Today, we look at a measure, Proposition 5, that the Realtors® strongly favor. As a matter of fact, this initiative was sponsored by the California Association of Realtors® (CAR), and was put on the ballot through their efforts.
The initiative, if passed, would allow “individuals 55 years of age and older to transfer their property tax basis to any home in the state, to purchase any price home, and to transfer their basis as many times as they wish.”
To appreciate the significance of this, it is necessary to have some idea of California’s property tax system. Property tax valuations are based on purchase price. You buy a house for $700,000, the assessor will value it at $700,000. After that, increases in property tax value are severely limited by formula. A home that was purchased for $500,000 five years ago could still be valued, for tax purposes, in the $500,000 range, even if its actual market value had increased to $700,000.
If you have lived in the same home for 15 – 20 years or more, you are probably enjoying relatively low property taxes because they are based on your low tax valuation. When contemplating a move, one of the things you have to think about is what your new property taxes might be, as they will be based on the purchase price of your new home. The effect of this has been to discourage people from moving down, e.g. from the 4-bedroom family home to a new 2-bedroom in a senior community, because the latter might result in significantly higher property taxes.
Californians sought to solve this problem in 1986 with the passage of Proposition 60. It allowed seniors to keep their property tax base assessment when they moved within the same county. However, in 1988, Proposition 90 was passed which allowed each individual county the option of participating in this tax base transfer by seniors who move from one county to another. This had great significance, because many retirees move to a different county (e.g. to be closer to grandchildren) than the ones in which they had lived.
Only eleven of California’s 58 counties (19%) will allow a senior from another county to transfer his or her old property tax base to a newly-acquired home in that county. It is estimated that 75% of California homeowners over the age 55 are still living in the same home they lived in since the year 2000. That is not because they still love living there. It is because of the tax consequences.
Suppose that Mr. and Mrs. Baby Boomer bought a home in 2001 for $400,000. It was taxed on a value of $400,000 the first year. Its value for property tax purposes could only increase 2% per year. So now it might have a taxable value of $560,000. At a Proposition 13 tax rate of 1%, that is $5,600, even though the house might now have a market value of $900,000.
If Mr. and Mrs. Boomer sought to move down in size, they might buy a nice (not fantastic) two-bedroom which could cost them $700,000. Under current law their taxes would increase by $1,400 to $7,000.
However, if the CAR tax initiative were in effect, their tax value would be proportionately the same to actual value as with their previous home. In this case, it would be 62%, and their property tax would be $4,340. It would be $2,660 less than it would under current law.
No wonder the initiative garnered more than one million signatures to put it on the ballot (585,407 was the required number). It’s the best idea since sliced bread, right? Well, no; not in everyone’s eyes.
The Legislative Analyst’s report, which appears in the Voter Information Guide, paints a bleak picture of the initiative’s potential influence on city and county revenues. It claims “Schools and local governments probably would lose over $100 million in annual property tax revenue in the first few years, growing over time to about $1 billion per year…” This analysis has apparently caught the attention of both nurses’ and fire fighters’ unions, who have taken positions of opposition to the initiative. (Although, I have it on anecdotal authority that there are plenty of fire fighters and nurses, who are contemplating retirement, that think it is a pretty good idea.)
It's worth noting that there is a serious flaw to the legislative analyst’s projection. That is, it is a static analysis that looks only at the potential losses. Thus, in the example we considered, the seniors’ property tax on their new home would be a $2,660 “loss” on the potential $7,000 tax that would have been generated by a “normal” sale (i.e. one without the tax benefit).
On the other hand, a dynamic analysis would have looked at other things that were going on. When Mr. and Mrs. Boomer sold their current home for $900,000, that would have generated a $9,000 tax bill for the new buyers, approximately a $3,400 increase in revenue generated to the taxing authority.
When all the moving parts are considered, it is implausible that a net loss in tax revenues will be the result.
Proposition 5 is picking up support. Recently the Southern California News Group – including papers from Long Beach, San Fernando Valley, Riverside, San Bernardino and Orange County – have taken editorial positions in its favor. Realtors® should continue to beat the drums.
