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August 6, 2008
The Evolution of Proposition 13
by David R. Doerr

Full Text Published by Tax Analysts®

Document originally published in State Tax Notes
on August 4, 2008.

This article is derived from a paper presented at the University of California, Berkeley, conference "Proposition 13 at 30: The Political and Fiscal Impacts," held on June 6. The university will be publishing the papers in a book.

For the appendix, contact the author.

* * * *

No one looks the same as they did 30 years ago. Neither does Proposition 13. It has evolved as a result of changes made by voters and through interpretation by the California Legislature, the State Board of Equalization, and the courts. Most of the provisions of the proposition have changed to some degree, but the core elements -- a general 1 percent tax rate limit and an acquisition value assessment system for local real property -- remain basically the same.

This report will focus on the changes in the allocation of property tax revenue, the changes in the definitions of change of ownership and new construction, the evolution of a fiscal tool stabilizing property tax revenue, and whether Proposition 13 has caused any shift in tax burden over time. But first, a brief look at the property tax before June 6, 1978, when voters passed Proposition 13.

The Property Tax Before Proposition 13

In reviewing the evolution of Proposition 13, it is instructive to look at the ad valorem property tax system that existed before the passage of the initiative. It is not a pretty picture. The property tax was a major political issue from 1965 to 1978. Ronald Reagan made property tax reform one of the central issues in his campaign for governor. Some of the problems with the property tax system that existed then:
    • Favoritism and Corruption. From 1965 to 1978, two assessors from major counties were sent to prison, one major county assessor under investigation committed suicide, and another assessor from a major county resigned under investigation and was not indicted. What helped favoritism flourish was that property was assessed subjectively, on an opinion of value. Proposition 13 ushered in a more objective standard, with local real property generally assessed on sales price.
    • Assessment Inequities. During that period, the Assembly Revenue and Taxation Committee periodically obtained the result of BOE samplings of individual local assessments in various counties by the BOE, as part of the board's intercounty equalization responsibility. Those samples showed properties being assessed at from 2 percent to 200 percent of value. Coefficients of dispersion, a way of measuring assessment uniformity, ranged from 7 percent to 37 percent in the three years before 1978. If all properties were assessed uniformly, the coefficient of dispersion would be zero. Only one county, Marin, had a coefficient of dispersion below 10. In San Francisco, it was 21.
    • Assessment Levels Well Below Statutory Requirements. Before the passage of Proposition 13, state law required property to be assessed at 25 percent of value. That practice was to fool most of the voters, who were unaware of the legal requirement, into thinking they were getting a good deal. But, the BOE found actual assessed values well below the 25 percent level. In 1977 the average statewide assessment ratio was 23 percent (which would be 92 percent on a full value basis). Now, under the acquisition value assessment system, the board is finding most assessors to be assessing between 98 percent and 100 percent of statutory value. San Francisco still lags, at just above 95 percent.
    • Property-Based School Funding Declared Unconstitutional. In 1971 the California Supreme Court declared the property-tax-based school finance system unconstitutional because some schools could raise more revenue than others with equal tax effort (Serrano v. Priest, 487 P. 2d 1241 (1971)). In a second decision in 1976, the court ruled that a legislative fix did not solve the problem. Before a second legislative fix (AB 65 of 1977) could be tested in court (John McDermott, an attorney for the plaintiffs, said it did not comply), it was superseded by the passage of Proposition 13.
    • Property Tax Rates Higher in Urban Core Areas. Before the passage of Proposition 13, property tax rates varied widely between urban areas and other regions of the state. Up to 2-to-1 disparities could be found. Because urban core areas generally had higher tax rates, that led to another form of fiscalization of land use, by encouraging investment and housing outside the central cities.
    • Heavy Tax Burden. Perhaps the most significant property tax problem from 1956 to 1978 was the heavy tax burden on property owners. Table 1 illustrates that burden in today's terms. If the median value home in 2006 was taxed using 1977's average tax rate and assessment ratio, the tax would be over $13,000, rather than just over $3,000. Compounding that problem was the cyclical reassessment plan used by most assessors that could cause property taxes to more than double in one year. Even worse, if a home was on land not zoned for homes, the assessor often would be valuing the property under the "highest and best use" theory of assessing then in use, as a site for a gas station or apartment house. That would result in a huge property tax bill, forcing the homeowner to sell.

Table 1
                 Comparison of Property Tax Bill Under
               Pre-Proposition 13 and Post-Proposition 13

2006-2007       2006-2007
                                         Using Pre-        Using
                                         Prop. 13        Post-Prop.
                                          Method         13 Method

 California Median Home
 Value                                   $556,430        $556,430

 Assessment Ratio                            92.0%           51.3%

 Assessed Value                          $511,915        $285,448

 Average Tax Rate                             2.7%            1.1%

 Annual Property Tax Bill                 $13,668           $3,129

 Monthly Property Tax
 Bill                                      $1,139             $261

Note: The assessment ratio for the "Pre-Prop. 13"
 column is from the 1976-1977 State Board of Equalization annual
 report, Table 13 (the BOE percentage was multiplied by a factor of 4
 to account for full-value assessment). The assessment ratio for the
 "Post-Prop. 13" column is calculated by dividing the assessed
 value of homeowner-occupied properties (as determined in the BOE's
 report, "Assessed Value of Homeowner-Occupied Properties") by
 the market value of homeowner-occupied property (the market value can
 be determined by multiplying the number of homeowner-occupied
 properties by the California median home sales price).

Source: California median home sales price from the California
 Association of Realtors; Average Tax Rate from the BOE annual
 reports, Table 4.

In view of those problems, it is unsurprising that a widespread cross-section of Californians came to believe what University of California Economics Prof. Malcolm Davisson told the Assembly Revenue and Taxation Committee: "The general property tax has only two faults: First, it is wrong in theory; and second, it doesn't work in practice."

Changes in the Allocation of
Property Tax Revenue

Section 1 of Proposition 13 required the property tax to be "apportioned according to law." The legislative counsel advised lawmakers that the phrase "according to law" gave the Legislature the responsibility for allocating the property tax (Opinion 17388, dated Dec. 29, 1977). (See Revenue and Taxation Code sections 95 through 100 for provisions allocating the property tax.)

As a practical matter, the state had to allocate the property tax. Requiring all local jurisdictions to agree on a formula was too cumbersome to be practical. Jurisdictions with little dependence on the property tax would be able to hold others hostage unless they received a large share.

Considering the competition among local units for scarce property tax dollars, if one local government agency (such as a county) had the responsibility, the allocating agency likely would take more than its fair share. As it was, some counties took more than the state formula provided. State audits caught and corrected that practice. At one point, the Department of Finance found Los Angeles County giving itself $25 million a year more than it was entitled.

In designing the allocation formula, the Legislature looked at alternative models. One plan would have divided the property tax equally among various levels of government (for example, counties would get 30 percent, cities would get 12 percent, schools would get 53 percent, and so forth). That idea was rejected by the conference committee that worked on the implementation of Proposition 13, after loud protests from local jurisdictions that would have lost a substantial amount of property tax. That formula also would have resulted in some local jurisdictions getting more than they lost from the passage of Proposition 13. During discussions of the issue, Senate President Pro Tem James Mills was critical of legislative staff for even suggesting that alternative.

The only politically feasible allocation scheme, and the one adopted in SB 154 of 1978, was to give all local jurisdictions the same proportionate share of the property tax that existed before Proposition 13 passed. (For cities, counties, and districts, the average percentage in the previous three years was used, at the request of Mills, who wanted to help jurisdictions in his San Diego County district.)

That allocation formula was justified on the basis of need, and jurisdictions levying high property taxes before 1978 got a proportionately larger share than those that levied low property taxes. The formula has come under criticism for giving some counties a much larger share of the property tax than other counties.

The allocation formula has been the subject of more legislation than any other feature of Proposition 13. However, there have been few court decisions on that part of the initiative.

In 1979 the Legislature, with AB 8, made two significant changes in the allocation formula. Allocation was shifted to a situs basis for growth, so fast-growing jurisdictions would get a greater share of the property tax to pay for the costs of growth. That change was accomplished by allocating the property tax proportionally based on pre-1978 shares for the property tax in each tax rate area, rather than the previous proportionate share of total countywide property tax revenue. Provisions also were included to allocate revenue when there is a jurisdictional change (such as an annexation or creation of a new city) or a transfer of services.

The second change made by AB 8 in the allocation formula was to shift a portion of property tax revenue allocated to schools in 1978 to cities, counties, and districts for 1979 and thereafter. For cities, the amount shifted equaled 82.91 percent of the funds that cities received in the 1978 bailout. For counties, the shift equaled 100 percent of their bailout, adjusted for health and welfare costs. Special districts got 95.24 percent of their bailout in shifted property tax revenue, subject to further allocation by counties. Those shifts reduced the schools' share of the property tax from 54 percent to 32 percent.

The Legislature also included in AB 8 a provision known as "the deflator." The deflator was designed to work if state revenue, as estimated by the Organization Responsible for Accurate and Comprehensive Long-Range Estimates, fell below a specified level. In that event, local subventions would be reduced. The deflator was never activated, and it was repealed in 1984 by AB 1849.

Almost immediately, a group of cities that did not levy property taxes in 1977 or before began agitating for a share of the property tax. Since the property tax had been allocated based on historical shares, and those cities had no historical share, originally they did not receive any of the allocated property tax revenue.

Those cities argued that the situation was unfair because their residents were paying the same 1 percent tax rate as residents of other cities. However, allocation of the property tax is a zero-sum game -- for every jurisdiction that gets a larger share, others have to lose an equal amount. After several unsuccessful tries, those cities finally gained a share of the property tax. In 1984 the Legislature and governor enacted SB 794 to allocate a share of the property tax to Yorba Linda, a non-property-tax city in Orange County, based on a 0.1 percent property tax rate. In 1987, SB 709 allocated a share of the property tax, also based on a 0.1 percent property tax rate, to all no- and low-property-tax cities, phased in over 10 years. In 1988 the formula was refined by shortening the phase-in period (AB 1197).

As a result, more than 30 small to medium-size cities (mostly in Los Angeles County) ended up with more property tax revenue than they received before the passage of Proposition 13.

In 1992 and 1993, the Legislature shifted back to schools approximately the same percentage of property tax that had been shifted from schools to other local agencies in 1979. That shift, known as the Education Revenue Augmentation Fund, was done to reduce the state's budget deficit, because schools need less state support when they get added property tax revenue.

That reverse shift was highly controversial and was fought vigorously by local agencies. After agonizing over her vote, Assembly member Debra Bowen cast the deciding vote to approve the 1993 shift. Legislation to reshift revenue -- in whole or in part -- from schools back to other local agencies failed in every session from 1993 through 1998.

In 1999 the Legislature gave cities and counties $150 million in one-time Education Revenue Augmentation relief as part of the budget agreement (AB 1661) and asked the legislative analyst to conduct a study of property tax allocation (AB 676).

To help balance the deficit-ridden fiscal 2005 and fiscal 2006 state budgets, the Legislature again raided local coffers and shifted $1.3 million each year from local agencies to schools. Cities, counties, and special districts were hit up for $350 million each per year, and redevelopment agencies had to shift $250 million (SB 1096). Also, state subventions to replace local governments' revenue losses from a car tax reduction (from 2 percent to 0.65 percent of a vehicle's value) were replaced by a shift of school property taxes from schools to cities and counties.

In exchange for all that shifting, the Legislature placed SCA 4 on the ballot to prevent further shifting of city and county property tax revenue. Approved by voters as Proposition 1A in November 2004, the measure prohibits the Legislature from passing a bill reducing any local agency's share of the property tax, except for 2 years out of 10 under specified conditions. Proposition 1A won in a landslide, with 83.7 percent of the voters in support.

For a number of years, San Diego County worked to get a legal challenge of the property tax allocation formula to court. The county argued that it was unfair for the state to allocate more property tax to some counties than to others.

However, a case from Rancho Cucamonga reached the courts first. In 1991 the Fourth District Court of Appeal sustained the constitutionality of the allocation system in Rancho Cucamonga v. Mackzum, 46 Cal. Rptr. 2d 448 (4th Dist. 1991).

Evolution of the Definition of Change of

Change of ownership became the primary reappraisal trigger under Proposition 13. Determining what is and what is not a reassessable change of ownership is not an easy task because of myriad transfer techniques and the complexity of the change-of-ownership law. Initially, the Task Force on Property Tax Administration, which developed the basic implementation plan adopted by the Legislature in 1979, set out to distill the basic characteristics of a change of ownership and to embody them in a single three-part test.

The task force concluded that a change of ownership is a transfer that has all three of the following characteristics:

    • it transfers a present interest in real property;
    • it transfers the beneficial use of the property; and
    • the property rights transferred are substantially equivalent in value to the fee interest.

The Legislature adopted those criteria verbatim from the Task Force Report (see Revenue and Taxation Code section 60).

For corporations, the Legislature added a second change-of-ownership trigger (Revenue and Taxation Code section 64). Even though shareholders have no legal rights to corporate real property, all corporate property was reassessed when a corporation or single person gained control of more than 50 percent of the voting stock of another corporation.

To further clarify whether transactions were changes of ownership, several examples of when ownership changed and did not change were added to the statute (Revenue and Taxation Code sections 61, 62, and 63). For example, a lease (including renewal options) for 35 years or more became a change of ownership. Transfers of property between spouses were not. Transfers into trusts were not changes of ownership if the trust is revocable or the creator of the trust is the sole beneficiary during his or her lifetime.

The creation or renewal of a possessory interest also was a change of ownership. The original definition included sublease portions of possessory interests. Taxpayers such as Pier 39 in San Francisco objected, arguing that the sublease didn't meet the general test of a change of ownership.

As a result, the Legislature revised the definition, providing that whether a sublease of a taxable possessory interest triggers a change-of-ownership reassessment depends on the length of the sublease (SB 44 of 1996).

Proposition 13 has been changed several times to remove types of property from a change-of-ownership reassessment. Proposition 58 of 1986 placed in the state constitution the original 1978 statutory interspousal exemption and excluded from reassessment transfers between parents and children of dwellings and of up to $1 million of other property. Voters approved Proposition 193 in 1996 to extend the parent-child transfer exclusion to grandparents and to grandchildren whose parents are deceased.

In 2003 the BOE adopted a rule (462.240) -- over the objections of county assessors, who asserted the board did not have authority -- exempting transfers between registered domestic partners from change-of-ownership reassessments. Proponents argued that registered domestic partners should be treated the same as married couples. In 2005 the Legislature codified that exemption in statute (SB 565). Again, assessors claimed that the exemption was illegal, and they went to court. In Michael V. Strong v. State Board of Equalization, 66 Cal. Rptr. 3d 657 (3d Dist. 2007), the Third District Court of Appeal said that the Legislature can ratify illegal regulations, that Proposition 13 was a limitation to tax, and that thus the Legislature had the authority to create the domestic partners exclusion by statute rather than by constitutional amendment. In 2007 the Legislature made that change-of-ownership exclusion retroactive to 2000 (SB 559).

In 2007 the parent-to-child change-of-ownership exemption was extended to foster children (AB 402).

A change-of-ownership issue unresolved as of mid-2008 was whether a transfer of a life estate in property is a transfer subject to reassessment. Although the 1978-1979 task force and the Legislature said that the transfer of property with a reserved life estate is not a change of ownership, they were silent on the transfers of life estates. However, they provided that a lease of less than 35 years is not a change of ownership.

The BOE and assessors have been operating as if all transfers of life estates are changes of ownership. However, in Steinhart v. County of Los Angeles, 155 66 Cal. Rptr. 3d 458 (2d Dist. 2007), cert. granted, 172 P.3d 400 (Dec. 10, 2007), the Second District Court of Appeal ruled that those transfers are not changes of ownership. In December 2007 the California Supreme Court agreed to review the decision.

It is often incorrectly presumed that changes of ownership will always produce more revenue for government because of a higher assessment. That is not true. A rule of thumb: If the market value is higher than the base-year value, the government will get more money. Conversely, if the market value is less than the Proposition 13 base-year value, government will lose money. That will occur because the transfer creates a new (and in these transfers, a lower) base-year value. Thus, the assessed value will not be allowed to increase to the original Proposition 13 base-year value.

Amendments were added in 1986 (Proposition 60) and 1988 (Proposition 90) to allow homeowners over the age of 55 to move to comparable dwellings and transfer their base-year value to the new residence within a two-year period. The right was unconditional for intracounty moves, but must be authorized by the receiving county for moves from one county to another. Severely disabled homeowners of any age also were covered by that exclusion.

Also, change of ownership does not include the acquisition of property comparable to that taken in eminent domain proceedings (Proposition 3 of June 1982), acquisition in the same county of property comparable to that damaged by a disaster (Proposition 50 of 1986), or acquisition in a different county (if allowed by the county) of property comparable to that damaged by a disaster (Proposition 171 of 1993).

Without constitutional authorization, the Legislature exempted transfers of a mobile home park to a nonprofit corporation formed by the tenants of the park and, under some conditions, transfers of spaces in a mobile home park to the tenants occupying those spaces (Revenue and Taxation Code section 62.1).

The courts also have been busy attempting to define reassessable change of ownership. Some critical decisions:

    • In Sav-On Drugs, Inc. v. County of Orange, 236 Cal. Rptr. 100 (4th Dist. 1987), an appellate court said a section 64 change of ownership occurred when there was a corporate merger in which shareholders of the acquired corporation became minority shareholders in the merged corporation.
    • In E. Gottschalk and Co., Inc. v. County of Merced, 242 Cal. Rptr. 526 (5th Dist. 1987), an appellate court held that the provisions of sections 61 and 62, which held that the creation of a lease of 35 years or more was a change of ownership, were a reasonable interpretation of Proposition 13. At issue was a 30-year shopping center lease with two 10-year options to renew.
    • In Title Insurance and Trust Co. v. County of Riverside, 767 P.2d 1148 (1989), the California Supreme Court, in a decision written by Justice Stanley Mosk, ruled that when a corporation acquires control of another corporation, properties owned by subsidiaries of the acquired corporation are subject to a change-of-ownership reassessment.
    • In Kraft, Inc. v. County of Orange, 268 Cal. Rptr. 643 (4th Dist. 1990), an appellate court held that reassessment of property of a corporation is triggered on acquisition by another corporation, even though stockholders of the acquired corporation have a majority interest in the acquiring corporation. The case stemmed from the merger of Kraft and Dart Industries into a new corporation, Dart and Kraft Inc. (DKI), with former Kraft shareholders controlling 51.5 percent of DKI stock. Kraft contended that no change in corporate control occurred because Kraft shareholders became majority shareholders of DKI and continued to control Kraft indirectly. The court said, "Kraft misses the point. The same shareholders did maintain control, but a new corporation obtained direct control."
    • In Howard v. County of Amador, 269 Cal. Rptr. 807 (3d Dist. 1990), an appellate court rejected Amador County's contention that the transfer of long-term fixed mineral interests in a property requires a reassessment of all interests in a property. However, the court found that the transfer of fixed-term mineral rights is a change of ownership for the specific mineral right transferred.
    • In Shuwa Investments Corp. v. County of Los Angeles, 2 Cal. Rptr. 2d 783 (2d Dist. 1991), an appellate court found that a complicated step transaction by which Shuwa Investments Corp. gained full control of the ARCO Plaza complex in Los Angeles triggered a full change of ownership.

Before the transaction, ARCO and Bank of America each owned 50 percent of a partnership that owned ARCO Plaza. Shuwa Investments gained control of the property in a three-step transaction in which ARCO sold its partnership interests to Shuwa, Shuwa and Bank of America liquidated the partnership and received 50 percent undivided interests in the property, and Bank of America sold its 50 percent interest to Shuwa.

                                    Table 2
          Comparison of Proposition 13 Homeowner-Occupied Property and
                       California Median Home Sales Price

                Value of a
                Homeowner-        Percent         California       Percent
                 Occupied       Increase by         Median       Increase by
   Year          Property
b         Year          Sales Pricec        Year
a       $11,357           --             $84,150            --

a       $13,076          15.1            $99,550           18.3

 1981-1982        $57,120           9.2           $107,710            8.2

 1982-1983        $61,610           7.9           $111,800            3.8

 1983-1984        $64,282           4.3           $114,370            2.3

 1984-1985        $69,258           7.7           $114,260           (0.1)

 1985-1986        $74,326           7.3           $119,860            4.9

 1986-1987        $79,712           7.2           $133,640           11.5

 1987-1988        $86,551           8.6           $142,060            6.3

 1988-1989        $93,318           7.8           $168,200           18.4

 1989-1990       $103,768          11.2           $196,120           16.6

 1990-1991       $113,488           9.4           $193,770           (1.2)

 1991-1992       $121,777           7.3           $200,660            3.6

 1992-1993       $130,412           7.1           $197,030           (1.8)

 1993-1994       $135,503           3.9           $188,240           (4.5)

 1994-1995       $139,164           2.7           $185,010           (1.7)

 1995-1996       $142,154           2.1           $178,160           (3.7)

 1996-1997       $145,133           2.1           $177,270           (0.5)

 1997-1998       $147,888           1.9           $186,490            5.2

 1998-1999       $155,314           5.0           $200,100            7.3

 1999-2000       $165,278           6.4           $217,510            8.7

 2000-2001       $176,946           7.1           $241,350           11.0

 2001-2002       $190,478           7.6           $262,350            8.7

 2002-2003       $203,404           6.8           $316,130           20.5

 2003-2004       $221,313           8.8           $371,520           17.5

 2004-2005       $235,854           6.6           $450,770           21.3

 2005-2006       $260,525          10.5           $522,670           16.0

 2006-2007       $285,024           9.4           $556,430            6.5

Average            --              7.1              --               7.5


aUntil 1981-1982, property was assessed at 25 percent of
 "full" value. Above "Percent Increase by Year" accounts for
 assessment changes.

bData calculated by dividing the total value of homeowner-occupied
 property (see Appendix 1) by the total number of homeowner exemptions as
 reported in the BOE Annual Reports, Table 9.

cData from the California Association of Realtors.


    • In Pacific Southwest Realty Co. v. County of Los Angeles, 820 P.2d 1046 (1991), the California Supreme Court reversed a lower court decision and held that sales and leaseback transactions are changes in ownership. At issue was the reassessment of the Security Pacific Bank building in downtown Los Angeles after its sale and leaseback in 1984. The $310 million sale of the building included a reservation of an estate of 73 percent of the property for a specified number of years.

In discussing section 60's "transfer of a present interest in real property" test, Justice Mosk wrote: "Plaintiff's contention that it did not convey a present interest in real property is simply incorrect and cannot forestall a conclusion that a transfer of a present interest in real property occurred. Plaintiff did not retain the same interest when it sold its fee and reserved an estate for years. The entire fee was transferred to Metropolitan Life. The simultaneous creation of a different interest in plaintiff will not defeat the first prong of Section 60."

In 1997 and 1998, the BOE revised its change-of-ownership rules to make them clearer and easier to understand. For example, Rule 462.180, which clarifies various aspects of legal entity transfers, was amended to include limited liability companies.

                                    Table 3
   Comparison of Growth in Assessed Value of Homeowner-Occupied Property and
                   Non-Homeowner-Occupied Property Subject to
                      Proposition 13 Assessment Provisions

All Locally
                   Assessed                        Assessed
                   Value of                      Nonhomeowner
                  Homeowner-      Percent          Property         Percent
                  Occupied      Increase by       Subject to      Increase by
    Year          Property
a        Year            Prop. 13b         Year
 1979-1980          $45.6           --               $63.0            --

 1980-1981          $53.7          17.8              $74.7           18.6

 1981-1982         $238.1          10.8             $345.7           15.7

 1982-1983         $259.6           9.0             $392.7           13.6

 1983-1984         $273.6           5.4             $429.9            9.5

 1984-1985         $295.2           7.9             $479.0           11.4

 1985-1986         $321.1           8.8             $529.9           10.6

 1986-1987         $349.9           9.0             $578.2            9.1

 1987-1988         $386.5          10.5             $641.8           11.0

 1988-1989         $424.3           9.8             $705.2            9.9

 1989-1990         $477.1          12.4             $780.3           10.6

 1990-1991         $528.1          10.7             $878.8           12.6

 1991-1992         $573.7           8.6             $955.1            8.7

 1992-1993         $625.3           9.0             $990.1            3.7

 1993-1994         $664.7           6.3           $1,000.8            1.1

 1994-1995         $699.8           5.3             $991.7           -0.9

 1995-1996         $722.9           3.3             $978.1           -1.4

 1996-1997         $739.8           2.3             $980.5            0.2

 1997-1998         $759.8           2.7           $1,004.2            2.4

 1998-1999         $800.4           5.3           $1,046.7            4.2

 1999-2000         $856.9           7.1           $1,127.3            7.7

 2000-2001         $921.4           7.5           $1,250.7           10.9

 2001-2002       $1,001.7           8.7           $1,351.7            8.1

 2002-2003       $1,080.2           7.8           $1,516.5           12.2

 2003-2004       $1,193.1          10.5           $1,543.0            1.7

 2004-2005       $1,281.7           7.4           $1,698.1           10.1

 2005-2006       $1,422.3          11.0           $1,903.7           12.1

 2006-2007       $1,559.4           9.6           $2,185.2           14.8

 Average             --             8.3               --              8.5

Note: Dollar amounts in billions.


aFrom the "State Board of Equalization Assessed Value of
 Properties Receiving the Homeowners' Exemption as a Percentage of Total
 Assessed Value."

bSee Appendix 1 (available from author) for a complete explanation of
 this table.


Evolution of the Definition of
New Construction

Because Proposition 13 did not define new construction, the matter of what type of new construction should trigger a new assessment remains an issue at this writing. There was no question that any addition to land would give rise to a new assessment. But what about remodeling?

Initially, the BOE, in Rule 463, took the position that any alteration of an existing improvement that extended the economic life of the property triggered a reassessment.

In 1979 the Legislature rejected the BOE approach and provided that only a major rehabilitation of an improvement would create a "reassessable event." A major rehabilitation was defined as a renovation that converted an improvement to the equivalent of a new improvement (see Revenue and Taxation Code section 70).

For multiyear new construction, the construction in progress on the lien date is appraised at its full value, and on the date of completion the entire property is reappraised.

Figure 1
Percentage of Overall Property Taxes Borne by
Homeowners and Nonhomeowners During the
1979-1980 Assessment Period

Note: Percentages for the 1979-1980 assessment period.

See Appendix 1 for notes and calculations (available
from author).

Voters adopted several amendments to Proposition 13 that provided for or authorized exclusions from a new construction reassessment. Those exclusions included some reconstruction after a disaster (Proposition 8 of Nov. 1978), some seismic reinforcements (Proposition 23 of 1984), fire extinguishing systems (Proposition 31 of 1984), and construction for making a dwelling more accessible to disabled people (Proposition 110 of 1990 and Proposition 177 of 1994).

In 1998 voters approved Proposition 1, authorizing the Legislature to exempt from new construction the replacement or repair of a structure on substantially environmentally damaged property, after remediation of the problem.

An unusual incident involving the interpretation of what constitutes new construction occurred in the early 1980s, when Los Angeles County Assessor Alex Pope sued the BOE over advice given by BOE Assessment Standards Chief Verne Walton in 1980 in Assessors' Letter 80-77.

Because advice by the board to assessors through letters and assessment manuals does not have the same force of law as a board rule, it was surprising that an assessor sued over an assessors' letter.

Figure 2
Percentage of Overall Property Taxes Borne by
Homeowners and Nonhomeowners During the
2006-2007 Assessment Period

Note: Percentages are for the 2006-2007 assessment period.

See Appendix 1 for notes and calculations (available
from author).

At issue was the treatment of construction in progress. Revenue and Taxation Code section 71 provided that construction in progress be appraised each year and that on the date of completion the entire portion of newly constructed property be reappraised. In Assessors' Letter 80-77, the BOE said that when a large project is completed in distinct stages, with some portions available for occupancy before completion of the total project, it is proper to assign a base year to the completed portions. Pope disagreed, saying there should be a final reappraisal of all phases when the total project is completed.

The Second District Court of Appeal in 1983 sided with the BOE, saying the board's interpretation of its rule was consistent with legislative intent. Pope v. State Board of Equalization, 194 Cal. Rptr. 883 (2d Dist. 1983).

Proposition 13 Adds Stability to the
Property Tax

One of the features of Proposition 13 that was not apparent when it passed was that it has stabilized property tax revenue over the long term. No one mentioned that in the campaign to pass the proposition, nor was it mentioned in any analysis of the measure. Under an ad valorem system, revenue is much more volatile, growing fast when real estate values boom and falling in real estate downturns such as the one we're in now.

Proposition 13's acquisition value assessment system acts in a countercyclical manner to provide stability in the flow of property tax revenue to local government. Acquisition value assessments have worked in the nature of a reservoir by keeping an untapped reserve of value that will accrue to local entities on changes in ownership.

In years of high inflation of real estate values, Proposition 13 acts as a brake, holding back money that otherwise would have been generated by rapidly growing assessments under an ad valorem tax. Conversely, in times of falling property values, assessment growth continues under an acquisition value system, because the new, substantially higher values from changes of ownership, new construction, and the 2 percent inflation factor are likely to exceed the Proposition 8 decline-in-value assessments.

Figure 3
Share of Property Tax Values for Properties
Subject to Proposition 13 Acquisition Value
Assessments, 1979-1980

Note: Percentages are for the 1979-1980 assessment period.

See Appendix 1 for notes and calculations (available
from author).

For example, assume that there is a 10 percent drop in market values, and a property worth $300,000 falls to $270,000 in value from one year to the next. Assume that the property's base-year value is $100,000. When it changes ownership, the value on the roll goes up $170,000 under the acquisition value system, rather than falling $30,000, as it would under the ad valorem system.

Table 2, (p. 310) illustrates the "reservoir effect" of Proposition 13. During economic downturns, when real estate market values declined -- at times as much as 4.5 percent (1993-1994) -- because of Proposition 13, the average assessed value of an individual-homeowner-occupied property grew for that same time period (3.9 percent in 1993-1994; see Table 2).

A Shift in Tax Burden?

Has the evolution of Proposition 13 caused a shift in the tax burden among classes of properties? When Proposition 13 passed, there was concern that the initiative would result in a shift of the property tax burden to homeowners. The Property Tax Administration Task Force, formed to implement the assessment provisions of the initiative, was one of the groups worried that there might be such a shift.

For many years, critics of Proposition 13 have alleged that such a shift occurred. They now cite the latest figures from the BOE that owner-occupied homes represented 34.3 percent of total property tax assessed values in 1979-1980 and 39.3 percent in 2006-2007.

Those figures are misleading. According to a more in-depth analysis of BOE data published by the California Taxpayers' Association in 2008, Proposition 13 did not cause that shift, and in fact has prevented a more substantial shift to homeowners.

Figure 4
Share of Property Tax Values for Properties
Subject to Proposition 13 Acquisition Value
Assessments, 2006-2007

Note: Percentages are for the 2006-2007 assessment period.

See Appendix 1 for notes and calculations (available
from author).

Further refinement of the data shows that values of owner-occupied homes grew an average of 8.3 percent a year since 1979, while values of other property subject to Proposition 13's acquisition value assessment system grew an average of 8.5 percent a year (Table 3, p. 311).

Why are both homeowner and nonhomeowner properties subject to Proposition 13 assessment a larger percentage of the assessment roll by 2006-2007? Ironically, the properties that still are assessed on an ad valorem basis at 100 percent of their value are very slow-growing. Locally assessed personal property values have grown only 4.2 percent a year on average, and the value of state-assessed property other than railroad property has grown only 3.4 percent a year (Appendix 1, available from author). State-assessed railroad property's average growth rate has been 0.7 percent.

The share of the total of nonhomeowner locally assessed property subject to Proposition 13's acquisition assessment system grew from 47.4 percent in 1979-1980 to 55 percent in 2006-2007 (figures 1 and 2). To put it another way, of property subject to Proposition 13's acquisition value assessment, the owner-occupied homes' share actually declined from 41.99 percent in 1979-1980 to 41.64 percent in 2006-2007 (figures 3 and 4).

If Proposition 13 had not passed, the share of property tax paid both for homeowner-occupied and nonhomeowner properties (currently subject to Proposition 13) would have been greater than it is today.

Another way of looking at the comparative tax burden is to determine the percentage of market values at which properties are being assessed. Since the late 1980s, the BOE has been determining the ratio of acquisition value to market value for commercial and industrial property. That is required by federal law (the Railroad Revitalization and Regulatory Reform Act) to adjust the value of state-assessed railroad property. Table 4 shows that ratio for each year. Commercial and industrial property assessment averaged 75.1 percent of market value from 1988-1989 to 2006-2007.

                                Table 4
                   Commercial and Industrial Property
              Assessments as a Percentage of Market Value

Year                       Assessment Ratio
           1988-1989                            70.4

           1989-1990                            71.1

           1990-1991                            74.2

           1991-1992                            74.9

           1992-1993                            81.9

           1993-1994                            84.9

           1994-1995                            87.6

           1995-1996                            86.7

           1996-1997                            86.1

           1997-1998                            80.6

           1998-1999                            76.2

           1999-2000                            75.6

           2000-2001                            71.7

           2001-2002                            74.9

           2002-2003                            72.7

           2003-2004                            71.5

           2004-2005                            65.6

           2005-2006                            61.0

           2006-2007                            59.9

Average                              75.1

Notes: All business property assessed values are based on BOE
 roll year assessments. Data are from the State Board of Equalization
 Ratio of Assessed Value of Commerical/Industrial Property to Market
 Value as adopted by the BOE each May. (Federal law requires railroad
 property to be assessed at the same ratio of market value as all
 other business property.) Legislation requiring the BOE to determine
 the ratio of assessed value to market value for business property was
 not adopted by the Legislature until 1986 in AB 2890 (Hannigan).
 Records for the roll years 1986-1987 and 1987-1988 were not available
 at time of printing (due to a mold problem at the BOE headquarters,
 records were temporarily moved to storage in 2007 and were not

For owner-occupied property, the average for the same period is 66.3 percent (Table 5). Thus, if all properties were assessed on an ad valorem basis (the assessment system before Proposition 13), homeowners would be paying a much larger percentage of the total property tax burden.

                                Table 5
                Homeowner-Occupied Property Assessments
                    As a Percentage of Market Value
                                       Value in Proportion to
              Year                          Market Value

           1979-1980                            54.0

           1980-1981                            52.5

           1981-1982                            53.0

           1982-1983                            55.1

           1983-1984                            56.2

           1984-2985                            60.6

           1985-1986                            62.0

           1986-1987                            59.6

           1987-1988                            60.9

           1988-1989                            55.5

           1989-1990                            52.9

           1990-1991                            58.6

           1991-1992                            60.7

           1992-1993                            66.2

           1993-1994                            72.0

           1994-1995                            75.2

           1995-1996                            79.8

           1996-1997                            81.9

           1997-1998                            79.3

           1998-1999                            77.6

           1999-2000                            76.0

           2000-2001                            73.3

           2001-2002                            72.6

           2002-2003                            64.3

           2003-2004                            59.6

           2004-2005                            52.3

           2005-2006                            49.8

           2006-2007                            51.2

Average From 1988                    66.3

           Average From 1979                    63.3

Note: This table is based on the state BOE report on the
 assessed value of homeowner property and the median home price times
 the number of homeowner exemption property. See Appendix 2 (available
 from author).

David Doerr has been the chief tax consultant at the California Taxpayers' Association since 1987. He was chief consultant to the California Assembly Revenue and Taxation Committee from 1963 to 1987.

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