The Background of Property Taxes in California

Prior to 1912, the state derived up to 70 percent of its revenue from property taxes. The state no longer relies on property taxes as its primary source of funds-since 1933, the only property tax directly levied, collected, and retained by the state has been the tax on privately owned railroad cars. Currently, the state’s principal revenue sources are personal income taxes, sales and use taxes, bank and corporation taxes, and a series of excise taxes. The State Board of Equalization (BOE) administers sales and use taxes and excise taxes, while the Franchise Tax Board administers the personal income and bank and corporation taxes.

Today, it is California’s counties, cities, schools, and special districts that depend on the property tax as a primary source of revenue. The property tax raised rnore than $48.9 billion for local government during 2010·11. These funds were allocated as follows: counties 17 percent, cities 10 percent, schools (school districts and community colleges) 54 percent, and special districts 19 percent.

Proposition 13

On June 6, 1978, California voters overwhelmingly approved Proposition 13, a property tax limitation initiative. This amendment to California’s Constitution was the taxpayers’ collective response to dramatic increases in property taxes and a growing state revenue surplus of nearly $5 billion. Proposition 13 rolled back most local real property, or real estate, assessments to 1975 market value levels, limited the property tax rate to 1 percent plus the rate necessa1y to fund local voter·approved bonded indebtedness, and limited future property tax increases.

After Proposition 13, county property tax revenues dropped from $10.3 billion in 1977·78 to $5.04 billion in 1978·79. As a result, many local governments were in fiscal crisis. Keeping local governments in operation the first two years following Proposition 13 required legislative “bailouts” to offset property tax revenue losses. A first·year stopgap measure costing $4.17 billion in state surplus funds was necessary to directly aid local governments. A second-year bailout, a long-term fiscal relief plan, cost the state $4.85 billion.

Prior to 1978, real property was appraised cyclically, With t’lo more than a five-year interval between reassessments. Since property values were systematically reviewed and updated, assessed values were usually kept at or near current market value levels. In contrast, under Proposition 13, properties are reassessed to current market value only upon a change in ownership or completion of new construction (called the base year value). In addition, Proposition 13 generally limits annual increases in the base year value of real property to no more than 2 percent, except when property changes ownership or undergoes new construction. Essentially, Proposition 13 converted the market value-based property tax system to an acquisition value-based system.

Disparities in Assessed Value

Under Proposition 13, similar properties can have substantially different assessed values based solely on the dates the properties were purchased. Disparities result wherever significant appreciation in property values has occurred over time. Longtime property owners, whose assessed values generally may not be increased more than 2 percent per year, tend to have markedly lower tax liability than recent purchasers, whose assessed values tend to approximate market levels. Court Challenges to Proposition 1 3 Immediately after Proposition 13 passed, its constitutionality was challenged. The California Supreme Court upheld the constitutionality of Proposition 13 in Amador Valley Joint Union High School District v. State Board of Equalization on September 22, 1978.

The decision rendered in this case remained the highest judicial ruling on Proposition 13 until 1992, when the United States Supreme Court ruled, in Nordlinger v. Hahn, that Proposition 13 did not violate the equal protection clause of the United States Constitution. This ruling effectively ended speculation about whether the judicial system would ever overturn or modify Proposition 13.