Winning the Property Tax Battle in California: A Comprehensive Guide to Filing and Fighting for Fair Assessments

PART I

UNDERSTANDING PROPERTY TAXES

Property taxes are vital for funding local government services, including public education, safety, infrastructure, and health services. They are calculated based on the assessed value of properties, which is determined by local tax assessors considering factors such as location, size, condition, and recent sales. This assessed value is then multiplied by a tax rate set by local authorities to determine the annual property tax amount.

Understanding the distinction between assessed value and market value is crucial. While market value reflects what a property could sell for, assessed value is used for tax purposes and is capped by Proposition 13 to increase by no more than 2% annually unless the property is sold or improved.

Proposition 13, passed in 1978, reformed California’s property tax system by capping property tax rates at 1% of the assessed value and limiting annual increases in assessed values. This provides stability and predictability for long-term property owners but can create disparities between long-term owners and new buyers, as newer assessments may reflect higher market values. Property taxes remain the cornerstone of funding for essential local services such as schools, public safety, infrastructure, public health, and parks, making it crucial for property owners to understand how these taxes are assessed and calculated."

CHAPTER 1

DEFINING PROPERTY TAXES AND THEIR PURPOSE

Property taxes are local government levies on property value, vital for funding municipal services. They are essential for maintaining and improving the quality of life within communities by financing public education, safety, infrastructure, and health services.

The Role of Property Taxes in Funding Local Government Services

Property taxes are the cornerstone of funding for local government services. Here are their major contributions:

Schools: A significant portion of property tax revenue supports public education, covering teacher salaries, school infrastructure, supplies, and educational programs to ensure access to quality education.

Public Safety: Police and fire departments rely heavily on property taxes for their operational budgets, helping to maintain staffing levels, purchase equipment, and support training programs that keep communities safe. Some fire agencies are organized as special districts with separate property tax levies in addition to a percentage of the base Proposition 13 assessment.

Infrastructure: Property taxes finance the maintenance and development of local infrastructure, including roads, bridges, and public buildings, ensuring community functionality and supporting growth and development.

Public Health and Welfare: Local health departments and social services benefit from property tax revenue, funding public health clinics, vaccination programs, housing assistance, and other social services.

Parks and Recreation: Property taxes also support public parks, recreational facilities, and community programs, enhancing residents' overall well-being and quality of life.

How Property Taxes are Calculated

Calculating property taxes involves several critical steps:

Assessing Property Value: The local tax assessor evaluates the property to determine its assessed value, considering factors such as location, size, condition, and recent sales of comparable properties. Additional details on Proposition 13's impact on assessment are discussed in the next chapter.

Applying the Tax Rate: The assessed value is multiplied by the tax rate, determined by local government authorities. The tax rate is typically expressed as a percentage or rate per thousand dollars of assessed value.

Calculating the Tax: The product of the assessed value and the tax rate results in the annual property tax amount.

The formula for calculating property taxes is:

Property Tax = Assessed Value x Tax Rate

Clarifying the Difference Between Assessed Value and Market Value

Understanding the distinction between assessed value and market value is crucial in property taxation:

Market Value: The price the property would likely fetch in an open market under typical conditions, reflecting current economic conditions, property condition, and buyer demand.

Assessed Value: The value determined by the local tax assessor for calculating property taxes. Under Proposition 13 in California, the assessed value cannot increase more than 2% per year unless the property is sold or undergoes new construction, which resets it to the market value.

Key Terms: Assessed Value, Market Value, and Tax Rate

To understand property taxation, understanding the following term is essential:

Tax Rate: The percentage of the assessed value that is levied as tax. This rate is determined by local government and can vary depending on the jurisdiction and the specific needs of the community.

Examples to Illustrate These Terms

Example 1: Understanding Assessed and Market Values

Consider a home purchased for $300,000. Under Proposition 13, the base-year value for tax purposes is set at $300,000. The assessed value can increase by no more than 2% annually, regardless of changes in the market value. After five years, the assessed value might be $331,000 due to the 2% annual cap (compounding), even if the market value has risen to $450,000.

Example 2: Calculating Property Taxes

Assume the assessed value of a property is $331,000, and the local tax rate is 1.2%, including assessments above Proposition 13 limits. The property tax calculation would be:

Property Tax = Assessed Value x Tax Rate

Property Tax = $331,000 x 0.012

Property Tax = $3,972

The annual property tax for this property would be $3,972.

Quick Reference Definitions

Assessed Value: The value of a property determined by the tax assessor for tax purposes, which can increase by a maximum of 2% per year under Proposition 13, except when reassessed at market value.

Market Value: The price at which a property would sell in an open market under normal conditions.

Tax Rate: The percentage of the assessed value that is levied as tax by the local government.

Proposition 13: A California law passed in 1978 that caps property tax rates at 1% of the assessed value and limits annual increases in assessed value to 2%, unless the property is sold or improved. A deeper analysis of Proposition 13 is provided in the next chapter.

Reassessment: The process of recalculating the assessed value of a property, typically triggered by a change in ownership or new construction.

By understanding these concepts and terms, property owners can better navigate the property tax system and ensure that they are being taxed fairly.

CHAPTER 2

OVERVIEW OF THE PROPERTY TAX SYSTEM IN CALIFORNIA

Proposition 13: Origins and Implications

Proposition 13, passed in 1978, significantly reformed California’s property tax system. This amendment to the California Constitution was designed to limit the amount of property taxes that could be levied on homeowners and businesses. Here are the key provisions and their impacts:

Key Provisions of Proposition 13

1. Property Tax Rate Cap:

Limits property taxes to 1% of the property’s assessed value at the time of purchase, plus any voter-approved local taxes and assessments.

2. Assessment Limits:

Assessed values of properties are set based on their 1975-76 value or the most recent purchase price if the property was acquired after 1975.

3. Annual Escalation Cap:

Limits annual increases in the assessed value of a property to a maximum of 2% per year, regardless of actual increases in market value.

4. Reassessment Upon Sale:

Properties are reassessed at their current market value only when they are sold or undergo new construction. This new assessed value becomes the baseline for future tax calculations.

5. Supermajority for Tax Increases:

Requires a two-thirds majority vote in the state legislature to increase state taxes and a two-thirds majority vote by local voters for local governments to impose new special taxes.

Impact on Property Tax Rates and Assessments

Proposition 13 has both benefits and drawbacks. It provides predictability and stability in property tax bills for long-term property owners but can lead to disparities in tax burdens between long-term owners and new buyers. Additionally, it limits the ability of local governments to raise revenue through property taxes, which can impact public services.

While Proposition 13 was designed to provide tax relief and predictability for property owners, it has also introduced complexities and unintended consequences. Here are the key points:

Compounding Increases:

The 2% annual increase might seem small, but it compounds over time. For example, if a property is initially assessed at $300,000, its value would be $306,000 in year 2, $312,120 in year 3, and so on. Over several years, this compounding effect can significantly increase the assessed value, even if the market value does not rise as sharply.

Over-Assessment Concerns:

Approximately 80% of properties in California are considered to be over-assessed, yet county tax collectors continue to increase assessed values automatically year after year to feed government’s thirst for revenue. Even though the 1% tax rate remains constant, the increasing Assessed Value results in higher annual property taxes. For more details, refer to the third paragraph in the linked media release from the Sacramento County Assessor’s office here (https://assessor.saccounty.gov/MediaReleases/Pages/2015-16RollTotalsNR.aspx ).

Outcomes of Proposition 13

Stability for Homeowners: Proposition 13 does provide predictability and stability in property tax bills for homeowners by prohibiting increases in the Tax Rate.

Revenue Limitations for Local Governments: Limits the ability of local governments to raise revenue through property taxes, potentially affecting funding for public services such as education and infrastructure.

Disparities in Tax Burden: Proposition 13 creates disparities in property tax burdens between long-term property owners and new buyers. New buyers may face significantly higher tax assessments due to market values increasing at a faster rate than assessed values. For example, homeowners who purchased homes in a neighborhood in the aftermath of the Great Recession may be levied $5,000 per year in property tax, while homeowners on the same street who purchased several years prior to the recession might be paying $10,000 to $15,000 to live in the same type and size of house on the same block. These are observed real-world examples, not hypothetical.

Economic and Political Climate Leading to the Passage of Proposition 13

Economic Climate

Rising Property Values: During the early to mid-1970s, California experienced a significant increase in property values. This surge was driven by a booming real estate market, urbanization, and the state’s attractive economic opportunities that led to a large migration into the state. As property values soared, so did property tax assessments, leading to sharply higher property tax bills for homeowners.

Inflation: The 1970s were characterized by high inflation rates, which eroded purchasing power and made everyday living expenses increasingly burdensome for Californians. Inflation affected all aspects of life, including housing costs. For homeowners, the combination of rising property values and inflation translated into unaffordable property tax increases.

Fixed Incomes and Limited Wage Growth: Many Californians, particularly retirees and individuals on fixed incomes, struggled to cope with rising property taxes. While property values and taxes escalated, income levels did not keep pace. Wage growth was relatively stagnant, making it difficult for average homeowners to manage their increased tax burdens.

Economic Uncertainty: The economic landscape of the 1970s was marked by uncertainty. Recessionary periods, oil crises that spiked prices at the pump, and fluctuating employment rates contributed to financial instability for many residents. The unpredictability of economic conditions heightened the urgency for measures that could provide financial relief and stability.

Political Climate

Taxpayer Revolt: The economic pressures faced by homeowners galvanized a taxpayer revolt. Citizens began to demand relief from what they perceived as oppressive and unpredictable property tax increases. Grassroots movements emerged, advocating for reform and greater control over property taxation. Government employees, which rarely see an interruption in their income, can be slow to perceive the struggles of those in private industry. The slowness can be seen as tone deaf by private industry struggling to meet payrolls, pay their taxes, or even survive. This frustration ripples through the pyramid of employees, and the other businesses those employees patronize.

Proposition 13 as a Political Solution: Proposition 13, officially known as the People’s Initiative to Limit Property Taxation, was introduced by Howard Jarvis and Paul Gann. It intended to provide immediate and long-term relief to property owners by capping property tax rates and limiting annual increases in assessed value. The initiative proposed a cap of 1% on property tax rates based on the assessed value at the time of purchase, with a maximum annual increase of 2% unless the property was sold or newly constructed.

Broad-Based Support: Proposition 13 garnered widespread support from a broad coalition of Californians, including homeowners, renters, and business owners. The appeal of tax stability and predictability resonated across diverse demographic and economic groups. The initiative promised to curb the unchecked power of local governments to increase property taxes without direct voter approval.

Legislative Inaction: Prior to Proposition 13, there were numerous attempts within the state legislature to address property tax concerns, but these efforts failed to produce significant reform. Frustration with legislative inaction and the perception that state and local governments were unresponsive to taxpayer concerns contributed to the momentum behind