Demographics of California Post Prop 13: Generational Inequity Defines State's Home Market

Executive Summary

Proposition 13's origins and cumulative effects over its 30 years are intertwined with California's soaring house prices. The traumatic crash of 2008 calls new attention to our ingrained assumptions about upward price trends and exposes a severe generational inequity. The older generation now holds a rich advantage, while the younger generation no longer can make up for the seniors' discounted low payments. This study examines the winners and loser[s] by demographic subgroup, focusing on the property taxes and house values of home owners. (See note below.)

Prop 13, as it is commonly known, was designed for a regime of rising home prices that has now ended. Its two main pillars were a fear of rising prices that drove property taxes to exorbitant levels and the promise that high taxes paid by new buyers would be reduced over time by inflation and made up for by higher taxes paid by other people when they bought at even higher prices in later years. Ever rising prices were the necessary assumption.

As long as this system worked as expected, each generation of home owners could benefit, and the rising level of tax payments by new buyers would offset the steep discounts accorded to the earlier buyers. Without the ever rising levels of tax payments by new buyers, however, the system could not remain solvent. The crash of 2008 has now ended this regime, for the statewide decline in prices by 40 percent far exceeds that in the only previous downturn in the Prop 13 era (15 percent in the 1990s). In fairness to property owners whose market values have fallen below assessment, tax assessors are now issuing temporary decline-in-value reassessments (as required by Proposition 8) that reduce the recent-buyers' extra high tax contributions. This lost revenue was formerly used to cover the Prop 13 discounts and implicitly subsidize the longtime home owners. Looking forward it seems doubtful that prices and tax assessments will recover to their former level in the next decade or beyond. Until they do, it seems more likely that recent home buyers, state and local governments, and public service users will be left in a depressed state.

Only the longer-time home owners are faring well today. The legacy of Prop 13 is a major generational disparity that has widened over the decades. The generation once though at risk for eviction from their homes because of high property taxes has now captured a California windfall. Prop 13 may have worked too well: Long time residents now pay power property taxes than the national average, yet at the same time they have captured much greater wealth from California's high house values. In a complete reversal of fortune, it is now the young adults who recently bought homes that face risk of eviction.

Some of the key findings from the study follow.

Low Taxes but High Values for Long-time Owners

• Comparing California and the US in 2007, home owners who occupied their homes before 1978 paid only $1,571 in property taxes compared to the national average of $1,994. (New Jersey was the highest with $6,155).

• At the same time, California's long-term home owners had average home values of $586,409 versus $240,277 in the US, giving them much greater assets.

High Taxes and High Values for Recent Buyers

• In contrast, home owners who bought their homes between 2003 and 2007 paid $4,787 in property taxes compared to the national average of $2,848. (New Jersey again was the highest with $6,264.)

• House values of California's recent buyers averaged $564,009 in 2007 versus $289,546 in the US, which presents a high barrier to entry with a new mortgage.

Young Home Owners are Likely to be Recent Buyers at Risk in the Downturn

• Of California home owners under age 30, 78.5 percent bought their homes in 2003-07, as well as 68.5 percent of those age 30 to 34 and 52.9 percent of those age 35 to 39. This compares to 19.7 percent among owners age 55 to 59, for example.

• It is these young recent buyers who are most at risk during the post-2007 housing crash, because they bought at the highest prices and are most likely to have their 2009 house value fall below their tax assessment and even below the principal owned on their mortgages.

Tax Savings from Prop 13 are Very Unequal and Based on Generational Differences

• Tax "savings" defined as the difference between 1 percent of current value and actual property taxes paid (both as self-reported in the American Community Survey) averaged $2,317 in 2007.

• The greatest disparities are based on year of purchase, with $4,293 savings for occupants since before 1978 and only $853 savings for recent buyers (2003-07), a difference of $3440.

• Other large disparities in savings are found between home owners of different age groups: $3213 for owners ages 70-74 and $796 for owners ages 25-29, a difference of $2417.

• Much smaller disparities are found by race, with only $757 separating the tax savings of the highest and lowest groups. This is because each race contains its own generational differences, which tend to balance out. For example, there is a $2513 difference in tax savings between old and young white home owners.

Recent Buyers and the Young Subsidize the Tax Savings of Others

• Groups with high payments and below average tax savings necessarily subsidize the groups with low payments and above average savings. The subsidies do not come from government but from contributions of fellow tax payers.

• The largest tax subsidy is provided by recent buyers (2003-07), who contributes [sic] $1464 more than average. Longtime home owners paying discounted taxes are the beneficiaries.

• Substantial tax subsidies are also provided by home owners younger than 45 or especially 35, with the beneficiaries being home owners older than 55 or especially 65.

Rising House Prices Once Helped Prop 13 to Function Well but Have Now Reversed

• "Ever rising house prices" is the fundamental assumption underlying Prop 13. New buyers entered the taxpayer system with high tax payments in booms of the late 1970s, late 1980s, and early 2000s. Volumes of home sales increased roughly 25 percent in each of these periods compared to the preceding, and the prices paid were at least 50 percent greater than before.

• Previous buyers enjoyed low tax assessments that fell further below the market value with each boom.

• The Crash of 2008 calls this all into question, because prices fell 40 percent from their peak compared to 15 percent in the only prior downturn (the long recession of the 1990s).

• Future price trends are unknowable, but three reasonable scenarios suggest prices could rise by 202 to a level that is higher than 2008 by 37 percent to 54 percent. (A more pessimistic scenario of long-term price stagnation, such as occurred in Japan in the 1990s or in the U.S. during the Great Depression, is not considered.) Nevertheless, this growth is not sufficient to recover the steep losses since 2007. As a result, buyers since 2003 are likely to gain few if any benefits from Prop 13.

Public Opinion in Support of Prop 13 Depends on House Prices

• Although it is believed that support for Prop 13 is a constant, that may be true only during boom times. Surveys in 1978 and 2008 both registered public opinion after several years of large price increases.

• A 1998 survey by the Public Policy Institute of California tapped public opinion after a period of flat price increases in the 1990s, revealing substantially lower preferences for unequal taxes than was later registered in 2008. Among likely voters, this feature of Prop 13 was favored by 40.1 percent in 1998 vs. 48.3 percent in 2008; among renter voters, 25.1 percent vs. 28.1 percent; and among home owner voters, 46.3 percent vs. $56.6 percent. Increases in support for Prop 13 after the price boom thus were much greater among home owners than renters.

Public Support for Prop 13 is Softer among the Younger Generation

• Asked by the Field of Poll if they would vote for Prop 13 if given a chance, fewer of the recent buyers said yes (54 percent) than buyers who resided in their homes since before 1978 (79 percent).

• Recent buyers were also much less likely to be very familiar with Prop 13 (29 percent) than the long-time owners (75 percent), suggesting they did not yet have a firm position.

• Young voters in fact expressed no opinion on the question much of the time (37 percent among those under age 40) compared to older voters (less than 10 percent among those age 60 and over).

Implications for Public Policy

• An education plan is needed to ensure that California citizens understand Prop 13 and the effects of its many provisions.

• Dependency on ever rising house prices is no longer a good basis for fiscal policy. Alternative designs must be explored.

• Continued guarantees against unexpected large spikes in property taxes must be promoted.

• There is an unacceptable discrepancy between longtime owner's property taxes below the national average and their far higher housing wealth, especially when that discrepancy is supported by extra high taxes imposed on recent buyer who struggle with those high prices.

• Public policy needs to be more future regarding and not simply maximizing benefits for current voters at future expense.

Note

The present study is limited only to the questions of house values and property tax payments by home owners, who constitute 74 percent of the voters in 2009. It is not concerned with commercial or rental properties. The study also does not address broader issues or Prop 13, including the effects of tax limitations on service delivery, local control of tax revenues, or the two-thirds voting rule. Preparation of this report was conducted as part of a broader study of California's changing political demography, with support from the John Randolph and Dora Hayes Foundation.