The state of California is bracing for a hit in revenue because of the COVID-19 crisis. Income taxes, sales taxes and corporate taxes, the three pillars holding up the state budget, are expected to fall precipitously. Property taxes, however, may not be reduced much, if at all, thanks to California’s Proposition 13 property tax system.
The Legislative Analyst, Gabriel Petek, recently stated, “A preliminary analysis conducted by our office indicates a very high likelihood that tax revenues from capital gains income will be several billion dollars lower than what the Governor’s budget assumed.”
With businesses and retail shops closed, corporate taxes and sales taxes will also suffer.
Property taxes are another story. The Proposition 13 property tax system requires properties to be assessed when they are purchased and the tax can rise no more than 2% a year, depending on inflation. Under this acquisition property tax system, when property values increase over time, property owners are paying a controlled property tax that doesn’t rise as fast as the value of property.
When an economic downturn hits, assessors are required to reassess property downward for tax purposes. Under Proposition 13, because many properties are paying taxes on assessed values below even the recession-reduced market values, taxes on these properties do not have to be lowered.
This situation has allowed property tax-reliant local governments to weather severe economic storms. During the recession of the early 1990s, one Los Angeles County official was quoted in the Los Angeles Daily News, “Thank goodness for Proposition 13,” because the system prevented a big drop in property taxes while other tax collections fell all around. The same thing was repeated in the difficult budget days of 2002 after the dot com bust. A December 10, 2002 Los Angeles Times article said that while tax revenue on income, capital gains, sales and other revenue sources were down, property taxes was an increasing revenue source for government. As California officials wrestled with a budget deficit of more than $21 billion, taxes on real estate, according to then Ventura County Assessor Dan Goodwin, are “keeping it from being a disaster.”
Property tax collection has dropped overall only twice in the 41 years that Proposition 13 has been the law. In fact, during that time, property taxes have been the most stable tax in California increasing about 7% a year, faster than inflation and population growth.
However, a stable property tax would be put in jeopardy if the initiative to raise property taxes on commercial property passes in November.
The proposal is to raise property tax assessments at least once every three years on certain properties to full market value. So when an economic downturn occurs, like the one that is occurring now, all those properties would have to be re-assessed to a new, lower value thus reducing tax collections for local governments and schools.
The California tax most reliable for government will become as volatile as other state and local taxes if the property tax increase initiative passes.
(Disclosure, the author is a paid consultant by Californians to Save Prop 13 and Stop Higher Property Taxes, sponsored by California homeowners, taxpayers, and businesses.)