Newswise — A steep decline in California housing prices is undermining the effectiveness of the state’s property tax system that was created through Proposition 13 three decades ago, according to a study by University of Southern California professor Dowell Myers.
The study, which is based on comparative data from opinion surveys and housing trends, finds a system under stress that is creating “severe generational inequity” magnified by recent dramatic losses in housing values.
Myers is a professor of urban planning and demography at the University of Southern California's School of Policy, Planning, and Development. The study – The Demographics of Proposition 13. Large Disparities Between the Generations and the Unsustainable Effects of Housing Prices - is available online at: http://www.usc.edu/schools/sppd/research/popdynamics/whatsnew.htm
Proposition 13 was originally designed to prevent older homeowners from being evicted from their homes due to inflation’s impact on property taxes. The measure set a cap as to how high the taxes could rise each year. Approved by voters in 1978, the system appeared to work as long as housing values rose over time.
Californians who bought property in 1975, for example, have increased their housing value from the initial average home value of $41,600 to $329,800 in 2009, falling from a peak of $555,700 in 2006.
This group, however, is paying less than the national average in property taxes: Californians who bought their homes in 1978 pay an average of $1,571 in annual property taxes compared to the national average for the same purchase year of $1,994 – even though their home values are twice as high as the nation’s average.
“Prop 13 may have worked too well for some: Long time residents now pay lower property taxes than the national average, yet at the same time they have captured much greater wealth from California’s high housing values,” said Myers. “Now however, it’s the young adults who face eviction since they were the most recent purchasers of homes before the housing bubble burst.”
Myers’ study suggests that the system – which is based on ever-rising house values bringing more revenue - is so broken that it may require an overhaul. The current system may have survived a 15 percent drop in housing values in the early 1990s, but housing values have plummeted about 40 percent from their most recent peak.
The biggest losers in this housing environment have been newer homeowners, who are typically younger. Of California homeowners under age 30, 78.5 percent bought their homes in 2003-2007, compared to 68.5 percent of those between the ages of 30 and 34 and 52.9 percent of those ages 35-39. In contrast, only 19.7 perecent of owners ages 55 to 59 are recent home buyers.
Buyers after July 2003 suffered most from the market crash, when current values fell below their mortgage principal and below their tax assessments, Tax assessors are now issuing what are called “decline-in-value reassessments” to help the young but that also reduces the high taxes required to subsidize the discounted, low taxes of longtime residents, according to Myers.
Myers created several categories to measure the financial impacts of Prop. 13 on demographic groups broken down according to race and ethnicity, but found that age was actually the most significant factor. Some key findings:
• The average “tax savings” – the difference between 1 percent of current house value and actual property taxes paid - was $3,213 for homeowners between the ages of 70 and 74 compared to $796 for those between the ages of 25 and 29.
• Myers looked at which groups receive less or more tax savings benefits based on when they bought. According to this formula, people who bought homes between 2003 and 2007 - who are generally younger - are contributing 3.08 billion in above average tax payments to offset the 1.89 billion in excess savings enjoyed by longer-term, mostly older, homeowners.
• Public support for Proposition 13 fluctuates along with the rise and dip in housing prices. For example, overall support for Proposition 13 among likely voters was 40.1 percent in 1998, after several years of declining prices, compared to 48.3 percent in 2008, at the end of the boom years. Support for the measure increased more among homeowners than renters, and especially among liberal voters who are homeowners, rising from 34.5 percent in 1998 to 48.9 percent in 2008.
Myers said the study should help shed light on how Prop. 13 is impacting Californians in different ways, and he expects it will provide a basis for policy makers to consider whether there is a need to reconfigure the current property tax system. Currently, California obtains 22.7 percent of its state and local tax revenue from property taxes compared to the national average of 30 percent.
To read the complete study, go here: http://www.usc.edu/schools/sppd/research/popdynamics/whatsnew.htm
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