New Homeowners Pay Considerably More In Taxes Than Longtime Homeowners

By Jesse Marx | Catherine Allen, the Voice of San Diego

August 18, 2022

When California voters approved Proposition 13 in 1978, its supporters portrayed the ballot measure as a much-needed means of keeping people, particularly seniors on a fixed income, in their homes. It was meant to provide stability in a time of inflation by capping property taxes annually — but also passed the burden of paying for public services onto future generations.

A national study by the Lincoln Institute of Land Policy, a think tank based in Massachusetts, attempted to quantify this gap. In June, it concluded that new homeowners in the city of San Diego are paying 37 percent more in property taxes than longtime homeowners for an identical house.

The researchers looked at cities across the country with tax assessment limits and found that the disparities created by Prop. 13 were stark.

New homeowners in San Diego spent on average 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 the cities surveyed. Researchers said the city’s average duration of homeownership is 14 years, which is how they defined “longtime” homeowners. Their 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 property when it was purchased and because the median home price is skyrocketing, the gap is also rapidly growing. The disparity in tax bills for new and longtime homeowners grew by $600 last year alone. The disparity has grown by more than $2,000 in five years.

In San Diego and beyond, limits on property taxes are supposed to act as “insurance” against the rapid growth in property values, said study author Adam Langley, associate director of North America programs for the Lincoln Institute of Land Policy. Yet his research concludes that tax assessment limits like Prop. 13 cause significant inequities that governments have a responsibility to address.

Even so, one of the fundamental obstacles to reforming or abolishing Prop. 13 is that as newer homeowners age, the incentive to give up their perk diminishes.

Prop. 13 limits property taxes to 1 percent of assessed value and annual increases over the base year value of the home when it was purchased to no more than 2 percent. But once the owner sells the property, the assessed value resets to the market value.

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

“Assessment limits, they create a lot of winners and losers,” Langley said.

But even when homeowners end up on the winning side, it can have unintended consequences.

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

He said he’s grateful for the tax benefit but acknowledged that one’s good fortune is a matter of timing. If someone purchases the house next to his, they’re paying significantly more in property taxes for no other reason than they found the money later.

“Even though we make more than we did when we purchased, we wouldn’t be able to afford the house we live in now,” Underwood said.

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

“I can’t sell my house now and move somewhere — where would I go?” Underwood said. “I wouldn’t be able to find a place that I can afford.”

Many commenters have argued over the years that Prop. 13 came in opposition to liberal reforms of the 1960s and a more diversifed population, foreshadowing the rise of Reaganism in the United States. Others contend that the tax revolt was rooted in middle-class frustrations over the cost of living and fears of being displaced.

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

As CalMatters has noted, property taxes used to account for 90 percent of all local government income. Prop. 13 slashed property tax revenue by 60 percent, forcing officials to look elsewhere for revenue. In many cases, that’s meant raising the sales tax, which falls disproportionately on the poor, or hotel taxes, which greatly diminished during the pandemic.

The Lincoln Institute of Land Policy is by no means the only group to analyze the long-term ramifications of Prop. 13. Another study released earlier this year in the Bay Area found that the property tax windfall in Oakland was much greater for White, wealthier neighborhoods, where home prices have risen faster than Black, Asian and Latino neighborhoods. Their taxes remained steady while their equity exploded.

That raises another question, often buried in the Prop. 13 debate, of who can raise capital in the first place.

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

Wages have been stagnant for decades, so regular people, working regular jobs, are effectively barred from the things that past generations enjoyed.

“Even having a house at all 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.

Yet another complicating factor is that, over the years, Prop. 13 has been expanded 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 on site and instead use the homes as investments. The newspaper found that as many as 63 percent of homes inherited in Los Angeles County were used as second residences or rental properties.

This was true for the people who owned the North Park house Kevin Wood now lives in with his wife and two kids. Wood said the previous family had owned the home since the 1950s, paying up to $1,000 in property taxes a year, but they didn’t live there.

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

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

Despite the problems Prop. 13 has caused for governments, politicians are rarely willing to attack it. It remains popular, especially among older homeowners, and resistant to legal and legislative challenges.

“Prop. 13 helps insulate people from what the current housing crisis is,” Wood said. “So it makes it harder, politically, to do something about housing prices, because so many people aren’t affected by them if you’re a longtime homeowner.”

Although older people on fixed incomes are often said to be the main reason behind Prop. 13, businesses also benefit tremendously. Prior to its passage, for instance, commercial properties in Los Angeles County accounted for nearly half of the property tax roll but that figure has dropped to 29 percent. Meanwhile, single-family homes accounted for 40 percent in 1975 and represent 57 percent today.

In 2020, another ballot measure, Proposition 15, would have taken away the property tax cap for commercial properties to fund local governments and education. But even that was a step too far. Voters across the state shot it down.

As both a cyclist and a father, Wood said he sees a greater need for funding to improve the quality of the roads, as well as improve the public school system, which has been one of the “big losers” from Prop. 13.

He, like others we spoke to, would have a hard time buying another place today, not just because the tax benefit is worth hanging onto but because the cost of housing is so prohibitive.

“For younger people who want to buy, they’re faced with the double whammy of there’s just not enough houses out there and housing prices in general are going crazy, but Prop. 13 discourages people from selling,” Wood said.

In its recent study, the Lincoln Institute of Land Policy evaluated other approaches to property tax relief for the people who truly need it. One of those alternatives is a property tax “circuit breaker” program that offers a credit when the property tax exceeds a percentage of someone’s income. If a tax is above five percent of household income, property tax relief is provided to those specific individuals.

Doing this avoids shifting the burden of public services onto new homeowners, so it’s “more proportional for everyone,” Langley said. As it stands, he added, “there’s no consideration of income and whether people actually are overburdened by their property taxes.”

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