California Proposition 5: Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute.
Proposition 5 would amend Proposition 13 (1978), to allow homebuyers aged 55 and older, or severely disabled, to transfer their current home tax assessed value to a new home no matter the value of the new home, the new home’s location in the state, or the buyer’s number of moves, limiting the tax increase those individuals would face in buying a new house.
Fiscal Impact
This measure would be expected to decrease property tax revenues by $150 million in the short-term, and over time the decrease in property taxes could be $1 billion per year.
Proponents Argument For
Advocates claim this measure will ensure older and disabled homeowners that they will not face property tax increases by moving houses. Due to Propositions 13, property taxes are capped at 1 percent of the tax assessed value and increases of no more than the inflation rate or 2 percent, whichever is less.
Voters approved Proposition 60 in 1986 to allow for a similar transfer of assessment values if the new home was of equal or lesser value, located within the same county, and purchased within two years of the original home. Proponents argue that Proposition 5 (2018) would extend this idea for older and disabled Californians. They say the current law imposes a “moving tax” on everyone because a move to a new house usually means higher taxes.
They argue that Prop. 13 was intended to limit the growth of property taxes and Prop. 5 would preserve that effort. This measure would change the law in a way so that citizens all across the state can upgrade or downgrade their homes without fear of large tax hikes.
Opponents Argument Against
Opponents argue this measure is another handout for wealthy homeowners that does not guarantee that more housing will be built but does guarantee that California’s fiscal situation will continue to decline.
They argue that even if Prop. 5 induces more people to sell their homes it will only be true for the older and wealthier, who are already able to afford homes and property taxes. Moreover, they argue, it does nothing to address the need for more new housing to be built.
Opponents say what California needs is more housing of all shapes and sizes being built, not more houses changing hands between those already wealthy enough to purchase homes. California’s property tax revenue is already overly restricted and limits needed revenue for local government public services. Prop. 5 furthers a carve-out for older, wealthier, homeowners to buy and sell homes without doing anything to address the state’s need for multimodal housing, especially for young people and first-time homebuyers.
Discussion
Proposition 5 would make some important changes that would affect homeowner decision making. First, it would create a formula to adjust the assessment value whether the new home is of more or less value. This is important because typically as people grow older and accrue wealth, they should move up the housing ladder freeing up older and less expensive homes for younger and less wealthy buyers.
Propositions 13 and 60 disincentivize older homeowners to sell their homes because their property tax assessment would change from the much lower rate to 1 percent of a far more expensive home (the transfer law currently only allows for homes of the same or lesser value), a significant increase that many avoid by simply holding onto their homes longer than they likely otherwise would have.
Prop. 5 claims to solve this problem by introducing a new formula where more expensive homes would be closer to current rates and where less expensive homes would get a slight reduction. This could free up many older homeowners to upgrade their homes without major tax hikes, thus freeing up lower rungs on the housing ladder.
While Propositions 13, 58, 60, and 5 have a good theory behind them, their practical implementation is leading to gross inequities in property taxes which creates a strong economic disincentive for older homeowners to sell, adding to the housing shortage. Upgrading your home equates to paying tens of thousands dollar more per year in taxes. The housing market ladder would then get squeezed as more people stay put and less new, denser, or multi-family housing is built and cheaper homes on the market do not go up for sale. Extending the limitations of Proposition 5 to all home sales would eliminate this distortion.
When it comes to the fiscal argument, it’s difficult to argue that California’s fiscal problems are due to low revenues as opposed to overspending. The latter is far more to blame for the issue. Prop. 13’s intent was a good one — to perpetually limit the state’s tax and revenue growth to a fixed percentage in the hope that spending levels would follow. Unfortunately, this approach has not proven successful. Income taxes, sales taxes, and spending have grown considerably despite the passage of Prop. 13.
Voters’ Guide to the 2018 California Ballot Initiatives
The Voters’ Guide offers analysis of each of the 11 ballot propositions certified for the election being held on November 6, 2018.