When it was approved by voters in 1978, Proposition 13 brought lower real property taxes for owners of residential, commercial and farm properties throughout California. It accomplished this through a rollback of property values to 1976 levels and a limit on annual increases in property taxes. A recent effort in the legislature to push forward a constitutional amendment changing some of the key provisions of Proposition 13 was not successful, but another attempt may be coming in 2020 with proponents of change seeking to place an amendment on the ballot for voters to consider. Given the interest in amending Proposition 13, this is a good time to take a look at it and the reasons some groups want to see it changed.
What Did Approval of Proposition 13 Mean Back in 1978?
More than 40 years have passed since voters in California overwhelmingly approved Proposition 13. The amendment to the state constitution rolled back the assessed values of residential and commercial properties to 1976 levels. The tax rate was set at 1{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0} of a property’s value with annual tax increases capped at 2{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0} provided ownership of the property did not change.
Reassessment of property prior to Proposition 13 could occur annually with no caps or limits on how much of an increase a homeowner might see. It was not uncommon for property values to rise by as much as 100{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0} in a single year, which increased the property tax obligation of the owner.
Under Proposition 13, residential, commercial and farm properties do not get reassessed until there has been a change of ownership. Even when that occurs, the new assessment is capped at 1{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0} of the price for which it was sold. Thereafter, annual tax increases are limited by the 2{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0} cap.
Proposition 13 also imposed a requirement that legislative initiatives at the state level to increase revenues with new taxes needed two-thirds of the votes in each of the two houses of the legislature before becoming law. At the local level, the proposition required that taxes for a designated or special purpose had to be approved by at least two-thirds of voters.
What’s Behind the Push to Amend Proposition 13?
Some advocates for amending Proposition 13 argue that large corporations should not reap the same tax benefits as homeowners. They point to Disney and Facebook as examples of companies with large real estate holdings in California that derive significant tax savings from Proposition 13 limits on assessments. Proponents of increasing assessments and taxes on commercial properties other than those owned by small businesses had planned to have their proposal added to the November 2020 ballot for voters to approve as an amendment to Proposition 13.
The success of any effort to tinker with Proposition 13 was cast into doubt by the recent failure of Assembly Constitutional Amendment 1 (ACA 1) to obtain the votes needed to make its way out of the Assembly. ACA 1 would amend Proposition 13 by changing the votes needed to approve revenue-generating measures at the local level for infrastructure and public works projects from two-thirds to only 55{b2882cad84bd77ee25ab8b8b9d1b0566021dcc5c7d8a30d0e639a0635fa20cc0}. Although it did not seek to change assessments or tax rates, legislators were reluctant to be associated with any measure that would alter Proposition 13.
For now, at least, changing Proposition 13 appears to be something that elected officials believe would not be viewed favorably by voters at election time and should be avoided. The effect this will have on efforts to place a proposition on the ballot next year remains to be seen.
Proposition 13 and Your Estate Plan
Avoiding reassessment under Proposition 13 when property is passed on to family members requires the knowledge and skills of a trusted estate planning attorney. Contact the trust and estate planning attorneys at Magee & Adler by calling us today at 562-432-1001 to schedule a consultation.
