Proposition 13’s Positive Split Roll Prohibition

In my last post, I was somewhat critical of Proposition 13, but I still acknowledged that it contained positive attributes. One of the best parts of Prop 13 is that it prohibits split roll property taxation. This means that California cannot charge different rates for homestead and commercial properties, and instead must tax all property at the same rate.

On cue, the California Taxpayers Association has published a new report that analyzes the effects of the split roll prohibition. Prop 13 restricts the rate of growth of assessments to 2 percent per year, but if a property is sold to new owners, or if there’s new construction on a property, then the property is reassessed at its market value. It’s not uncommon for a person to pay much less in property taxes than his next-door neighbors, who just bought their house. Since residential properties are bought and sold more frequently than are commercial properties, they are also reassessed more frequently. This fact caused some people to warn that Prop 13 would shift the property tax burden to homeowners and away from businesses.

The California Taxpayers Association has found that this fear never came to fruition. “Business property owners pay a greater share of the property tax under Proposition 13,” the report states, and “the assessed value of homeowner-occupied property . . . has declined since passage of Proposition 13.” There are several reasons for this outcome: “Court decisions have clarified when reassessments should occur. . . . large mergers and acquisitions have resulted in valuation increases on the local property tax rolls that are equal to the turnover of thousands of homeowner-occupied properties. New construction also contributes to the rise of property tax assessments on businesses.”

Interestingly, the California Taxpayers Association also found that “California’s property tax is the most stable source of revenue in the state,” and this stability ensures “that local governments are shielded from booms and busts of the economy.” It’s very important for governments to have stable streams of revenue, because there is usually a higher demand for government services during recessions.

Despite its well-documented tax problems, California does demonstrate that it is possible to have a flat and neutral tax that falls on taxpayers in an equitable manner, while still providing a stable revenue source. California’s property tax, with its prohibition on split roll taxation, is neutral, which is one of the principles of sound tax policy. This means that there are no advantages to owning one kind of property, so Californians will make decisions that make the most economic sense, not the decisions that politicians want them to make. And since Prop 13 was intended to protect homeowners first and foremost, the fact that the tax burden hasn’t shifted to homeowners is an encouraging sign.