Even for those who aren’t in the market, it’s hard to ignore all the news about rising home prices. According to the California Association of Realtors, median home prices are up nearly 30 percent over just the last year. California has not seen this big of a one year increase since 1977 when it jumped 28.1 percent.
But the huge increase in values in 1977 brought as much anger and fear as anything else because that was just before voters overwhelmingly approved Proposition 13 to rein in out of control property taxes. Those taxes were going up as fast as home prices and forcing many from their homes.
Under the pre-Proposition 13 system, homeowners shuddered in fear when their tax bill arrived because it would be based on what someone else was willing to pay for a home like theirs, not on what they had paid or could afford. Those whose property values were increased by hyperinflation in the housing market were treated as if they were now “rich guys” who should be taxed on their “paper profits.” But those who were committed to homeownership were seeing no benefit. If they did sell their home and realized a profit, they would find that they would need every cent if they wanted to buy another house at the new inflated values.
Some homeowners today will say it is about time home values rebounded, clearly remembering that many homes lost more than 30% of their value when the housing bubble burst half a dozen years ago. However, most will not be troubled by this real estate market yo-yo effect, because Proposition 13 makes their taxes predictable from year to year. A buyer who pays $250,000 for a house knows that they will be taxed at a one percent rate and that annual increases in assessed value are limited to two percent. This means that the basic property tax — voter approved parcel taxes and bonds are extra — does not increase by more than two percent, and this certainty allows the owner to budget for future taxes.
While providing security to homeowners, Proposition 13 also guarantees stable — and almost always increasing — revenue to local governments. The take from property taxes is estimated to increase in the 4 to 5 percent range this year. However, even in years when property values are down, the Proposition 13 system acts like a shock absorber stabilizing revenue, because most property owners continue to pay under this system that allows an annual two percent increase. The exception is for those who bought at the top of the market and have seen a subsequent decline in value below the purchase price. These folks are entitled to a temporary tax reduction until the marked goes up and full value is restored.
While Proposition 13 continues to benefit both government and property owners, taxpayers must be alert to the defect that seems inherent in most city councils, county boards of supervisors and other agencies that receive property tax revenue. One can visualize the eyes of local officials bugging out when they see an uptick in the revenue stream. Just as during the recent housing bubble, most of these local politicians and bureaucrats will be unable to resist the temptation to commit the new found tax dollars to new programs as well as higher pay and benefits to government employees. Their short term thinking will result in pain next time property values decline, which they surely will. Officials will respond to a less robust revenue stream by pushing for new per parcel property taxes, utility user taxes and sales taxes.
The last thing we need is for the local politicians to make commitments that over-extend taxpayers so that the only choices in bad economic times are to raise taxes, cut services, or both. Local officials need to be reminded that any revenue windfall should be used to pay off debt, contribute to a prudent reserve and fully fund one time capital improvements because, even with Proposition 13, taxpayers are still vulnerable.