Enacted in 1978, California's Proposition 13 served to reduce property taxes and put a cap on increases on property taxes. Under this proposition, property taxes could increase at most by 2% per year on a property unless it was sold. While this sounded like a great deal for the average homeowner – who doesn’t want to pay less in taxes? – Proposition 13 had some unintended consequences that weren’t seen until a few years down the road.
Someone who purchased a home several years ago for $300,000 will pay property taxes based on that purchase price. Today, someone purchasing a similar house next door for $700,000 will pay much higher property taxes, due to the higher purchase price. This creates something called horizontal inequity, where homeowners pay different amounts of property taxes on houses that have similar market values. This is seen as unfair, because the taxpayer with higher property taxes is paying a larger share towards the funding of public infrastructure.
Additionally, the taxpayer with lower property taxes would be reluctant to purchase another house in the current market at a higher price, due to the startling increase in property taxes. This produces a disincentive for the homeowner to relocate, move for a new job or just purchase a new or larger home, and creates the so called “lock-in effect.”
I was hired to determine the impact of allowing a household to transfer part of the prior property tax base to a new residence, which would not only lower property taxes for the homeowner, but also create an incentive to move or purchase a new house. I presented my results to members of the California House Assembly and other interested parties at the California State Capitol building in Sacramento. A copy of the report I prepared can be found here.