Circumventing California’s Proposition 13 for the
Public Collection of Rent
Santa Clara University
Conference of the Eastern Economic Association
Sessions on property tax reform
and land-value taxation
February 23, 2006
California’s Proposition 13, June 1978,
limits the real property tax
to one percent of the purchase price,
and limits the annual increase to two percent until the title is transferred.
Local governments have circumvented
the limitations to extract revenue
from real estate.
The proposition has centralized government, increased the complexity of its public finances, exacerbated inequalities,
and ultimately failed to fully constrain
using real estate for public revenue.
Benefit to new buyer reduced by capitalization.
Proposition 13 did not confront
the public choice incentives
of voters or politicians.
Only a restructuring of voting and governance can shift the incentives created by the structure.
Proposition 13 requires new state taxes
to obtain a two-thirds majority in the legislature.
New local taxes need a two-thirds approval.
Proposition 88, November 2006.
Classroom Learning and Accountability Act sought to levy a parcel tax of $50
on most parcels of land.
Failed, 23% yes, 77% no.
Local property taxes
that circumvent Proposition 13
California's local governments (1991):
58 counties, 466 cities, 1005 school districts,
81 transportation agencies,
381 community redevelopment agencies,
4995 special districts.
1) Developers' exactions or "impact fees"
Financing of new infrastructure by developers.
Can be money, land, infrastructure, or services.
Does not need voter approval.
A relationship between benefit and charge.
"Exactions are simply taxes on development."
Cannot be ad valorem.
Can be based on the square footage,
or else lump-sum.
California has the greatest use of exactions.
$20,000 to $30,000 per dwelling.
Creates additional risk, can deter development.
2) Tax increment financing
Does not require approval of voters.
Government creates a redevelopment agency.
Agency declares some area to be “blighted”
Development increases site values.
The tax increment is shared
by the agency and local governments.
Shoup: parking increment finance district.
3) User and Property-related "Fees"
Levied as incidental to property ownership.
E.g. garbage collection, sewage.
New and increased fees require voter approval
if related to the property.
Fees based on usage are not restricted.
4) Civic partnerships
Governments partners with private enterprise.
To develop shopping centers, sports stadiums.
The city provides the infrastructure
and relaxation of zoning or tax abatements.
5) Certificates of Participation (COP)
Issued by nonprofit established by government. Bonds from nonprofits don’t need approval.
Finances infrastructure or other capital goods.
Government rents facility from the organization. Holders of bonds receive shares of revenues.
The Mello-Roos Community Facilities Act
Gives local governments the authority to finance infrastructure or services in a designated "community facilities district."
Either two-thirds of the residents
or owners of two-thirds of the land area
can vote to levy special taxes
and issue tax-exempt bonds,
which become a lien against the real estate.
Homeowners are responsible for the payment of the debt.
Mello-Roos has been widely used
in areas of new and existing development
to provide services to communities.
7) Parcel taxes
Levied on the size of property,
either of the lot or
the square footage of improvements.
Revenue can be used for any purpose.
Many local parcel taxes have been levied.
8) Assessment districts
The purpose of a tax is for general revenue;
the purpose of an assessment
is to finance specific benefits,
the levy proportional to the assessment.
An assessment also differs from
an imposed "fee,"
which is charged for the use of a commodity such as water,
or to offset government burdens
such as in property development.
New benefit assessments
cannot be based on property value.
Each assessment district has a benefit formula
in which each parcel in the service area
is assessed according to the specific benefit
it receives from the services and improvements.
New assessments require approval
by the majority of the property owners
in proportion to the assessment liability.
Assessment districts finance benefits
such as landscape development,
street lighting, flood control, and sewage maintenance.
Special assessment districts are units of local government that manage specific resources within defined boundaries.
9) Business Improvement Districts
BIDs establish a partnership among property owners and businesses in commercial areas to improve the business environment.
In some districts, tenants are responsible for paying the assessments.
Otherwise, landlords may pass the assessment to the tenants' rentals.
Assessments are levied on businesses on the basis of relative benefit from the improvements and activities to be funded.
They can be based on the amounts of license fees, gross revenues, or gross payrolls.
10) Real Estate Transfer Taxes
and documentary Transfer Tax
Also known as a real property transfer tax,
Local levy on the sale of real estate.
By California law, the tax is computed at
55 cents for each $500 of consideration
or fraction thereof, hence a rate of .11 percent.
A city may also adopt its own transfer tax ordinance with the tax amount fixed at one-half the rate charged by the county.
Proposition 13 prohibits new and additions to the transfer tax, but left the existing ones intact.
As an example, the City of Berkeley
has a city transfer tax of 1.5 percent,
in addition to the Alameda County
rate of .11 percent,
for a total rate of 1.61 percent
11) Hotel taxes (transient occupancy taxes)
The hotel or transient occupancy tax
can be considered real-estate related,
as a tax on the rental of a hotel room,
the incidence falling mostly on nonresidents.
As examples, the hotel tax rate is
14 percent in San Francisco and Los Angeles,
11 percent in Oakland,
12 percent in Berkeley.
12) Homeowner associations
Sixty percent of new residential construction
in California includes homeowner associations.
They own facilities such as landscaping, parking, security, recreation,
and in some cases streets and a transit service.
There are three million California homes,
one fourth of the state's housing stock,
in the state's 36,000 residential associations.
Such associations include condominiums and housing cooperatives.
Although such common interest developments
substitute their own public works
for those provided by government,
association assessments are not tax deductible as are property taxes,
and local governments in California
do not provide a tax rebate
for the reduced governmental expenses.
A greater use of private-sector civic associations
is another way to tap property values
to finance local public goods.
Total homeowner association revenues in California were $6.3 billion in 2003.
As private-sector entities,
community associations have no legal limitation on their assessments or services
or methods of assessments.
They can have ad valorem assessments
that in effect tap the site rentals
generated by the community services.
They can implement what Proposition 13 forbids to local governments.
The median monthly assessment
in common interest developments in California was $112 in 2002, or $1344 per year.
The median for condominiums and cooperatives was $186 per month or $2232 per year.
Case study, in the City of Berkeley
A typical house in Berkeley can serve as an example of the charges.
The property was purchased in 1979.
The land is valued by the country at $120,630;
the improvements at $26,975,
for a total of $147,605.
The homeowners exemption of $7000
is subtracted from the total
for a tax base of $140605.
The bill for 2006-2007 includes the following ad valorem charges:
Taxing agency Tax rate Tax amount
County 1.0000 $1406.05
Berkeley debt 0.0525 $ 73.81
School District 0.1352 $ 190.10
College District 0.0272 $ 38.24
Rapid Transit 0.0050 $ 7.03
Regional Park 0.0085 $ 11.95
EBMUD 0.0068 $ 9.56
total 1.2352 $ 1736.74
Landscaping & parks $186.28 parcel tax
Library services $257.18 parcel tax
Berkeley School Tax $230.58 parcel tax
School maintenance $ 92.34 parcel tax
School 2004 $176.64 parcel tax
AC Transit $ 48.00 parcel tax
Physically Disabled $ 18.58 parcel tax
Paramedic $ 49.66 parcel tax
City Street Lighting $ 19.28 assessment
City refuse collection $541.68 fee
Mosquito abatement $ 1.74 unit tax
CSA Paramedic $ 24.96 assessment
CSA lead abatement $ 10.00 assessment
CSA Vector control $ 5.92
CFD1 Disaster Fire $ 22.34 Mello Roos
EBMUD Wetweather $ 58.80 unit fee
EBRP Park Safety $ 12.00 excise tax
Clean Storm Water $ 31.26 lot footage
The total tax divided by the assessed tax value
is $3529.42/$140605 = 2.51 percent.
The market value of the property is about $750,000, thus $3529.42/$750000 = .47%.
The tax rate relative to market value
is about one-half percent.
The rolled-back base is $81,488 (1975-76).
($147605 divided by 1.02^30).
A new owner would pay the tax of
1.2352 percent of $750,000, or $9264
plus the fixed and special charges of $1792.68 for a total of $11056.68,
effectively 1.47 percent of market value.
Estimating the building value at $100,000 and the land at $650,000, the tax rate
based on site value would be about 1.7 percent.
Proposition 13 has increased the complexity and the inequalities of property taxes.
Much of the impact of slashed rates is nullified for new real-estate investments.
It would have been much simpler and less costly
to exempt buildings and other improvements from the property tax
and simply levy a charge
based on the current market value of land.
Given the opposition to a repeal of Prop. 13, there is another way to restore
the relative simplicity and effectiveness
of ad valorem payments
and even land-value-based payments.
A greater use of homeowner associations,
and the conversion of existing neighborhoods
to community associations
(as practiced in St. Louis)
would also shift the financing of the public goods from government to the associations.
The privatization of civic works
could be the most feasible way
to simplify the public finances of California
while shifting from taxes with excess burdens
to efficient benefit-based assessments.