What is Proposition 13?
The People’s Initiative to Limit Property Taxation, passed in 1978, was a two-part populist revolt against trending tax-and-spend policies. Prop 13 capped property taxes at 1% of residential/commercial property value and annual increases of assessed value of real property at the inflation factor of 2%, while mandating a two-thirds majority in both state legislatures to increase any state tax with the same majority requirement for localities to increase special taxes.
The Effects of Prop 13
While largely considered a boon for California’s property owners, many have criticized Proposition 13, alleging it has led indirectly to the proliferation of ever increasing “Development Impact Fees (DIF).” California’s notoriously extensive development impact fees are increasingly burdensome, often nixing the viability of a potential project. For example, in the Bay Area, developer fees can exceed $150,000 for a single-family home.1 The merits of Prop 13 are certainly up for debate, however the impetus behind development impact fees is rooted in the environmentalist axiom: “growth must pay for growth.”1 The notion that DIF rates will decrease significantly if Prop 13 is curtailed or repealed appears dubious at best.
What Challenges Exist to Proposition 13?
Currently there are several challenges working their way through both California legislatures aimed at reducing Proposition 13’s protections. “Senate Constitutional Amendment 5” aims to reduce the two-thirds majority necessary for localities to increase parcel and school taxes, to a 55% majority. A similar bill failed to pass in the Assembly on August 19th. Though, it failed by a narrow margin with 15 assembly members providing a “Non-Vote,” and is currently being re-tooled for another hearing. However, the most considerable challenge is already on the 2020 ballot – “The California Schools and Local Communities Funding Act of 2018.” This act would amend the California Constitution, stripping Prop 13’s protections from commercial/industrial properties for any business with more than 50 full-time employees.
What Does it Mean for Your Project?
Reductions to the two-thirds majority requirement will undoubtedly lead to special tax increases for California’s already cash-strapped population – with some estimates indicating a modest increase of $1,000 in home price eliminates tens-of-thousands of potential homebuyers. The California Schools and Local Communities Funding Act will create an inequity of incentives, with localities preferring commercial projects while businesses are disincentivized to relocate. Paired together, and California will likely exacerbate its growing middle class/business exodus, reducing the long-term viability/profitability of innumerable projects.
The author of this blog, Austin Hughes, is Murow Development Consultants’ Fee Analysis Coordinator and can be contacted directly with any questions or comments via link on his name
- Coupal J, (2019). ‘Scapegoating Proposition 13’, OC Register, Orange, 18 August, p.1.