Dan Walters

Dan Walters: Rising housing market could generate windfall of property taxes

Dan Walters
Dan Walters

California’s housing market is rebounding sharply from the worst recession since the Great Depression, with fast-rising sales and prices.

However, the overall rate of inflation remains very low by official measurement. And the contrast between those two economic factors is creating some uncertainty in property taxes.

Proposition 13, the landmark property tax limit passed by voters in 1978, allows taxable values of homes and other property to be annually increased by the rate of inflation or 2 percent, whichever is lower.

That means, local officials say, that even though market values of homes have been jumping, especially in urban areas, the low official inflation rate is limiting tax assessors’ ability to capture the increased values.

There is, however, an exception to Proposition 13’s limits. When a property changes hands, its taxable value is increased to the sales price.

Therefore, if the market in housing remains strong and the rate of turnover increases, those higher values will, at some point, be reflected in taxable values and therefore in revenue to schools and local governments.

Adding new construction of both housing and commercial property to the equation could result in a boom of property taxes during the rest of the decade, according to a projection of the state’s fiscal situation by Legislative Analyst Mac Taylor.

Taylor sees the state amassing multibillion-dollar surpluses beginning next year, and a big factor in that forecast is a boom in property taxes.

How so?

While property taxes are exclusively paid into local government and school district treasuries, the state has an indirect stake in their level due to another voter-passed measure, 1988’s Proposition 98, which sets forth how public schools are to be financed.

Each school district is guaranteed a certain level of financing under Proposition 98, and the first increment comes from its share of local property taxes, with the state making up the difference.

Taylor believes that a strong real estate market will result in a boom of property taxes that will allow the state to hold its share of school financing almost level.

Taylor sees total financing of schools increasing from $62.2 billion in 2014-15 to $73.7 billion in 2019-20, but the state’s share rising from $45.4 billion to just $49.1 billion while local property taxes jump from $16.8 billion to $24.6 billion.

The money that the state would not have to spend on schools would fatten its own potential budget surpluses during the decade to as much as $10 billion a year. And cities, counties and special districts which receive about two-thirds of property taxes would also reap the revenue bounty.

This is all, of course, somewhat speculative and assumes that the recovery, and the mini-boom in housing, will continue – by no means certain.