A proposed change to California Proposition 13 (1978) to retroactively recapture lost tax revenue at the time of sale.

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.

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Author: Mark Klink, 2012
Contact: mark _at_ holopy.com
  1. ^ Formulas used in example https://docs.google.com/open?id=0B1rl4SpddxQUeVpHendCOGpNVEE
  2. ^ "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