Proposition 13 in 1978 was part of a nationwide cultural “tax revolt” by voters. It changed California’s property tax rules in three important ways:
1. It capped local property tax rates at 1 percent of a property’s assessed value, which is roughly the purchase price.
2. It limited the annual growth of a property’s assessed value to 2 percent, regardless of how much the market value changed.
3. It required the property’s value to be reassessed to market value only when its ownership changes.
Just as importantly, it also required that state tax increases had to be approved by a two-thirds legislative vote. This planted the supermajority rule that still governs California tax politics.
Prop 13 was passed by nearly two-thirds of voters, who were motivated by increases to property values that led to corresponding increased tax assessments. The soaring property values were caused by 1970s inflation, a surge in population growth and associated housing demand, and state and local regulations, such as the 1970 California Environmental Quality Act (CEQA), that caused a severe housing shortage.
What does Prop 13 mean for homeowners?
Prop 13 provides predictability for homeowners’ future tax liability but at the cost of creating enormous differences in property taxes between neighbors.
A family that bought their home in 1995 pays a 1 percent tax rate on roughly the home’s 1995 sale price plus 2 percent allowed growth each year, or 1 percent of approximately 1.8 times the 1995 sale price.
In comparison, assuming that the identical house next door was bought just last year, its new owners would pay 1 percent on an assessed property value that’s almost five times higher than the 1995 price, assuming that its value grew at the average rate for California. Those taxes would be 2.7 times larger than their neighbors’ for exactly the same house.
Long-tenured owners are protected against being taxed out of their homes, which was Prop 13’s 1978 promise. Newcomers and younger buyers shoulder correspondingly more of local taxes while homeowners have a powerful incentive to never move. This creates a “lock-in” effect that reduces housing turnover, limiting the housing available for growing families.
How did Prop 13 change California government?
Prop 13 caused at least three important spillover effects on tax policy, education, and local land use.
First, Prop 13 centralized power at the state level by reducing local governments’ ability to generate their own revenue. Property taxes had funded local government services and public schools, and Prop 13 cut them by more than half overnight. The legislature responded by back-filling local funding and, as a result, effectively took control of a lot of local policy, especially school finance.
Second, Prop 13 pushed California into relying more on the volatile income tax because any new taxes required a two-thirds majority for approval. See FAQ 5, “How Is the Budget Spent,” for an explanation of California’s boom-bust cycle of income tax revenue.
Third, Prop 13 implicitly changed land-use priorities. The restrictions on property tax revenue motivated cities to shift toward collecting more sales tax revenue, meaning that local leaders prioritized commercial growth, such as auto malls and big-box retail, over housing growth. Urban planners blame this “fiscalization of land use” as an important part of California’s housing shortage.
Given the problems associated with Prop 13, why does nobody change it?
The residential benefits provided by Prop 13 mean that proposed reforms have little public support, and voters have consistently shot down attempts to change it.
The most serious recent attempt, Proposition 15 in 2020, would have implemented a “split roll” reform by allowing market-value assessment for large commercial properties while leaving homes untouched. It lost, 48 to 52 percent.
The protection that homeowners feel from Prop 13 makes it one of the most popular policies in California polling memory. Its beneficiaries are concentrated, attentive, and numerous.
Adjustments happen at the edges. Proposition 19 in 2020, which passed with just over 51 percent, reworked inherited-property and senior transfers, but the core bargain has survived every challenge for nearly fifty years.
What should a voter actually know?
Prop 13 isn’t just a tax rate. It’s best understood as having been a fundamental change to California’s operating system. It explains the state’s dependence on income tax, the legislature’s grip on school funding, city zoning incentives, the two-thirds tax rule that shapes every revenue fight, and a meaningful share of the housing shortage.
Prop 13 advocates defend the measure as drawing a line in the sand against higher taxes. Its critics contend that it spawns tax inequities and deprives local government and public schools of added tax revenue.
Reasonable people can disagree about whether the trade-off is worth it, but nobody can understand a California ballot without knowing that the trade-off exists.
