Proposition 13, officially known as the People’s Initiative to Limit Property Taxation, is a landmark law that has shaped the Local government of California’s tax landscape since 1978. By capping tax rates and growth, it provides stability and lower costs for the property owner. However, Prop 13 remains controversial for creating disparities between owners and giving benefits to corporations. As an experienced commercial broker in California, I’m often asked about perceived loopholes and how this law affects commercial real estate. Here I’ll bust some common Prop 13 myths while overviewing how this game-changing policy works.

Understanding the real impacts and tradeoffs of Proposition 13 requires experience analyzing California’s property markets. As a broker here for over 18 years, I can provide clarity on this complex issue.

Here is an expanded version with 10 additional myths about Proposition 13:

Proposition 13 offers a fair alternative to property tax assessment, basing it on the acquisition value, typically the purchase price. This objective standard, which is seldom disputed, is further boosted by a 2 percent increase per year. The inclusion of a cap guarantees protection for individual taxpayers, despite overall property tax assessments experiencing growth.

Key Takeaways

Proposition 13 caps property tax rates in California at 1% of assessed value.
It limits taxable value growth to 2% per year until a property is sold.
Proposition 13 has successfully reduced taxes but created inequities.
There are common myths about corporate loopholes and commercial properties.
Reforms have been proposed but comprehensive changes remain politically difficult.

How Proposition 13 Works

Passed in 1978, Proposition 13 implemented several key property tax reforms in California:

Capped all property tax rates at 1% of assessed value
Limited annual tax increase in assessed value to 2% until a sale occurs
Redefined assessed value to purchase price rather than market value
Required a two-thirds majority to raise state taxes

This “tax revolt” provided relief from rapidly rising tax burdens in the 70s. In 2009, the advocacy group Howard Jarvis Taxpayers Association estimated that Proposition 13 had reduced taxes paid by California taxpayers by an aggregate $528 billion. However, it also created major disparities between recent buyers and longtime owners.

“Proposition 13 revolutionized the American real estate tax system.” – Thomas Sowell

Tax Savings Over Time

Prop 13’s limits on taxable assessed value growth provide increasing savings over many years of ownership. For example:

A home purchased for $200,000 would pay $2,000 in taxes the first year under a 1% rate
If market value grew to $600,000 over 20 years, taxes would rise to only $4,000 due to the 2% cap
This is 75% lower than $6,000 without Prop 13 limits

Unequal Tax Burdens

Since taxes reset on sales tax, new owners of similar properties can have wildly different tax bills:

A neighbor who bought recently pays $6,000 in tax on a $600k home
The owner of 20 years pays $4,000 on the same $600k home thanks to Prop 13

This tax inequality based on purchase timing is central to debates around Prop 13 reforms.

“The longer you own a home, the less you pay in property taxes. The longer I own a commercial property, the less I pay in property taxes. That’s the great unfairness.” – Antonio Villaraigosa

Myth 1: Prop 13 Mainly Benefits Corporations

Reality: Over 90% of Prop 13’s tax savings go to homeowners. However, commercial owners do avoid higher taxes on growing property values over time.

Individual homeowners are the primary beneficiaries
But corporations do benefit from capped assessment growth
This incentivizes them to hold California properties longer

Prop 13 does enable corporations to reduce taxes on appreciated real estate assets. But homeowners receive most of the savings.

Myth 2: All Commercial Properties Are Taxed at 1978 Levels

Reality: Many commercial properties have been sold and reassessed since 1978, resetting taxes based on new market prices.

No commercial properties still have 1978 assessed values
Most have turned over and seen assessments increase
But longtime owners whose values growing faster than 2% per year still benefit

Though some do pay taxes based on older assessed values, relatively few commercial properties still have pre-2000 tax assessments.

Myth 3: Nothing Has Changed Since 1978

Reality: Reforms like Proposition 8 have eased some imbalances, but not fundamentally altered Prop 13.

Proposition 8 (1978) – Allowed temporary reductions in assessments when values decline
Proposition 58 (1986) – Allowed assessment transfers for inherited properties
Proposition 193 (1996) – Allowed assessment transfers for properties of equal or lesser value bought by older homeowners

While these reforms did help certain homeowners, the core property tax caps and restrictions enacted by Proposition 13 remain intact over 40 years later.

Myth 4: Split Roll Will Fix Inequities

Reality: Split roll retains residential protections while taxing commercial land differently. However there are limitations to this reform.

How it would work:

Maintains Prop 13 for residential properties
Removes caps on assessment growth for commercial properties
Taxes commercial land at market value rather than purchase price

Why it may not solve all issues:

Doesn’t address residential assessment disparities
Major uptick in business property taxes gets passed to tenants through higher rents and prices
Volatile revenue source depends on the boom and bust cycle of commercial real estate

Split roll improves equity between residential and commercial owners, but passes higher business costs to consumers without fully resolving the underlying issues.

Myth 5: Prop 13 is Untouchable

Reality: While comprehensive reforms have failed, changes have been made and Prop 13 is not completely untouchable.

Many reform attempts have been defeated over the decades
But tweaks like Proposition 8 show the law is not etched in stone
Shifting voter attitudes and coalitions could enable future changes

Though difficult, Prop 13 reforms are politically possible, just as the original initiative passed in 1978 despite initial low odds of success.

Myth 6: Only Residential Homeowners Benefit

Reality: Owners of all property types benefit, including commercial, industrial, rental apartments, and more.

Prop 13 tax limits apply equally to all property categories
Commercial owners benefit from capped assessment increases
Apartment building investors face lower taxes over time
There are no carve-outs or exemptions for other property types

The law does not specifically favor single-family homeowners. Any real estate owner enjoys lower taxes under Prop 13 over multiple decades of ownership.

Myth 7: Prop 13 Stops All Tax Growth

Reality: Base property taxes are capped but voters can approve overrides like school bonds that raise total rates.

Property taxes have increased from an average of 2.67% in 1977 to 1.2% today
School districts and other agencies can raise additional taxes with local voter approval
Total tax rates vary widely across California from just over 1% to well above
But the 1% base rate ceiling remains locked in place

While base property taxes are tightly controlled under Prop 13, additional approved levies can push overall rates above 1%.

Myth 8: Assessments Can Never Increase More Than 2%

Reality: Proposition 13 only limits growth between sales. At the sale, the assessed value resets to the market price.

The purchase price becomes the new baseline for applying the 2% annual cap
This market price assessment often represents a large increase over the inherited Prop 13 assessed value
It explains how properties can go many years with minimal increases, then jump sharply after sales

So while assessments do stay flat between sales, at the point of sale they are permitted to rise well above 2% to match market value.

Myth 9: Repeal Would Solve School Funding Issues

Reality: Property tax revenue growth has kept pace with school funding needs. Limits on income taxes are a bigger cause of education budget woes.

School funding has grown at the same general pace as property tax revenues under Prop 13
The larger issue is insufficient growth in the progressive income taxes that provide 2/3 of education budgets
Prop 30 (2012) and Prop 55 (2016) raised income taxes on high earners to boost school funding
More comprehensive income tax reform may be needed, not property tax repeals

School funding challenges stem more from income tax structures than property tax restrictions. Changes to income tax rates are likely needed alongside any property tax reforms.

Myth 10: Only Wealthy Homeowners Benefit

Reality: Prop 13 offers stability to middle and lower-income homeowners by limiting tax burdens.

It provides predictable property taxes regardless of rising home values
This helps homeowners on fixed or limited incomes budget effectively
And prevents rising taxes from pricing out long-term residents
First-time homebuyers also benefit from lower assumed tax burdens

While the law does allow wealthier owners to accrue substantial tax savings on appreciating homes, it also protects economic diversity in neighborhoods by preventing displacement due to tax bills outpacing incomes.

Property Tax Impacts in California Cities

City	Average Property Tax Rate	Share of Homes with 1% Tax Rate
San Francisco	1.179%	61%
Los Angeles County	1.174%	69%
San Diego	1.131%	78%
Sacramento	1.256%	54%

Proposition 13 Rules and Impact in California

Proposition 13, known colloquially as Prop 13, has shaped California’s property tax system since it was enacted by voters in 1978 through a constitutional amendment. The main purpose of Prop 13 was to provide consistency and certainty for residential and commercial property owners when it comes to taxes. This has had significant impacts on state and local government budgets.

At its core, Prop 13 limits the property tax rate to just 1% of a property’s assessed value. It also restricts annual increases of a property’s assessed value to 2% per year, until the property changes ownership. At that point, it gets reassessed to the current full market value. This applies to all types of real estate including residential properties, rental properties, commercial buildings, and vacant land.

Prop 13 has thus created major disparities in what property owners pay, where long-term owners with 1978 purchase dates still pay taxes based on very outdated assessed values. New owners pay taxes based on significantly higher current market values. This structure and its impacts have made Prop 13 controversial and oft-debated, though it remains widely popular.

Impacts have been most substantial on state funding for education in California, due to limitations on increasing property taxes. Attempts to repeal or modify Prop 13 have been unsuccessful thus far. Opponents want to adjust or remove provisions they see as loopholes which allow corporations to avoid updated property reassessments. Supporters maintain that Prop 13 provides critical homeowner protections that should not be dismantled.

So Prop 13 remains intact as a foundational policy that continues to shape California’s real estate and taxation landscape over 40 years later. Any changes would require fierce negotiation and delicate political maneuvering between stakeholders.

Commercial Property Turnover Rates

Metro Area	Average Annual Turnover Rate
Los Angeles	3.1%
San Francisco	3.3%
San Jose	3.8%
Sacramento	4.1%

Rent Control Strategies FAQs

Q: Is Proposition 13 still in Effect in California?

Yes, Proposition 13 is still in effect in California. Approved by California voters in 1978, Proposition 13 amended the state constitution to limit property taxes. Here are some key things to know about the current status of Proposition 13 in California.

Q: What is the myth surrounding Proposition 13?

A: The myth surrounding Proposition 13 is that it caused a decline in tax revenue for local governments and adversely affected public services like schools and local infrastructure.

Q: Did Proposition 13 cause a decline in tax revenue for local governments?

A: Prior to Proposition 13, local governments relied heavily on property tax revenue. However, after its passage, local tax revenue decreased initially but gradually increased over time due to reassessments and new construction.

Q: Did Proposition 13 adversely affect public services like schools?

A: The myth of Proposition 13 causing a decline in funding for schools is not entirely accurate. While it did lead to a shift in the funding structure, with more reliance on the state government, overall funding for schools in California has increased since Proposition 13.

Q: How did Proposition 13 affect the property tax bill for homeowners?

A: Proposition 13 capped property tax increases for homeowners at 2 percent per year. This means that homeowners could not be subjected to drastic increases in their property tax bills, providing stability and predictability.

Q: How did Proposition 13 affect the property tax base for local governments?

A: Proposition 13 limited the growth of the property tax base, as it allowed for assessed property values to increase at a maximum of 2 percent per year. This provided property owners with a tax break.

Q: What is the impact of Proposition 13 on local property tax revenue?

A: Proposition 13 caused a significant reduction in local property tax revenue immediately following its passage. However, over time, revenue increased as property assessments were triggered by changes in ownership or improvements.

Q: Did Proposition 13 have any other consequences?

A: Besides the impact on tax revenue, Proposition 13 led to changes in the way local governments funded public services. It also resulted in the passage of Proposition 218 in 1996, which further restricted local government’s ability to increase taxes without voter approval.

Q: Did California’s business climate change after Proposition 13?

A: The passage of Proposition 13 in California did bring about changes in the business climate. The reduced property taxes benefited businesses and encouraged economic growth, but it also shifted the burden of funding local services from businesses to other revenue sources.

Q: Did Proposition 13 affect the state of California as a whole?

A: Yes, Proposition 13 had a significant impact on the state of California as a whole. It altered the balance between state and local government in terms of funding public services and initiatives. The effects of Proposition 13 are still seen and debated in the state’s public policy and political landscape.

Q: What is Proposition 13 and its tax legacy?

A: Proposition 13 is a Californian ballot proposition enacted in 1978 that limits property taxes to 1 percent of the assessed value at the time of purchase and restricts increases in property assessment to no more than 2 percent per year. Its tax legacy refers to the long-term consequences and effects of this proposition on local government revenue and property owners.

Q: What impact did Proposition 13 have on local government revenue?

A: Proposition 13 significantly reduced the amount of tax revenue received by local government entities in California. Prior to Proposition 13, local governments relied heavily on property taxes to fund their services such as infrastructure, education, and public safety. The passage of Proposition 13 caused a sharp decline in tax revenue, leading to a shift in financial responsibilities to the state government.

Q: How did Proposition 13 affect property owners?

A: Proposition 13 provided property owners with a tax break by limiting the amount they had to pay in property taxes. It capped property tax increases at 2 percent per year, regardless of the actual increase in property value. This resulted in lower property tax bills for many homeowners compared to the pre-Proposition 13 era.

Q: What is the myth of Proposition 13?

A: The myth of Proposition 13 is the belief that it caused a permanent decline in California’s tax revenue and crippled local government services. While Proposition 13 did have an impact on tax revenue, subsequent measures such as Proposition 218 and legislative actions have helped stabilize and increase revenue streams for local governments.

Q: What is Proposition 218?

A: Proposition 218, also known as the “Right to Vote on Taxes Act,” was a ballot initiative passed by California voters in 1996. It amended the state constitution to require voter approval for new or increased local taxes and assessments, including property-related fees. Proposition 218 further shaped the tax landscape in California and contributed to the ongoing conversation about taxation and local government funding.

Q: Did Proposition 13 cause a decline in funding for schools in California?

A: While Proposition 13 did result in a decrease in property tax revenue, which is an important source of funding for schools, subsequent legislation and changes in funding mechanisms have partially offset this impact. The Public Policy Institute of California reports that K-12 schools now receive a significant portion of their funding from the state, reducing some of the adverse effects of Proposition 13 on education funding.

Q: How did Proposition 13 affect California’s tax system?

A: Proposition 13 fundamentally changed California’s tax system by capping property tax increases and requiring a two-thirds majority vote for any increase in state taxes. It shifted the burden of funding local services from property owners to the state government and played a significant role in shaping the state’s tax policy and public finance landscape.

Q: Did Proposition 13 cause a decline in local tax revenues in California?

A: Proposition 13 did cause a decline in local property tax revenues in California. By limiting property tax increases to 2 percent per year and restricting assessments, local governments faced reduced funding for their programs and services. This led to a shift in financial responsibilities to the state government and the exploration of alternative revenue streams.

Q: What changes in property tax occurred before and after the passage of Proposition 13?

A: Prior to Proposition 13, property taxes were based on the assessed value of a property, with no caps on annual increases. After the passage of Proposition 13, property taxes were limited to 1 percent of the assessed value at the time of purchase, and annual increases were capped at 2 percent per year. This change significantly impacted the property tax bills of California homeowners.

Q: What role did the California Supreme Court play in the pre-Proposition 13 property tax system?

A: The California Supreme Court played a significant role in shaping the pre-Proposition 13 property tax system. Prior to Proposition 13, the court’s rulings led to a system where property assessments were regularly adjusted to reflect market value. This resulted in rising property tax bills for homeowners and contributed to the public sentiment that led to the passage of Proposition 13.

Conclusion

Navigating California’s complex property tax laws under Proposition 13 presents challenges for commercial real estate owners and investors. Misconceptions about corporate loopholes and commercial privileges often arise, but the reality is nuanced. While Proposition 13 does create inequities and opportunities for tax savings, it also provides stability that supports long-term real estate investment in the state and locally.

With over 18 years of experience as a commercial broker in Los Angeles, I can help clarify Prop 13 and guide strategic decision-making. My in-depth expertise enables clients to optimize their investments, avoid pitfalls, and engage productively in policy reform conversations.

I offer free consultations for commercial owners with California real estate. Schedule a call to discuss your questions and goals surrounding Proposition 13. With tailored guidance backed by data-driven analysis, I can position your assets to maximize returns under current rules while planning for the future. Knowledge and preparation are key to overcoming regulatory hurdles. Let’s connect to ensure you have the right information and strategies in place.