Cal-Tax Research Bulletin


Proposition 13: Love it or Hate it, its Roots Go Deep


California continues to face one of the most serious crises in the state's public finance history, and proposals are likely to surface in the Legislature or via the initiative process that would overhaul the way taxes are imposed on individuals, businesses and property owners, both residential and commercial. This research bulletin, the first in an occasional Cal-Tax series on public finance issues, examines California's property tax system. It highlights the strengths of acquisition-value assessments and projects the ramifications of possible changes to the system established by Proposition 13.

  • A property tax system based on acquisition value has a progressive impact on the tax structure, according to the California Policy Seminar.
  • Property tax assessments prior to Proposition 13 showed wider divergences than assessment disparities under the current acquisition-value system.
  • Alternatives to Proposition 13 have a variety of unwelcome effects, including substantial increases for low-income and elderly homeowners.
  • 92% of elderly property owners would be negatively impacted by suggested revenue-neutral changes in Proposition 13.
  • Proposed revenue-neutral changes in how property is assessed would result in tax increases of over 160 percent to 43 percent of Los Angeles County homeowners.
  • Proposition 13 revenue flow has been 2.9 times more stable than pre-Proposition 13 property tax collections.
  • The property tax has proven to be a stable revenue source for local governments, growing almost 10 percent per year between 1980 and 1992; even in 1992, a recession year, the annual increase was 7.9 percent.
  • A 2-to-1 rejection of Proposition 167 in November 1992 suggests one alternative to the current system, a split roll, finds little favor with voters.
  • Business properties already pay a proportionately higher share of the property tax than residences. Business properties are assessed at 75 percent of market value; the statewide assessment average -- including business properties -- is 55 percent.

Taxpayer Revolt

In 1966, after an assessors' scandal, the Legislature enacted a reform bill (AB 80) to keep assessments at a uniform percentage of market value. As a result, during the 1970s, when real estate values escalated rapidly, so did home assessments.

By 1978, with home ownership threatened by escalating property tax bills, the fate of Proposition 13 was sealed. The tax revolt was born, aided in part by the release of new assessments just prior to the election showing large increases in assessed value for many taxpayers.

On June 6, 1978, voters selected Proposition 13 over Proposition 8, an alternative proposal to lower and stabilize tax rates. The latter, placed on the ballot by the Legislature, had no control on rising assessments. It garnered 47 percent of the vote; Proposition 13 was approved by 65 percent.

Acquisition Value Provisions of Prop. 13

Section 2 of Article XIIIA of the California Constitution (enacted by Proposition 13) establishes an acquisition-value assessment system. It provides that property is to be assessed at its value when acquired through a change of ownership or by new construction. Thereafter, the taxable value of property may increase annually by no more than the rate of inflation or two percent, whichever is less.

There are certain exceptions: (A) market value, if lower than acquisition value, establishes value for tax purposes; (B) property transferred to a spouse, between parents and children, etc., is not reassessed; (C) certain other changes of ownership, added to Article XIIIA by voter approval in the years since 1978, do not trigger reassessment, and (D) property assessed by the State Board of Equalization, such as property of state-regulated utilities, is not subject to the acquisition value limitation. (See ITT World Communications v. City and County of San Francisco, 1985.)

Constitutional Validation

Almost immediately after passage, the California Supreme Court sustained Proposition 13's constitutionality in the Amador case (Amador Valley Joint Union High School District v. State Board of Equalization. September 22, 1978). After a series of legal challenges in the 1980s, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California's acquisition-value system.

The court ruled that an acquisition-value system does not violate the Equal Protection Clause of the U.S. Constitution because it "rationally" furthers a legitimate state interest. The court said, "The state legitimately can conclude that a new owner, at the point of purchasing his property, does not have the same reliance interest warranting protection against higher taxes as does an existing owner who is already saddled with his purchase and does not have the option of deciding not to buy his home if taxes become prohibitively high."

The court also opined that a state has a rational interest in neighborhood preservation, continuity and stability, and that Proposition 13's system of "locking in" lower tax assessments contributed to such preservation.

Acquisition Value Versus Assessed Value

Many other property tax systems link tax liability to market value. Property is equated to wealth and the ability to pay. Thus property taxes predicated on market value, the theory goes, should be equitable and affordable.

Inequity by market-value standards is the chief argument used by critics against Proposition 13. They point to inequities between side-by-side properties that receive similar government services but pay differing property taxes.

A recent study by the California Policy Seminar (CPS), a joint program of the University of California and the State of California, focused on the inequity argument. It found on average in Los Angeles County that properties with a 1975 base year were assessed at 19 percent of market value, while 1991 base-year properties were assessed at 100 percent, a five-to-one ratio of disparity. This was a key argument presented by those challenging Proposition 13 to the U.S. Supreme Court in the Nordlinger case.

Disparities in property tax systems are nothing new. In a 1966 report entitled "Problems of Property Tax Administration in California," the Assembly Committee on Revenue and Taxation was informed that equalization of assessments is "more a myth than a reality."

At the time of the study, California had a traditional ad valorem property tax system. County assessors periodically reassessed properties to market value, and aimed for a reasonably uniform assessment roll. The results, however, showed dramatic variances.

The data for assessment roll year 1965 demonstrated there were serious departures from the goal of uniform assessments. In San Francisco, for example, where the average countywide assessment ratio (assessed value to full value) was 18.6 percent, one industrial property of a sample of 42 properties was assessed at 4.6 percent of full value, while another was valued at 114 percent.

Sparsely populated Trinity County showed even wider disparities. In a sample compiled from records of the State Board of Equalization, one vacant residential lot was assessed at 3.8 percent of full value, while certain timber land was valued at 212 percent. Countywide, the average assessment ratio was 19.9 percent.

The county with the best record for uniform assessment, Contra Costa, had only 24.4 percent of the properties sampled within a 15 percent tolerance zone. The worst performance was turned in by San Francisco County, where 89.2 percent of sampled properties fell outside a 15 percent tolerance range. Indeed, in that county, almost 42 percent of sampled properties were more than 50 percent above or below the county average assessment ratio.

Even after enactment of the reforms in AB 80, uniform assessment remained elusive. According to a BOE study, Sierra County in 1977 had five times more variance in assessments than did Marin, the most uniform of all the counties.

From these data it is obvious that property tax disparities pre-Proposition 13 were at least as flagrant as in the examples in the arguments on behalf of Stephanie Nordlinger, a Los Angeles County resident whose suit against Assessor Kenneth Hahn reached the U.S. Supreme Court. Indeed, the 1965 San Francisco sample showed wider divergences than has occurred in Los Angeles County assessments since 1975. According to he CPS report, fully 18 percent of all Los Angeles County properties had disparity ratios (market value to assessed value) of less than 1.27, and another 43 percent (those with a 1975 base year) had the exact same tax rate.

In Defense of Acquisition Value

Proposition 13 supporters point out other reasons for defending the acquisition-value approach. Wallace F. Smith, a professor of business administration at the University of California at Berkeley, has concluded: "California homebuyers probably pay no real tax penalty under Proposition 13 because the differential assessments are capitalized into the purchase price." In other words, taxes reduce the purchase price that wold otherwise be paid, which tends to reduce resale value; hence no tax penalty.

Others argue that as real estate values gradually drop or grow, the disparities between 1975 base-year properties and newer properties lessen. For instance, a high percentage of properties purchased since 1989 have received reduced assessments reflecting today's declining real estate market. Thus, the disparity between these more recently purchased properties and properties held since the late 70s and early 80s has declined accordingly.

Average Change in Tax Liability for Different Income Groups
Table 1

(Assumes assessments are raised to market value and tax rate is reduced so the net change is revenue neutral. Shaded areas signify tax decreases.)
Average Change in Tax Liability

Personal Income Alameda Los
$0 - $10,000 $268 $179 $65 $335
$10,000 - $20,000 304 206 79 386
$20,000 - $30,000 213 138 38 294
$30,000 - $40,000 95 57 -3 164
$40,000 - $50,000 5 0 -25 62
$50,000 - $60,000 -47 -22 -35 6
$60,000 - $70,000 -105 -49 -47 -50
$70,000 - $80,000 -162 -69 -60 -105
$80,000 - $100,000 -233 -109 -56 -202
More than $100,000 -366 -335 -61 -530

Source: "The Future of Proposition 13 in California," California Policy Seminar, March 1993, University of California.

Progressivity of Proposition 13

One measure of tax equity is ability to pay. Taxes are deemed more equitable, by this measure, if those who can afford more pay more. Under this standard, acquisition-value assessments appear to provide property tax equity. According to the CPS study, the acquisition-value system has a progressive impact on the tax structure. Low- and middle-income taxpayers, on average, pay less than they would under a market-value system and higher-income taxpayers pay more, according to CPS findings.

The CPS report concludes: "A revenue-neutral reform of Proposition 13 would have unwelcome distributional effects. Using a match of property tax rolls and income tax returns, we were able to analyze the effects of alternative changes in the property tax system on homeowners. Consider the following experiment for Los Angeles County. Raise all assessments to true market value but lower the property tax rate to raise the identical amount of total revenue. We estimate that this policy would adversely affect elderly and low-income households. In fact, according to our calculations, 92 percent of the elderly would lose under this revenue-neutral reform.

"Under the hypothetical revenue-neutral tax change described for Los Angeles County, the 43 percent of households with 1975 base years would find their property tax bills increasing by over 160 percent!"

Table 1, developed from the CPS study, illustrates the progressivity of the acquisition value assessments.

Property Tax Levies
(Dollars in thousands)
Table 2

Tax Levies
1980-81 $6,360,276 ---
1981-82 7,185,005 13.0%
1982-83 8,007,037 11.4%
1983-84 8,634,771 7.8%
1984-85 9,437,483 9.3%
1985-86 10,274,050 8.9%
1986-87 11,125,581 8.3%
1987-88 12,203,844 9.7%
1988-89 13,307,539 9.0%
1989-90 14,720,218 10.6%
1990-91 16,398,256 11.4%
1991-92 17,687,106 7.9%

Average Annual Growth 9.8%

Source: Board of Equalization,
Annual Reports.

Stability in Revenue Flows

Acquisition-value assessments provide substantially greater predictability and certainty of revenue flow to local agencies, with property tax revenues growing at a steadier clip than any other revenue source. Since the adoption of Proposition 13, property tax revenues have grown at a rate averaging approximately 10 percent compounded annually from 1980-81 through 1991-92 (See Table 2).

High volatility in tax systems leads to a lack of predictability and certainty of revenue for governmental agencies for planning, budgeting and management purposes. A Cal-Tax study based on reports published by the Board of Equalization shows that property tax revenue under the pre-Proposition 13 market-value tax system was 2.9 times more volatile than the acquisition-value tax system under Proposition 13. By comparison, the California income tax system is 5.8 times more volatile (See Figure 1).

Recently, California has been in an economic cycle that has reduced the value of residential property, and the impact has been dramatic in some regions. Yet, despite reductions in some assessments of more than 30 percent for recently acquired properties, the acquisition-based valuation system continues to produce modest increases in overall property tax revenue to these jurisdictions. In 1992, a recession year, property tax revenue growth was 7.9 percent. By comparison, if lawmakers had not increased tax rates in 1991, state sales tax collections would have fallen off some 3%, and personal income tax revenues would have been down about 6% during the same period.

Volatility of Major Taxes
Compared to Acquisition-Value Property Tax
Figure 1
Source: California Taxpayers' Association. Volatility measured as standard deviation of percent change in annual collections over 11 years before and after enactment of Proposition 13.
Acquisition-value assessments have worked in the nature of a reservoir by keeping a reserve of value that will accrue to local entities each year. The unrealized market value that is taxed when properties change hands ensures stable revenue flows. Even with falling real estate values in recent years, property tax growth has held up because of this reserve value. If California had used a market-value property tax system during this time of reduced property values, the results would have been drastic reductions in revenues to local jurisdictions.

Objective Standard of Measurement

Proposition 13 introduced an objective standard upon which property is taxed. For most properties, the purchase price is the value placed on the roll, and this value is changed by no more than two percent per year until there is a change in ownership and another purchase price.

Under a market-value system, the assessor's opinion of value is the basis of assessment. The State Board of Equalization admitted prior to Proposition 13 that "no assessor, even one given unlimited resources, could produce an assessment roll in which the appraisal of property was strictly current and precisely accurate in all respects."

The subjective standard of the market value system led to assessment abuses in the 1960s and 1970s as assessors had enormous latitude to determine levels of taxation. Several assessors were sent to jail during this period.

Acquisition value removes subjective judgment and discretion, and reduces the chances of corruption.

Predictability for Taxpayers

One of the major arguments used by the campaign in support of Proposition 13 in 1978 was that it would give taxpayers predictable property taxes. This argument was also well received by the court in Nordlinger v. Hahn and in earlier cases dealing with the issue of acquisition-value assessment.

In general, the predictability argument for taxpayers is as follows: Taxpayers are protected under an acquisition-value assessment system with the certainty that the property tax burden will grow no faster than two percent per year. Thus property owners can know precisely how much the property tax liability will be at the time of purchase and at any time in the future.

This contrasts dramatically to a market-value ad valorem system where taxpayers can be taxed on the paper gain in the value of property. Prior to Proposition 13, this had the impact of doubling and quadrupling the property tax burden of homeowners very quickly due to unrealized appreciation in the value of their property.

Pressures to Change

The advantages of Proposition 13's acquisition-value approach notwithstanding, pressures to change the system abound. In 1991, the California Tax Reform Association and the New California Alliance, funded mainly by public employee unions, published "Taxation with Representation: A Citizen's Guide to Reforming Proposition 13," in which it was argued "California's public sector is stalemated by Proposition 13's structural and ideological legacy."

The same year, the Senate Commission on Property Tax Equity and Revenue (Senate Resolution 42 Commission) concluded that "on balance, a market valuation system is more reasonable than an acquisition system."

Common to these works and others appearing in the last few years are four proposals on how Proposition 13 might be changed. These are:

Equalize up

Equalizing up would bring all properties to market-value ad valorem assessments. This would have the effect of raising taxes substantially for many homeowners with 1975 base-year values and those who have transferred property or constructed properties since that time and who benefited from inflation protection provided in Proposition 13. Equalizing up would provide several billion dollars of additional revenue to local agencies.

A change in Proposition 13 which would raise taxes dramatically on high-propensity older voters would likely be politically difficult. Such a plan would threaten homeowner voters with the prospect of tremendous increases in property taxes that could push them out of their homes. It would also tend to reduce resale values.

Equalize down

A change in the opposite direction would involve equalizing all properties downward to achieve equity. Most often this is discussed in terms of establishing 1975 base-year values for properties which existed at that time and indexing values for properties constructed since then.

Equalizing down would substantially reduce revenue to local agencies. This would amount to several billion dollars per year in revenue reduction. While this could initially sound enticing to some, the resulting impacts on public services would be devastating for most communities. It is also unlikely that Californians would vote for a plan which would so undercut local services, even though resale values would increase.

Equalize up and reduce the rate

A third approach would combine equalization upward -- bringing properties up to market value -- with a rate reduction to ensure revenue neutrality and avoid revenue windfalls to local agencies.

This third approach has received a good deal of attention and focus over the past several years. The objective of equalizing property assessments without producing substantial additional revenue for local agencies sounds reasonable. However, the problem with this approach is that it would result in major tax increases for low-income and elderly property owners, despite a rate reduction.

As was noted earlier, 92 percent of the elderly would pay more property tax under such a plan, and in Los Angeles County, 43 percent of households would pay 160 percent higher property taxes.

The major drawback in each of these three approaches is that taxpayers would again be placed at risk for large future tax increases if property values increased. Further, the purchase price would no longer serve as an objective standard of assessment and once again, a subjective standard -- the assessor's opinion -- would be used for determining property assessments. Finally, the change-of-ownership cushion that keeps the assessment roll and property tax revenues growing during economic cycles would be lost.

Split Roll

A fourth alternative is to impose a split-roll property tax in which business would pay property taxes at a rate higher than that imposed on residential properties. Essentially, higher business taxes would allow equalization downward for homeowner property taxes.

At least three recent studies have recommended a split roll. The most recent is the California Policy Seminar (CPS) study, published in 1993. Two years earlier, the Senate Resolution 42 Study Commission and the California Tax Reform Association recommended a split roll. A 1985 preliminary report from Governor George Deukmejian's Tax Reform Advisory Commission referenced the split-roll approach, although this recommendation was not incorporated in the commission's final report.

Several split-roll proposals have surfaced since Proposition 13; none has been successful. The most recent effort to be rejected -- by a 2 to 1 vote -- was contained in Proposition 167 in November 1992.

Arguments Against the Split Roll

The arguments against adopting a split roll center around the points that business already pays its fair share of property taxes, and that California needs to become more competitive:

Income-producing or business property pays approximately two-thirds of the property tax, just as it did prior to enactment of Proposition 13. The initiative has not resulted in a tax burden shift to homeowners.

According to the State Board of Equalization, business properties are assessed at 74.93 percent of market value. The ratio of assessed value to market value for other property is much lower, according to the CPS study. (The statewide average, including business properties, is 55 percent.)

The massive tax increase on business from a split roll would either be passed on to consumers (in a regressive fashion) or make California business less competitive, resulting in job losses as some businesses move to other states. In 1992, a somewhat limited split roll measure contained in Proposition 167 was estimated as a potential $1 billion to $2 billion property tax increase on California businesses. More far-reaching proposals, which would increase all business property assessments to market value, would increase taxes many times that amount. Small businesses, including many that are struggling to survive, would be particularly hard hit.


Difficult political realities surround any proposal to change the acquisition-based assessment system. Problems with equalizing up, equalizing down and equalizing up with a rate reduction have been evident for some time.

Even though a split roll has been recommended by some studies, it too would be inequitable and very difficult to achieve politically. Public opinion surveys associated with 1992 statewide ballot measures showed voter attitude against a split roll. As a result of the campaign against Proposition 167, the public has a better understanding of the economic implications of a split roll on consumers, workers and stockholders.

Finally, if California did not have an acquisition-value standard for assessing property, it would have to consider creating one. An acquisition-value standard has advantages for taxpayers and for government. This system is more equitable as it links tax liability to ability to pay more directly than a market-value system. It is also more predictable for taxpayers, removes much of the problem of subjective assessments, and protects homeowners against prohibitive property tax increases during periods of rising values.

For businesses, most find the predictability of Proposition 13 one of the few bright spots in California's often-burdensome climate of taxation and regulation. For government, acquisition value has created a stable and fast-growing revenue source, with a reserve of value to cushion revenue downturns in economic bad times.

© Copyright 1993, California Taxpayers' Association

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