Many things in life are movable, such as planes, trains and automobiles, to quote a movie title from years past. Or personal items such as TV’s, golf clubs or a suit case, can all be moved from here to there, down the street or even across state lines. But when it comes to moving real estate a stark reality is immediately apparent: real estate is just not movable and the politicians are keenly aware of this fact.
As such, the political powers have always treated real estate as a target of taxation to fund general government services, special government needs or a politician’s pet project. Since real estate is not movable and can’t be transferred to cities or states where taxes might be lower, owners of real estate have historically been the target of high property taxes. They had simply been subject to whatever tax rate was imposed upon them.
By the mid 1980’s property taxes had increased so dramatically that many older homeowners who had owned their properties for many years could no longer afford to pay the property taxes that were expected by the tax authority. Many were on fixed incomes, pensions or were only receiving social security. Their income had not increased as fast as or in proportion to the increase in property tax rates. There were a lot of people who were property rich but cash poor.
In the early eighties Howard Jarvis literally became a one man driving force in advancing the movement that eventually placed Proposition 13 on the California state ballot in 1987. He had experienced the financial burden of his property taxes going through the roof on real estate he owned. In addition he was involved in a tax organization where he became aware of many others who were experiencing the same situation. So he went out and did the logical thing and started soliciting support from others to rally behind his property tax reduction movement. It developed over time to be one of the biggest tax revolutions in the history of California. He was successful in gathering enough registered voter’s signatures to get what was then becoming known as Proposition 13 on the California statewide ballot.
The voters overwhelming passed Proposition 13 on June 6, 1978 by a 2/3 majority vote and immediately the California Constitution was amended (since Proposition 13 was intended to be a constitutional amendment).
Prior to the passage of Proposition 13, properties in California were subject to the following:
- No limit on the overall rate of tax
- No annual tax increase limit
- No remedy available to homeowners
Following the passage of Proposition 13, homeowners and property owners throughout all of California were entitled to:
- Taxes based on 1% of the assessed property value
- 2% maximum annual increase in total taxes owed
- Reassessment only upon the sale of the property at 1% of the assessed market value
Property tax rates were immediately rolled back to 1976 levels with many homeowners experiencing a 57% decrease in their annual property taxes.
The only time now that properties can be reassessed is when a buyer purchases a property and the assessed value is then calculated at 1% of the price paid which is determined to be the fair market value of the property. For example, if a buyer pays $100,000.00 for a property the annual property taxes would be $1,000.00 (1% of the assessed value) which is payable in 2 installments of $500.00 each. The first installment would be due on November 1st and (delinquent after December 10th) and the second installment would be due February 1st (delinquent after April 10th).
In addition Proposition 13 provides for ¼ of 1% for bonded indebtedness to be assessed and secured by both General Obligation and Special Obligation bonds as passed by government bodies or by the voters.
Most governmental entitles make it a practice to always increase property taxes by the maximum annual 2% allowable under the law.
Currently there are movements by those that think Proposition 13 was the worst thing that ever happened to California. They believe that the government is being starved for money that would, in turn, provide services and payments to those involved in the governmental process. The reality is that ever since Proposition 13 passed 35 years ago government’s tax revenue has had annual increases that have been far above the rate if inflation. The government is doing better than just about every person and company in California. The claims back in 1987 that government services were going to be put in a desperate situation just never materialized.
The people behind this current movement want to begin chipping away at the protections to homeowners against taxation from their government. All homeowners should take very seriously the current movement by those who always want more government services and are now looking to property owners as a funding source for the money for their pet social programs. Many of the people behind the current movement are not property owners but are from the side of society that believes that if someone owns real estate they are by nature rich and as such should be taxed more because they have it and others need it. Since all levels of government throughout California are broke and spending like crazy there are politicians would like nothing more than to get more money to do more things.
Home ownership is a pivotal component that is very important in the economy. Repealing Proposition 13 or placing additional property taxation on real estate not only affects current owners now but will add additional impediments to prospective buyers desiring to own real estate. This one action could have a very negative effect not only in the real estate world but to the economy at large.
It would be highly advisable for everyone who reads our blog to get involved in preventing property taxes from going back to the confiscatory level that existed prior to the passage of Proposition 13.