Proposition 5: A New Tax-Cutting Measure Shakes Up California’s Ballot

Proposition 5 is about property taxes, who pays them and how much. But it is a measure whose presence is practically drowned out on the crowded Nov. 6 ballot despite the stakes for California.

The measure, a constitutional amendment, is also about the state budget. The California Legislative Analyst’s Office puts the amount the state collects from property tax income, which supports local government services and schools, at $60 billion annually.

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Prop. 5, placed on the ballot by the California Association of Realtors , would change present law that allows both homeowners 55 years or older and the severely disabled a one-time opportunity to take their existing property tax assessment based on their old home’s original purchase price to a new home of equal or lesser value in California counties that permit the transfer (not all do) rather than an assessment based on the new home’s market value.

The Prop. 5 adjustment to the tax code would allow homeowners with the same eligibility to essentially keep their existing property tax bill when they move, with some possible adjustments — no matter how many times or where in California they move, and no matter the price of the new property they buy.

The taxes on the new property would be based on the assessed value of their old home, what that home sold for, and the purchase price of the new home.

If Prop. 5 passes, “you, as a person, would have a property tax you take with you,” said Lenny Goldberg, executive director of the California Tax Reform Association.

“You could buy a house on the beach and still retain your prior property tax status.”

There’s an inequity here and it skews against younger homebuyers. A California Budget & Policy Center calculation shows that a Californian 55 or older who sells a $1.4 million home that has a taxable value of $200,000, and purchases a new home for $1.5 million, would only pay $3,000 in annual property taxes. Someone under 55 would be taxed $15,000 for the same property.

The potential loss of local property tax revenues that support schools and services is what motivates Prop. 5 opponents, from the California League of Women Voters to the San Luis Obispo Chamber of Commerce. The state Legislative Analyst’s Office estimates that the schools and local government losses will run $1 billion annually. The analyst’s report notes that 85,000 homeowners older than 55 currently move to different homes each year without a property tax break incentive.

“Prop. 5 brings the realtors more profit,” said Veronica Carrizales, policy and campaign development director at California Calls, a statewide alliance of 31 organizations working to educate and mobilize young and infrequent voters. California Calls has organized nearly 4,000 volunteers statewide to speak to voters about Prop. 5 and its potential impacts on local school and government budgets.

The ballot measure is a gambit “to bring the tax conversation back to residential tax issues rather than the reform of commercial property tax structures,” she said. “Expand protections for seniors—keep it all about benefits for seniors.”

California Calls and other Prop. 5 opponents have set their sights on a bigger fight in two years. In September, as part of a coalition of labor, faith and community organizations, they qualified a measure for the 2020 ballot that would adjust Proposition 13 to re-assess commercial property taxes.

Unlike residential property that frequently changes hands in a straight-forward deed transfer, commercial land holdings can change ownership in a variety of ways. The sale of shares in a company that owns the land, for example, changes the ownership but not in a way that would trigger a property tax re-assessment.

In California political terms, any challenge to Prop 13 is potentially seismic. The landmark 1978 measure set the property tax rate at one percent of a property’s purchase price, with annual increases capped at two percent. It applies to commercial and residential properties but got its momentum and brand when it was overwhelmingly approved by homeowners hit hard by the existing tax structure on residential property.

Prop. 13 maintains a tight grip on the psyches of likely voters over 55. The 2020 ballot measure would not apply to their residential property. Commercial and industrial properties presently locked in at 1976 levels would be taxed based on current market value. The reform could yield up to $10.5 billion annually for the state, but would not change the tax structure for residential properties.

“Re-looking at Prop. 13 opens up a discussion about the real flaw in Prop. 13—which is [its] commercial property tax structure,” Goldberg said.

The real estate industry may well be bracing for that fight. In the meantime, August polls showed Prop. 5 trailing badly.

Proponents recently petitioned the Secretary of State to place a new version of Prop. 5—similar to the November measure—on the 2020 ballot. It is approved for circulation for signatures, with an April, 2019 deadline for signature collection.

Representatives of Prop. 5 proponents did not respond to multiple email queries from Capital & Main.

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