Urban Studies Paper on Limiting Local Property Tax Rates
The properties subject to taxation in California are residential property as well as commercial and industrial property where most Californians work. Under the California constitution, all owner-occupied and commercial property are taxed equally with the same tax rate. Proposition 13, passed in 1978 by California voters placed limits on property taxes increment from one year to another. The provision of proposition 13 reduced the growth of property taxes for existing property owners at two percent bringing about stability and predictability for property taxpayers. It also created a new avenue whereby California’s rising real estate and neighboring property owners could pay different amount of property taxes on comparable parcels.
In limiting property tax rate, the proposition 13 restructured the housing market in a way that it affected every person within the state. For instance, the greatest tax breaks accrued to those who were least in need of housing assistance. It discouraged people from moving to a new home even when it was in their best interest to do so. Advocates of site value argued that the practice of taxing land and building at the same rate as under the market assessment discouraged property improvements in California since improvements could lead to higher assessed values (William & Alberro, 2008).
The demand for split-roll tax law provided certainty for taxpayers and policy makers to effect the tax rates for the assessed value of property. Under this law, not all properties on the assessment roll were treated equally. Property taxes were imposed without distinguishing property used as a principal residence or an apartment building rented for tenants or used for commercial and industrial purposes. The amendment of proposition 13 on limiting local property taxes resulted to several impacts that both positively and negatively influenced development.
First, homeowners remained the largest beneficiaries of proposition 13’s property tax assessment protections. The property tax has not shifted from businesses to homeowners due to proposition 13.Since its passage; the assessed value for all homeowner-occupied property has grown to an average of 7.79 percent per year while that of investor-owned property has increased an average of 7.53 percent per year. This has encouraged new constructions (William & Alberro, 2008)
Second, there were increased economic incentives to develop land. By increasing the carrying cost of underdeveloped land, the higher property taxes adopted from split-roll speeded up the rate at which such land was developed. The split roll law made it more expensive to hold undeveloped land as open space, therefore, encouraging the landowners to develop their property.
Third, it resulted to increased rents. Increase in property taxes shifted to renters. Most low-income earners were the most affected since they were more likely to occupy rental housing. Notably, only 2 percent of homeowners receive food stamps as compared to 12.5 percent of renters, who receive the subsidy. Moreover, increased rents left tenants with less money to spend on other goods and services thus reduced the amount that could be contributed to the expenditure stream for development. Split roll reduced the after-tax returns from investment and brought a reduction in the volume for investments in business firms and rental housing. Less investment resulted to fewer jobs as people migrated in search for better opportunities outside California.
Finally, proposition 13 assessment limits resulted to increased local government bias in favor of commercial development. Under the split roll property tax system, local government had a fiscal incentive to make land available through zoning for higher revenue uses in order to generate additional sales tax revenue (William & Alberro, 2008).
William, G. & Alberro, J. (2008).The Economic effects of California adopting a Split Roll Property Tax: Departments of Labor and Housing and Urban Development.