Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Split Decision
Published Date : October 19, 2013
The current environment is providing much improved revenue generation for California government, as general economic recovery is leading to higher overall tax receipts from various sources. The real estate recovery in general plus the prospect in many locations of potential upward readjustments in property value assessments—beyond normal annual increases—are major contributors to this brighter income outlook. The possible increased revenue from property reassessments is the result of provisions on the books since the passing of Proposition 8 in 1978, shortly after the more famous Proposition 13. Prop 8 requires local assessors to cut real property valuations during real estate declines—which they did in many areas a few years ago—but then restore them again during recoveries. Except for these Prop 8 considerations, Prop 13 prohibits reassessments other than by change of ownership or completion of new construction. When it passed, Prop 13 reset property values to 1975 assessed values and then limited annual increases in the assessed value to an inflation factor not to exceed 2% per year.
Homeowners in recovering areas should generally be happy that they have recaptured significant equity in their homes—and also saved some tax money the past few years. But the increased equity is probably little solace for larger tax bills now; especially if those homeowners are living on fixed incomes, a situation that ironically helped pass these propositions in the first place. In a nutshell, the combination of increasing demand for housing and severe inflation during the 1970s caused ongoing and increasing reassessments of property values that eventually pushed many homeowners—particularly the most vulnerable on fixed incomes—to the point where they could no longer afford to stay in their homes. By the end of that decade, there was growing desire for some type of relief, and Prop 13 passed with solid support – so much so that it became one of those “third rails” of politics. No one wants to touch it. Increasingly, though, some legislators are talking about tinkering at the margins.
One common idea under consideration is something called “split roll,” which would divide (or split) commercial and residential property in order to allow higher property tax rates on businesses. In 1992 voters rejected, by a 2 to 1 margin, a proposition promoting this split roll concept. But some feel the climate has changed enough to propose it again. The argument is that unlike residential property, income producing property should pay higher property tax rates. However, this would also target residential rental property such as apartment buildings, which is often a meaningful source of wealth and income for small business owners and modest investors. Another consideration is to close various loopholes that frequently allow commercial property to change hands and avoid reassessment.
Supporters of Prop 13 worry that any split roll would weaken and erode its basic support and divide its existing coalition of residential and commercial property owners. They argue that Prop 13 is a progressive tax and that it provides predictability both for property owners and taxing authorities, as well as stability for communities. Opponents believe that it contributes to inefficiencies in housing markets because owners are less inclined to sell. Moreover, the statutory maximum 2% increase in assessed valuation typically falls below the normal rate of inflation, causing declining purchasing power for governments. Whatever might happen with its future, Prop 13 and its related provisions continue to greatly impact state governance… and residents too.
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