Tuesday, June 1, 2004
Page 7
CALIFORNIA COMMENTARY (Column)
Propositions 13 and 8 Combine to Keep Property Taxes Reasonable
By JON COUPAL
(The writer is an attorney and president of the Howard Jarvis Taxpayers Association.)
California real estate sells every day. The reasons are, of course, varied. But anecdotal evidence indicates that many homeowners are cashing out of the California housing market believing that escalating values cannot continue.
Some will move to areas, or states, where housing is cheaper. Others will rent, planning to re-enter the market when prices subside.
Will the market decline? It has before. In the early 1990s homes bought in the heated market of the late 80s lost as much as twenty percent or more of their value. In some cases, owners did not see their home’s value return to historic highs until the end of the decade.
However, most housing experts point out that conditions are not the same as during the housing bust of the early 90s. Then, a number of critical industries, including aerospace, were shrinking. And in some areas, the housing supply was exceeding demand due to an increase in speculative activity by developers.
Today, the housing supply remains tight and demand, aided by rock bottom interest rates, remains strong. Still, it is unrealistic to assume that annual double-digit home value increases will continue indefinitely.
Because most buyers see their homes as a residence first and an investment second, homes will continue to be sold to those who plan on living in them for a long time. These buyers, once calculating that they can afford the payments on their new home, will find themselves concerned with the other major expense that comes with home ownership: taxes.
And here the news is still good. Thanks to Proposition 13, which limits taxes to one percent of a property’s value, and limits annual reassessment to no more than two percent, tax costs remain more or less predictable. (“More or less” because those in government who wish to squeeze more from property owners are working diligently to make it easier to increase other types of property-related charges that are allowed under Proposition 13 as “voter approved indebtedness.”) But it is a far cry from the old days when local government agencies submitted their budgets to the county and the county arbitrarily established the property tax rate to meet these funding requests, regardless of the impact on the taxpayers.
However, some may ask what happens if the pessimists are right and the bottom drops out of the housing market—possibly leaving recent homebuyers in the position of having to pay taxes on assessed home values that are much higher than the home’s actual market value. Here again, Proposition 13, as amended by Proposition 8, comes to the rescue.
After Proposition 13, which protected homeowners against being penalized by increasing property values by establishing limits on yearly property tax increases, was overwhelmingly approved by voters in June of 1978, the question was raised, what would protect taxpayers whose homes, for reasons beyond their control, lost significant value.
The issue was addressed with Proposition 8, which was placed on the ballot in November of 1978. Proposition 8 allowed homeowners whose homes had lost value to apply for a tax reduction—actually a reduction in value—that would amount to one percent of the property’s new lower value. However, for years assessors, backed by the courts, had operated as if the lower tax only applied as long as a property’s value remained depressed. If it increased, the tax could be raised as long as it was never higher than the amount allowed by Proposition 13—that is one percent of the base value with an additional two percent compounded for each succeeding year. This is known as the “Proposition 13 trended value.”
As a practical matter what this means is that a homeowner is never charged more than allowed under Proposition 13, but they can be charged less. However, if the home’s value goes up, the owner is again responsible to pay the tax allowed by Proposition 13.
Assessors sending out notices to property owners informing them that their property qualifies for a tax increase sometimes use the term “value recapture,” which smacks of legalese. This is an unfortunate use of words, because non-lawyers sometimes read this to mean that their taxes will be increased so the county can get back, “recapture,” all the money that the taxpayer has already saved. This is not the case. “Value recapture” simple means that the county is now able to tax the property based on its higher value—as long as this does not exceed the amount that would be allowed under the Proposition 13 trended value.
The result of “value recapture” can still be controversial because, while the actual tax will not be greater than what would have been allowed if the taxes had not been temporarily lowered, the result can be an increase in taxes that exceeds Proposition 13’s two percent annual limit. Even a person who has saved hundreds, even thousands, of dollars due to a Proposition 8 value reduction, can find a tax increase of 10 or 15 percent quite shocking.
Several years ago, Orange County resident Robert Pool, who had been a beneficiary of a Proposition 8 reduction, took the issue of “value recapture” to court. He argued that Proposition 13, a constitutional amendment, clearly stated that for tax purposes, property values could not be increased by more than two percent. The trial court agreed, but this was overturned by the appellate court, which said that Proposition 8, also a constitutional amendment, allowed an increase greater than two percent to recapture value.
The issue is now before the California Supreme Court and there is no telling what the high court will do. But whatever the outcome, homeowners need to know that Proposition 13 will continue to provide huge taxpayer savings—tens of billions of dollars per year—over what they would have faced if Proposition 13 had never become law.
Copyright 2004, Metropolitan News Company