What you need to know about Proposition 5: Property tax break for seniors
If more older homeowners moved, it might make more houses available for younger families and ease California’s housing crunch.
Proposition 5, however, is not how to make that happen. Instead, the Nov. 6 ballot measure would make property taxes in California even less fair while devastating the budgets of local schools and governments. Voters should reject it.
Under existing law, a home’s tax value is only changed when it is sold. Property taxes are set at 1 percent of the purchase price, and that tax value can only increase by as much as 2 percent a year. Since Proposition 13 passed in 1978, that has produced huge disparities in property tax bills between identical houses, depending on when they were bought.
Since Proposition 13 became law, voters also added further protections for seniors. Homeowners who are older than 55 – or who are disabled or whose house has been destroyed by natural disaster – can make a one-time “transfer” of the tax value of their home to a new house, as long as its market value is not higher than the old one.
Proposition 5 would allow all homeowners older than 55 to use this same tax break to buy a more expensive house, as many times as they want. Also starting Jan. 1, it would allow transfers from anywhere in the state. As of November, only 10 counties will allow transfers from outside counties, none in the Sacramento region.
Homeowners – including those older than 55 – also have another tax shelter because in 1986, voters prevented reassessments for transfers between parents and children, which happens about 70,000 times a year. Even if they don’t want to live in houses they inherit, beneficiaries can convert them into rentals or vacation homes and keep the tax break.
The bottom line is seniors already have plenty of protections from steep property tax increases and don’t really need another tax shelter.
Proposition 5 is sponsored by the California Association of Realtors, whose members would profit from increased home sales. The campaign committee it is sponsoring has raised $7.2 million so far.
The association says that California has an “unfair moving penalty” that makes it unaffordable for many seniors to move when their homes are too big or too far away from family. It says this measure would “unlock” the housing market.
But the independent Legislative Analyst’s Office points out that 85,000 homeowners older than 55 already move to new houses each year.
Plus, the LAO projects that Proposition 5 would initially reduce property tax revenues to schools by $100 million a year and to local governments by another $100 million a year and eventually by $1 billion a year each. The loss from homeowners who would have moved anyway would be far larger than gains from higher home prices and more homebuilding. That’s money going to public safety, schools, services to seniors, and even to build and subsidize affordable housing.
Because of the potential impact on their members, SEIU California has put $1 million into the no campaign so far and the California Teachers Association has sunk another $500,000.
It should be a telltale sign to voters that many housing advocacy groups are not backing Proposition 5. Opponents argue convincingly that the measure isn’t going to help the vast majority of Californians who are being squeezed by the affordable housing crisis, including the working poor struggling with rising rents.
Instead, many homeowners who would profit from Proposition 5 have already benefited from property tax breaks over the years and would get a huge windfall when they sell their houses.
Here’s an example from the LAO that explains the impact: A 55-year-old couple bought their home 30 years ago for $110,000. After the 2 percent annual increases, it now has a tax value of $200,000, so their bill is $2,200 a year.
That home has a market value of $600,000. Under current law, if the couple sells it and buys a home for less than that, they can transfer the assessed value of their old house, so their tax bill would stay at $2,200 a year.
If Proposition 5 is approved, the couple could buy a more expensive house and still get the tax break. On a $700,000 home, the new tax bill would be $3,300, instead of $7,700 without it.
Proposition 5 is a reminder that California’s property tax system does need to be made more equitable. But this measure would only make it worse. That is the wrong direction for California.