Circumventing California’s Proposition 13 for the

Public Collection of Rent


Fred Foldvary


Santa Clara University

[email protected]


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.

6) Mello-Roos


The Mello-Roos Community Facilities Act

of 1982.


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.