A recent article in the Wall Street Journal should dispel all doubts as to why Prop. 13 is so important to California homeowners. The article, entitled, “Americans have amassed $35 trillion of wealth in their homes, yet many feel less well off because of it,” presents a sobering view of what is happening in most other states.
The extensive piece, written by Veronica Dagher and Anne Tergesen, addresses how home ownership can be a two-edged sword. First, the good news. Home equity, nationally, has increased 80% since 2020 due to rapid increases in home values. This approximately $19 trillion in new wealth adds to the personal balance sheets of Americans lucky enough to own homes. As of 2024, this rate of increase was about twice the rise in financial wealth from other investments including stocks and bonds.
But the bad news is that as home values rise, so can the cost of homeownership, especially in the form of higher property taxes. The WSJ article notes other negatives as well: “Lots of equity can bring down college financial aid for families. And cashing in on the wealth is difficult: High interest rates and prices have held back home sales – and the prospect of big capital gains tax bills is spurring some to hold on to the homes.”
But the fear among homeowners that the market value of their homes will drive property taxes is muted in California because of Proposition 13. In addition to limiting the maximum tax rate to 1%, Prop. 13 also limits the annual increase in taxable value to 2%. Moreover, because property is reassessed to market value when it changes hands or there is new construction, property tax revenues generated for local governments have increased faster than inflation and population. (California ranks 18th out of fifty states in per capita property tax collections, negating the myth that Prop. 13 has somehow “starved” local governments and schools).
The simple beauty of Prop. 13 is that it decouples tax liability from the vagaries of the real estate market – something over which homeowners have absolutely no control. Instead, the amount of property tax liability depends almost exclusively on the voluntary act of purchase, something they do control. This is especially helpful for first-time homebuyers, because it provides certainty to homeowners as to what their tax bills will be in all future years. Few things would be as tragic as a young family forced out of their first home in a few years because of excessive property taxes.
Even if critics of Prop. 13 concede that it provides tax certainty, many still assert that the system is flawed because owners of similar properties may be paying different tax amounts. Berkeley progressives who raise this objection never suggest lowering the higher property taxes. Their idea is to raise the lower property taxes, regardless of a homeowner’s income or ability to pay. In any case, it should be no concern whatsoever to a new resident what the neighbor’s tax is as long as his or her own tax is reasonable. The absolute cap of 1% imposed by Proposition 13 makes everyone’s tax reasonable, and much lower than it would have been without Prop. 13.
Interestingly, the same certainty that Prop. 13 gives to homeowners also provides a benefit to local governments by stabilizing the revenue stream from property taxes. Indeed, it is this feature of Proposition 13 that has saved California from economic meltdown during recessions, especially during the 2008 housing crisis.
Assuming a state decides to retain a property tax at all – and some states are planning full repeals – a system like Prop. 13 provides stability to both property owners and government. And as the Journal piece demonstrates, it also protects home equity against excessive taxation. And that might be the best benefit of all.
Jon Coupal is.