Wealthy Homeowners Are Beneficiaries of California's Prop. 13: Study

Homeowners in Palo Alto, one of the richest areas in the state, pay less in property tax than homeowners in Beaumont, a middle-class city, thanks to Proposition 13, according to a recent study by the real estate website, Trulia.

The anti-tax measure, passed by voters in 1978, was supposed to protect elderly residents from losing their homes because they suddenly can't pay their taxes, but it ended up benefiting the wealthy most, according to the study.

The Prop. 13 caps property tax at 1 percent of the home's value at the time of purchase and limits property tax hikes to 2 percent a year. The tax assessment resets only when the home is sold. So, the longer people live in their homes, the more money they save in property taxes.

This is the reason why Malibu residents have a lower effective tax rate than their inland neighbors. According to the study, coastal residents tend to stay in their homes longer than those further inland.

“There is a geographic disparity in who benefits from Prop. 13,” the study said. “Residents in expensive coastal cities pay noticeably lower tax rates than residents in cheaper inland cities.”

Palo Alto residents pay an effective tax rate of 0.42 percent, the lowest in the state. How is that possible?

Say a home was bought for $100,000, the property tax for the first year would be $1,000 (or 1 percent of the home's value). In the second year, if the home's value increased to $150,000, under Prop. 13, the property tax can only increase 2 percent, meaning the home is assessed at $102,000, instead of its true market value. The homeowner would pay only $1,020, instead of $1,500, making it an effective tax rate of 0.68 percent.

In 2015, Californians saved an estimated $12.5 billion because of Prop. 13, according to Trulia. Good news for some, but, as the study notes, that money could “have gone to local government spending on public goods and services.”

In fact, more than 40 percent of California homeowners play an effective property tax rate of less than 0.5 percent, according to the study.

Trulia used tax records, census data and its own property value estimate data to determine the effective tax rate for the study.

Here are the California Cities with Lowest Effective Property Tax Rates

1. Palo Alto 0.42%
2. Millbrae 0.48%
3. Santa Barbara 0.50%
4. Malibu 0.50%
5. Manhattan Beach 0.50%
6. Los Altos 0.50%
7. Burlingame 0.51%
8. Laguna Beach 0.52%
9. Beverly Hills 0.53%
10. Sunnyvale 0.53%

Here are the California Cities with Highest Effective Property Tax Rates

1. Beaumont 1.37%
2. Arvin 1.35%
3. Palmdale 1.33%
4. Lancaster 1.27%
5. Indio 1.26%
6. Hercules 1.23%
7. Selma 1.21%
8. Murrieta 1.20%
9. Palm Desert 1.17%
10. Cathedral City 1.15%

For more on the study, click here.

Photo via Pixabay