Prop 13 limits the yearly base value increment to 2%. For each year where the actual value of the home was greater than the Prop 13 base value, the homeowner paid less property tax than they should have. Effectively, they have deferred the payment until the time the house is sold, at which time they will pay the sum of the deferred amounts.

But how do you calculate the actual value of the home each year?

One approach is to draw a straight line between the sale price of the house and the original purchase price. The actual value of the home at any given time between those dates is found from that line. This works well if home prices only go up. However we need to allow for falling prices as well. To allow for California Proposition 8 (November 1978) reassessment of real property values due to falling values, the straight line will pass through all reassessment values. To put it another way, in any year where the assessed value of the home was less then the base value calculation, the straight line will also pass through those assessed values (This case is shown in Example 2 below.)

This change addresses two of the primary concerns related to Prop 13. It allows older homeowners to keep their homes, but recaptures the capital appreciation benefit they received from urban development and services paid for by tax dollars they did not contribute too.

A motivation for this change is to provide more money for California's schools which are vastly underfunded and rate poorly on the national scale.

Example 1 - No reassessments

Below is an example of the calculation of taxes owed at the time of sale for a house purchased in 1959 for $47,000 and sold in 2012 for $720,000. A total of $162,123.66 will be owed in taxes at the time of sale.^{[1]}

Sale Price

$720,000

Year Sold

2012

Purchase Price

$47,000

Year Purchased

1959

Year

Base Price (assuming 2% increase/year)

Taxes Paid

Straight Line Assessment

Taxes based on Straight Line

Difference

1959

47,000

470

47,000

470

0

1960

47,940

479

59,698

597

235

1961

48,899

489

72,396

724

235

1962

49,877

499

85,094

851

352

etc.

2007

121,592

1,216

656,509

6,565

5,349

2008

124,024

1,240

669,208

6,692

5,452

2009

126,505

1,265

681,906

6,891

5,554

2010

129,035

1,290

694,604

6,946

5,656

2011

131,615

1,316

707,302

7,073

5,757

2012

134,615

1,342

720,000

7,200

5,858

Taxes Owed at time of sale (Sum of differences between taxes paid and taxes based on straight line) =
$162,123.66

Example 2 - Home reassessed due to falling values

Sale Price

415,000

Year Sold

2013

Purchase Price

640,000

Year Purchased

2006

Year

Base Price (assuming 2% increase/year)

Assessed price (including Prop8 assessments)

Taxes paid

Straight Line points

Taxes based on Straight Lines

Difference

2006

640,000

640,000

640,000

0

2007

652,800

652,800

6,528

6,130

-398

2008

665,856

586,000

5,860

586,000

5,860

0

2009

679,173

635,000

6,350

635,000

6,350

0

2010

692,757

692,757

6,928

5,925

-1,003

2011

706,612

550,000

5,500

550,000

5,500

0

2012

720,744

450,000

4,500

450,000

4,500

0

2013 Sold

415,000

Taxes owed at time of sale (sum of differences) = $0 (because sum of difference is -$1,401 which is less than zero).

Notes

The 2007 $6,130 tax based on straight line is based on 1% of the 2007 interpolation of the 2006 $640,000

and 2008 $586,000 values

You can see the prop8 reassessed values because they are the assessed values below the base value (which

always increases 2% each year)

Discussion

The book "Property Taxes and Tax Revolts: The Legacy of Proposition 13" ^{[2]} analyses several alternatives to Prop 13, including what is referred to as the deferred payment option. The deferred payment option sums the yearly difference between the assessed value and acquisition based calculation (i.e. Prop 13 taxes actually paid that year) and this sum is owed at the time of sale. Their calculation of state revenue increase using this option was quite low and seemingly not worth it. However, they do mention that adding interest charges on those deferred payments would increase revenue.
The proposed approach improves on O'Sullivan, Sexton and Sheffrin's deferred payment in the following ways

It does not limit the recaptured taxes to when the amendment is introduced. O'Sullivan et-al limited the recovery calculation to the assumed date where Prop 13 was amended to recover taxes on sale.

By using a straight line calculation to estimated the yearly value owed, we more accurately capture the benefit of price increases on property which exceeds inflation.

Thus, the expected gain in revenue for the proposed approach is predicted to be much greater than O'Sullivan et-al's deferred payment approach.

Comments? Other Ideas? Enter them here (click Edit at top right)

Author: Mark Klink, 2012
Contact: mark _at_ holopy.com

^ "Property Taxes and Tax Revolts: The Legacy of Proposition 13" Arthur O'Sullivan (Author), Terri A. Sexton (Author), Steven M. Sheffrin (Author). Cambridge Press, 1995. Paperback reissued 2007

Prop 13 limits the yearly base value increment to 2%. For each year where the actual value of the home was greater than the Prop 13 base value, the homeowner paid less property tax than they should have. Effectively, they have deferred the payment until the time the house is sold, at which time they will pay the sum of the deferred amounts.

But how do you calculate the actual value of the home each year?

One approach is to draw a straight line between the sale price of the house and the original purchase price. The actual value of the home at any given time between those dates is found from that line. This works well if home prices only go up. However we need to allow for falling prices as well. To allow for California Proposition 8 (November 1978) reassessment of real property values due to falling values, the straight line will pass through all reassessment values. To put it another way, in any year where the assessed value of the home was less then the base value calculation, the straight line will also pass through those assessed values (This case is shown in Example 2 below.)

This change addresses two of the primary concerns related to Prop 13. It allows older homeowners to keep their homes, but recaptures the capital appreciation benefit they received from urban development and services paid for by tax dollars they did not contribute too.

A motivation for this change is to provide more money for California's schools which are vastly underfunded and rate poorly on the national scale.

## Example 1 - No reassessments

Below is an example of the calculation of taxes owed at the time of sale for a house purchased in 1959 for $47,000 and sold in 2012 for $720,000. A total of $162,123.66 will be owed in taxes at the time of sale.^{[1]}Taxes Owed at time of sale (Sum of differences between taxes paid and taxes based on straight line) =

$162,123.66

## Example 2 - Home reassessed due to falling values

Taxes owed at time of sale (sum of differences) = $0 (because sum of difference is -$1,401 which is less than zero).

Notes

- The 2007 $6,130 tax based on straight line is based on 1% of the 2007 interpolation of the 2006 $640,000

and 2008 $586,000 values- You can see the prop8 reassessed values because they are the assessed values below the base value (which

always increases 2% each year)## Discussion

The book "Property Taxes and Tax Revolts: The Legacy of Proposition 13"^{[2]}analyses several alternatives to Prop 13, including what is referred to as the deferred payment option. The deferred payment option sums the yearly difference between the assessed value and acquisition based calculation (i.e. Prop 13 taxes actually paid that year) and this sum is owed at the time of sale. Their calculation of state revenue increase using this option was quite low and seemingly not worth it. However, they do mention that adding interest charges on those deferred payments would increase revenue.The proposed approach improves on O'Sullivan, Sexton and Sheffrin's deferred payment in the following ways

- It does not limit the recaptured taxes to when the amendment is introduced. O'Sullivan et-al limited the recovery calculation to the assumed date where Prop 13 was amended to recover taxes on sale.
- By using a straight line calculation to estimated the yearly value owed, we more accurately capture the benefit of price increases on property which exceeds inflation.

Thus, the expected gain in revenue for the proposed approach is predicted to be much greater than O'Sullivan et-al's deferred payment approach.## Comments? Other Ideas? Enter them here (click Edit at top right)

Author: Mark Klink, 2012

Contact: mark _at_ holopy.com