"APARTHEID: CALIFORNIA-STYLE"
How Prop 13. Continues to Shape Where and How Californians Live
March 26, 2018
On June 6, 1978, California voters overwhelmingly supported an amendment to the State's Constitution. Known as Proposition 13, or the People’s Initiative to Limit Property Taxation, the now infamous voter initiative effectively capped property tax assessments on both residential and commercial properties. The initiative declared:
Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties. — California Constitution Article XIII A
Along with the 1% cap on the annual ‘value tax’ of the property, the initiative dictated that property taxes were to be assessed at their 1975 value. On top of that, annual increases were to be restricted by an inflation factor not to exceed 2% per year. "Prop. 13" also states that reassessment of the property tax can only be made when 1. The property ownership changes or 2. There is major construction done.
Capturing the anti-tax zeitgeist of the mid-late 1970’s, which would ultimately help propel Ronald Regan to office in 1981, supporters of the initiative believed they were curtailing an unfair tax burden created by California’s surging population growth, severe nationwide inflation, and ever-increasing housing demand. With success toward these goals however came the unforeseen, and sometimes insidious, costs of Prop. 13.
Since it’s passage in 1978, Prop. 13 has become a ‘third rail,’ or untouchable subject in California politics. Attempts to alter the initiative usually result in political suicide. Critics however argue that the initiative fundamentally upsets the housing market balance, as it enshrines a disincentive for selling property in favor of remaining or bequeathing the property to avoid a new, higher property tax assessment. The 1% cap means that the longer a homeowner owns their home, the lower their effective tax rate becomes. Consequently, some contend that Prop. 13 has created a sort of feudal caste system, which benefits legacy landowners.
Fig. 1. Market Value and the Capped Assessed Value of A Sample Home Over Time (Legislative Analyst's Office)
Fig. 2. Home Value and Effective Tax Rate Over Time - Simulation (Trulia Real-Estate Listings)
Critics argue that Prop. 13 has created a ‘legacy landed gentry’ that continues to pay an artificially low (and getting lower) effective tax rate, depriving the state of California a massive piece of its tax revenue pie. In a 1988 New York Times editorial, The Curse of California’s Proposition 13, Edmund Andrews outlines how Prop. 13 benefits legacy homeowners at the expense of the less-affluent, young families, first time buyers, and newcomers to California:
“First, home buyers still get slammed on property taxes, because their rates are pegged to current land values. By contrast, folks who bought their homes before 1978 pay taxes based on their home's 1975 assessment, which can be hiked by no more than 2 percent a year. Since the median price of homes in California has doubled since 1978, the disparities between identical homes can now be huge.
The undemocratic effects of Prop. 13 go further. Starved for revenues, California cities have been aggressively hunting for new sources. They could raise rates, but that would be political suicide. They could stop repairing roads and schools, but that wouldn't be much better.
Their solution, instead, has been to charge vastly higher ''impact fees'' on new homes. Theoretically, impact fees cover the cost of new streets and sewers associated with new homes. When tax revenues financed these costs, impact fees were minimal or nonexistent. Since Prop. 13, though, they've been soaring. In 1983, they averaged about $5,700. By 1987, they had zoomed to $11,807, according to a survey by the National Association of Home Builders. On top of that, cities now frequently demand that developers also foot the bill for new parks and schools.”
Andrews further highlights how Prop. 13 incentivizes a bias toward high-income housing, hotels, and shopping malls, as opposed to low-income/affordable housing. The culprit of this bias? High impact fees and sales tax from malls and hotels generate the missing revenue deprived from local governments by Prop. 13. Andrews goes so far as to call the initiative ‘California-Style Apartheid,’ or institutionalized property segregation along economic lines.
While the numbers Andrews provides reflect the reality in 1988, these disparities have only expanded with time. In 2015 alone, California local governments lost out on $12.5 billion because of Prop. 13. As of 2015, More than 40% of California property owners have an effective property tax rate of less than 0.5 %, half of the 1% cap outlined in the initiative. This effect is largest in affluent communities like Palo Alto and Los Altos where median home values top $2 million, and effective tax rates are often below 0.5%. As you go further inland however, lower-income communities like Beaumont and Arvin with home values often under $265,000 commonly post effective tax rates above 1.3%.
The effects of Prop. 13 are subtle, complex, and extremely far-reaching. Physical manifestations of the initiative, from wealth disparity to empty lots and rotting buildings, untouched to maintain their 1975 tax assessment, are not hard to find. The Mission District in San Francisco has three famous examples documented below: 2583 Mission St., 3067 23rd St., and 3398 18th St.
2583 Mission Street, San Francisco, CA
3067 23rd Street, San Francisco, CA
In 1902, John Gaehwiler, a Swiss immigrant, began operating a forge at 3067 23rd Street. Following the Great Earthquake of 1906, business boomed for Mr. Gaehwiler. In the late 1940’s, the Gaehwiler’s turned to truck repair, and by 1956 no business was listed on state registers. The Gaehwiler’s rented the space out to tenants through the 1980’s. The property has been vacant since the early 90’s. The property is still owned by the Gaehwiler family.
3398 18th Street, San Francisco, CA
Owned previously by former Facebook executive Owen Van Natta, the Mission Economic Development Agency recently purchased the decaying building on 18th and Mission. The agency paid $6 million for the property, and currently has plans to spend another $45 million to add six stories, and 40 affordable housing units. MEDA has plans to maintain and highlight the buildings historic elements during the renovation. For now however, it serves as a gathering place for homeless entrepreneurs selling miscellaneous items on blankets.
Sights Around the Neighborhood
In November of 2018, a statewide ballot initiative seeks to change the constitution, so that commercial and industrial properties are taxed based on their current market value. Business whose total property holdings valued below $2 million would be exempt. While the initiative could influence a business’ decision to move or expand in California, the Legislative Analyst’s Office estimates it will raise between $6 to $10 billion each year for schools and other public services. You can read more about the initiative here.
