Socio-Economic Developments Leading Up to Proposition 13
California residents voted Proposition 13 into law (otherwise named “The People’s Initiative to Limit Property Taxation”) as a property tax limitation measure, after years of arbitrary tax hikes, which were viewed by state economists as an unprecedented statewide mass response to limit property taxes that had expanded to degrees that were seen by the citizens of California as unreasonable and spiraling upwards out of control since the 1960s – which was reportedly creating a statewide revenue surplus of five billion dollars.
Many elements brought about Proposition 13. Aging and elderly Californians living on a modest fixed income were experiencing compounding difficulties paying their property taxes… and frequently older homeowners, veterans, retirees and other aging middle class and even upper middle class Californians living on a fixed income were being displaced by foreclosure and sudden eviction, literally with their belongings and furniture on the street! This certainly brought about greater public interest in property tax relief for homeowners over 55. There were also issues arising from population growth in California, and severe inflation during the 1970s, which created a growing demand for homes suitable for starting a family.
Residential properties were reassessed at such high rates that property taxes escalated to such a degree that many retirees could no longer sustain these inflated rates and hold onto the homes they had bought decades before. Naturally, Proposition 13 attracted their votes and protecting older homeowners from property tax hikes, so older Californians would no longer be priced out of their home from egregiously high property taxes, was the image that framed the branding for Proposition 13 in the run up to the Nov 1978 ballot when voters actually had the opportunity to vote property tax relief from Prop 13 into law as an Amendment to the CA Constitution.
Proposition 13: Property Tax Relief Replaces Arbitrary Tax Hikes
Proposition 13 was listed on the ballot through the California ballot initiative process. The Proposition 13 amendment to the CA Constitution, impacting all 58 counties, formally passed on June 6, 1978, with 2/3 of the vote in favor and with the participation of around 2/3 of all registered voters in the state – becoming Article 13-A of the California Constitution.
As Proposition 13 took affect in 1978—1979, California properties were reassessed at current or “fair market” value only when there was a change in ownership or there was completion of brand new construction, referred to as “base year value”.
In addition, Proposition 13 limited annual increases in the base year value of real property to no more than 2% except when property changes ownership or is under construction. Proposition 13 successfully changed a market value-based property tax system to an acquisition value-based system.
Feb 2021: Proposition 13 Morphs into Proposition 19
As the history of present day property tax relief further unfolds, new tax assessment exclusions for inherited property could, in some cases, have a less than positive affect on wealthy homeowners and beneficiaries.
Paul DeLauro, property tax relief specialist and manager of wealth planning at City National Bank, informs us, “Proposition 19 changes several tax rules, but the biggest impact will be on high-net-worth families [impacting heirs inheriting family owned high-end real estate]. Proposition 60, which passed in 1986, allowing property tax relief for homeowners over 55 who wanted to sell their home and move to another house of equal or lesser value in the same county to take their tax assessment with them. The idea was to make it easier for seniors to move without worrying about a huge jump in their property tax bill that might be difficult for them to pay.”
The 1986 Proposition 58 parent to child property tax transfer on an inherited home morphed into Proposition 19, which was, as you probably know, voted into law in Nov of 2020 and adopted other property tax relief benefits such as property tax relief for homeowners over 55, for residents with severe disabilities, and who are victims of natural disasters such as forest fires, floods or earthquakes.
Another property tax relief expert, attorney Bruce M. Macdonald with law firm Carico Macdonald Kil & Benz LLP in El Segundo CA tells us, “If someone over 55 sold a house for $5 million, but they were paying taxes on a lower assessed value based on their original purchase price, they could buy a new house for $2 million and still pay taxes at their original, lower tax assessment”.
Prop 19 Enhanced Certain Benefits While Limiting Others
So while Proposition 19 admittedly limited certain benefits for Californians with respect to avoiding property tax reassessment, especially beneficiaries inheriting a home from a parent, such as property tax transfer, the right to transfer parents property taxes, and the ability to keep parents property taxes after inheriting property taxes from parents with a parent to child property tax transfer; as well as the important and highly popular parent-child exclusion from paying fair market (i.e., current) property tax rates.
However, on the other hand, Prop 19 allowed transfer of property between siblings through a loan to an irrevocable trust, without limitations; and actually expanded property tax relief for homeowners over 55, for residents with severe disabilities, and for victims of natural disasters, as we mentioned a moment ago.
Mr. DeLauro went on to add, “Prop. 19 is highly attractive for eligible homeowners who want to sell their existing primary residence and move to another residence in the state without incurring a higher property tax bill“.
Mr. Macdonald also added, “These new rules allow people to move to any county in the state and not just within their own county. The new house can even be more expensive than the one they sell, and homeowners over 55 can transfer their tax assessments three times in a lifetime.”
Legal Challenges to Proposition 13
After Proposition 13 passed, its constitutionality was challenged. The California Supreme Court upheld the constitutionality of Proposition 13 in Amador Valley Joint Union High School District v. State Board of Equalization on September 22, 1978. Moreover, in 1992 the United States Supreme Court ruled, in Nordlinger v. Hahn, that Proposition 13 did not violate the equal protection clause of the United States Constitution. This ruling more or less effectively ended speculation about whether the judicial system could overturn or revise Proposition 13.
State Board of Equalization and the Taxpayers’ Rights Advocate
The Taxpayers’ Rights Advocate, appointed by the BOE (State Board of Equalization) is responsible for identifying areas of recurring conflict between taxpayers and property tax assessment officials; as well as determining how effective the BOE’s County Tax Assessors are providing materials to property taxpayers as well as dealing with inquiries, complaints, and challenging issues requiring fast resolution.
Lisa Thompson is currently the Taxpayers’ Rights Advocate. Lisa and the Taxpayers’ Rights Advocate Office staff are independent of the agency’s program staff. The Taxpayers’ Rights Advocate Office helps taxpayers who are unable to resolve a problem through normal channels. Miss Thompson tells us:
“We can help if you have a question regarding your rights or if you have a disagreement with the programs administered by the State Board of Equalization, or county agencies involved in California’s property tax system. Some taxpayers contact us to communicate their frustration with aspects of the property taxation system or seeking confirmation that they have been treated lawfully and fairly by a county or state office.
In cases where the law, policy, or procedure does not allow any change to the staff action, but a change appears justified, the Taxpayers’ Rights Advocate Office is alerted to a potential area that may need clarification or modification. Several past recommendations for policy, procedural, and legislative changes have resulted from these types of contacts with taxpayers.
Our office facilitates communication between taxpayers, the State Board of Equalization, and county staff to eliminate potential misunderstandings. Taxpayers are provided information on policies and procedures so they can be better prepared to discuss their issues with the appropriate staff and increase the opportunity to affect a resolution which will satisfy them.”
The BOE holds public hearings to address the report and related property tax issues. In addition, the Property Taxpayers’ Bill of Rights provides measures designed to promote the fair administration of the property tax.