Prop. 13 Circuit Breaker Halts Tax Losses

JULY 8, 2011

By WAYNE LUSVARDI AND CHARLES B. WARREN

California’s Proposition 13 is working to halt a larger and faster erosion of the property tax base in Sacramento County and elsewhere around the state.  But that is not what is being reported in the mainstream newspaper media, which only tell a “poor me” story of how property taxes are declining in the Sacramento area.

It is not the superficial absolute percentage of decline in property taxes but the relative decline in relation to the overall decline in market values that is critical.

Property values go up and down in cycles and it is up to government to have rainy day fund reserves to handle the downturns.  Fortunately, with Prop. 13, these declines can be managed. While without Prop. 13, the pain would be much deeper and would likely dig deeper than budget reserves.

For example, the Sacramento Bee is reporting that the Sacramento County property tax base fell by $4 billion for the fiscal year from July 1, 2010 to June 30, 2011, resulting in a 1 percent, or $40 million, drop in property tax revenues.

But Zillow.com indicates that the market value of single-family homes declined by about 16.7 percent from 2010 to 2011 (as of July 7, 2011); and by about 57 percent since 2007 at the peak of the Real State Bubble.  At the market peak, the median home price in Sacramento County was about $350,000, while today it has dropped to $150,000.

Since 2010, the median price of a single family home has dropped by about 16.7 percent.  But due to Prop. 13, the latest decline in the property tax base has been held to 1 percent.

One of the unheralded benefits of Prop. 13 is that it serves as a circuit breaker to large fluctuations in market values, either upward or downward.

Prop. 8 Provides for Tax Adjustments

Proposition 8, passed in 1978, amends Prop. 13 to provide for reductions in assessed property values due to a decline in market value.  Prop. 8 re-assessments are temporary and will ratchet back upward when the market recovers.

Prop. 8 property tax re-assessments do not necessarily have to be applied for by the owner and are automatically adjusted by the tax assessor in each county.  Such re-assessments typically affect so-called “underwater” properties whose mortgages are more than the assessed value for property tax purposes. Zillow.com reports that the percentage of underwater mortgages in Sacramento County is 51 percent.

An “underwater” property is not the same as when the assessor at his discretion may reduce the property value assessment temporarily until the market recovers. If monetary inflation takes off, as predicted by many, there may be a flight of capital out of money markets and back into real estate, at which time assessed values would be readjusted upward by the Assessor, but only for those properties that had their assessment previously lowered under Prop. 8.

Prop 13 is good for government as well as for homeowners.  But don’t expect to read or hear that in the newspaper or broadcast media.