because the tax benefits are worth holding on to, but because the cost of housing is so prohibitive.

“Younger people who are looking to buy are faced with the double whammy that there just aren’t enough houses and house prices in general are going crazy, but Prop. 13 is keeping people from selling,” Wood said.

In its most recent study, the Lincoln Institute of Land Policy evaluated other approaches to facilitating property taxes for the people who really need them. One of these alternatives is a property tax “breaker” program that offers a credit when the property tax exceeds a percentage of a person’s income. If a tax is more than five percent of household income, those designated individuals are exempt from property tax.

This avoids shifting the burden of public services to new homeowners, making it “more proportionate for everyone,” Langley said. As it stands, he added, “it doesn’t take into account income and whether people are actually overwhelmed with their property taxes.”

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