By Sam Brunson
I grew up in the north suburbs of San Diego and, while I haven’t lived in Southern California in a couple decades now, I try to keep a vestigial self-identification as a Southern Californian.[fn1] Part of that self-identification is listening to the Voice of San Diego podcast; it keeps me vaguely up-to-date on current politics in San Diego.
Today, as I was walking to the pet store, I turned on the most recent episode. On that episode, the regular hosts were joined by Liam Dillon, now a reporter for the LA Times. And they mentioned a story he’d recently written, about the inheritance of property tax rates in California.
I recently wrote an article about inheritance taxes, and Fred Trump’s evasion of transfer taxes was recently (and briefly) in the news. So this idea of an inherited tax rate that benefits the tremendously wealthy (more on that in a minute), possibly at the extent of the poor and the middle class, caught my ear, and immediately when I got home, I found the story.
And you really need to read the story (here, in case you missed it above). But here’s a quick summary of what’s going on:
In 1978, Californians enacted Proposition 13 as part of its 1970s tax revolt. Prop. 13 did two things: it limited property tax to 1% of the assessed value of real property,[fn2] and it prevented the reassessment of property value, except for when the property changed hands or when the owner completed new construction. The property tax could go up with inflation, but its increase couldn’t exceed 2% per year. The underlying idea, to the extent there was one, was that home values were increasing faster than inflation, and annual reassessments made homeowners’ property tax rise faster than their incomes.
Eight years later, California voters approved Proposition 58. While I was familiar with Prop. 13, I’d never heard of Prop. 58. But Prop. 58 turns out to magnify the effects of Prop. 13: it excludes transfers between parents and children from reassessment. Effectively, it allows homeowners’ children to inherit their property tax assessment. (The Times story doesn’t mention Proposition 193, enacted a decade later, but Prop. 193 excludes transfers between grandparents and grandchildren from reassessment as long as the parent of the grandchildren/child of the grandparents is dead at the time of transfer.)
The Times story illustrates the consequences through Jeff Bridges and his siblings, who inherited Malibu beachfront property from his parents, who had acquired it in the 1950s. Today he and his siblings rent it out for about $16,000 a month (a month!), Meanwhile, because of Prop. 58, they pay less than $6,000 per year in property taxes on a property estimated to be worth $6.8 million.
That strikes me as an extreme example (though the Times provides several extreme examples), so I thought I’d try to illustrate it with a more-modest example. In 1980, my parents bought a 4-bedroom, ~2,000-square-foot home in San Diego county. My public record search didn’t come up with what they paid for it, but in 1989, they sold it for $255,000. Per Redfin, it sold again in 2015 for $655,500.
So what are the property tax consequences? It depends on the buyer. If it was sold to a third party, their 2016 property tax bill would have been about $6,550 (ignoring any local San Diego County assessments). If they sold it to their children, though, their children would have inherited their property tax assessment, which was $255,000 plus up to 2% per year. Based on my rough calculation, the 2016 assessment would have been about $435,300, for a tax assessment of $4,353. Because there was no reassessment, selling the property to the owners’ children would result in their paying more than $2,000 a year less in property tax than selling it to a third party.
This has serious detrimental effects. Among other things, while the original projection was that Prop. 58 would reduce state revenue by $137 million (in 2018 dollars) a year, today, it costs the state somewhere in the range of $1.4 billion a year. And maybe the state wants to provide a tax cut to residents, but this is a tax cut of the least fair type. It’s a tax cut for people whose parents bough property a long time ago. It entrenches current owners, to the exclusion of new residents. It forces California to collect more taxes from other taxpayers to make up for the lost revenue.
And it’s just unfair. Under Prop. 13, neighbors with almost identical homes may pay wildly different amounts of property tax, based on when they acquired the property. But with Prop. 58, neighbors with almost identical homes may pay wildly different amounts of property tax even if they bought their houses on the same day. It means the person you acquire your home from helps determine the amount of property tax you pay.
In other words, it subsidizes the concentration of wealth in the hands of families. Now, while I find that concentration troublesome, there are legitimate arguments for allowing individuals to pass money on to their children. But it’s hard to think of an argument for why the government should subsidize that concentration.
Which makes California’s property tax regime deeply troubling.
[fn1] Effectively that means that I’m a Cubs fan except when they play the Padres.
[fn2] It’s apparently a little more complicated than that—the 1% is at the state level, but local governments can add on to that to service their bonds, as long as they get sufficient voters to vote in favor of the additional assessment. But that’s not super-important for purposes of this post.