California Proposition 19: Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment.
Summary
California’s Proposition 19 would make various changes to rules that allow Californians who are disabled or older than age 55 to transfer below-market property tax assessments when moving to a new home. If Proposition 19 is approved, these lower assessments could no longer be transferred to heirs once the property owner dies, in many cases. But, while the taxpayer is alive, it would make transferring below market assessments easier by eliminating certain exceptions in current law.
Fiscal Impact
Proposition 19 would increase revenues to local governments and school districts by tens of millions annually statewide, with the revenue increase growing to hundreds of millions in later years. A portion of the increase in local school district revenue would reduce the amount of aid school districts would receive from the state. County assessors would need to hire new staff and make computer upgrades to carry out the measure, at an expected cost of tens of millions of dollars. Also, because the measure is expected to increase home sales, state and local governments would receive more revenue. The state’s revenue increase is estimated to be in the tens of millions of dollars. Most incremental state revenues would be earmarked for fire suppression purposes.
Proponents’ Argument For
Supporters argue that this measure contains several provisions intended to increase the stock of available housing and provide protections to vulnerable Californians in the housing market while ensuring that counties and local governments receive equal and equitable funding. They say Prop. 19 would make it possible for the elderly and disabled to move to a different county in California and keep their lower property tax rate in most cases, meaning they are not trapped by property tax bills in the same county until they die. It would mean that family farms can be passed on from grandparents or parents to younger generations, keeping them as family farms rather than being snapped up by agribusiness. Most importantly, they say, Proposition 19 would limit these property tax exemptions to primary residences, and not protect investment properties like rentals from benefitting from property tax limitations. Currently, 60 percent of parent-child transfers are rental properties. While protecting families from increases in property taxes for their residences, Prop. 19 would mean more revenue from investment properties, creating protected funding for underfunded fire districts throughout the state.
Opponents’ Argument Against
Opponents argue that Proposition 19 is an attempt to raise property taxes in California, one that was tried and rejected by 60 percent of voters in 2018, but is now back with portability and funneling the tax hike into fire districts. They say this measure takes away Proposition 13 (1978) protections that shield children from the sticker shock of property tax reassessments when their parents or grandparents pass away. Between 40,000 and 60,000 families would likely be subjected to sharp property tax hikes because of this measure. Opponents say this takes away an important opportunity that families in California use to provide financial stability for their children by passing them a home or farm without a massive property tax hike, even if it will not be their residence. This could be terrible for family farms they argue because if a child inherits a farm and does not want to work it, the large property tax increase caused by Proposition 19 would mean most of them would be sold, and this is how agricultural businesses easily snatch up family farms. Opponents argue that the one good part of Prop. 19 is portability—allowing people to move to other counties and keep their Prop. 13 (1978)-based property tax level—but counties can and should allow that without Prop. 19.
Discussion
Proposition 19 is an intricate set of changes to the state’s already complex system for assessing property values. Californians who have lived in their homes for a relatively long time benefit from below-market property valuations because Proposition 13 (1978) limits increases in assessments to two percent annually until the home is sold. Proposition 58 (1978) was approved by 75 percent of California voters and it added to Prop. 13 (1978) by allowing properties worth up to $1 million to be transferred between parents and their children without reassessment. And then Proposition 193 (1996) applied the same rules to grandparents and grandchildren. Current law also allows Californians who are disabled or over 55 to continue benefiting from the low assessment on their current property when moving—but only in certain cases.
Currently, eligible taxpayers can only make one such transfer. Proposition 19 increases this limit to three. Also, current law only allows the valuation transfer when the taxpayer moves to a home of equal or lesser value. If Proposition 19 passes, a homeowner could upgrade to a more expensive home and still get a tax break: the assessment on the new home would be its market value minus the difference between the selling price and assessment on the old home.
Finally, under current law, older and disabled taxpayers can only make these tax assessment transfers when they either buy and sell within the same county, or if they buy within one of the 10 counties that accept valuation transfers (although these 10 counties represent a minority of the state’s 58 counties, they are home to a majority of Californians because most are highly populated). Proposition 19 would do away with this limitation, allowing transfers throughout California.
Although these changes reduce tax burdens and thus total tax revenues, they are more than offset by a tax increase included in the measure. Currently, children and certain grandchildren can inherit the lower property tax assessments. If Proposition 19 passes, heirs will only be able to take advantage of the lower assessment if they use the property as a primary residence or farm.
This is a crucial point. Proposition 13 (1978) protected homes from increases in property taxes, not commercial properties. When Propositions 58 (1986) and 193 (1996) extended those benefits to properties passed from parents and grandparents to younger generations, investment properties like rental properties and commercial farms were included in the property tax limitations. The major change of Prop. 19 is to remove those property tax protections from such investment properties, and consequently increase property taxes on many inherited properties each year.
Most local governments should receive more from the posthumous reassessments than they’ll lose from additional use of the tax break by 55+ and disabled property taxpayers. Proposition 19 contains a mechanism for making whole the few governments that may lose out.
The Legislative Analyst’s Office (LAO) also expects the state to collect tens of millions of additional dollars from Proposition 19 because it would increase home sales. When a property changes hands, the seller may need to pay the state capital gains tax, and real estate agents would earn more taxable income. The state would also save Local Control Funding Formula aid to school districts because most school districts would receive more property tax revenue. This additional revenue would reduce the amount of state funding intended to equalize spending per pupil across districts.
The ballot language requires the state’s director of finance to estimate the annual state revenue increase and cost savings each year. Of this state revenue, 10 percent would go to a fund that will offset any revenue loss suffered by local governments.
A much larger share of the state’s gain—75 percent—would be allocated to fire-related priorities. Some of these funds would go to the Department of Forestry and Fire Protection, but most would be used to subsidize “underfunded” local fire protection districts.
Some fire districts in California receive a relatively small share of local property tax revenue. The fire districts facing the big challenges are those serving areas that have grown rapidly since tax allocations were locked in during the implementation of Proposition 13 (1978).
For example, the East Contra Costa Fire Protection District (ECCFPD) receives eight percent of the ad valorem property tax collected from homeowners in Brentwood and adjacent areas of Eastern Contra Costa County, while other districts in the county receive an average of 12 percent. This may have made sense in the late 1970s when Brentwood had about 4,000 residents but appears less sustainable now that the city’s population has soared to over 64,000.
Topping up the revenues of districts like ECCFPD with state funds would place them at par with peer districts, but it would also fund some costly practices. In 2018, ECCFPD spent over $4 million on pension and other post-employment benefits—about a quarter of total revenue—and reported $30 million in unfunded retirement liabilities. The district provides medical and dental benefits to both retirees and their families. Like many fire districts, ECCFPD mostly responds to calls for medical service rather than fires or other disasters. Many of these calls could be handled more economically by private ambulance services.
Overall, Proposition 19 is a complex vehicle for squeezing a relatively small amount of incremental revenue from property taxpayers. California property taxes raise an enormous amount of revenue in an inequitable manner as the state pursues ways of increasing property tax revenue from those properties not protected by voter initiatives.