Is California really a low property tax state?

Spoiler alert: the answer to that question is no. But even if you suspected this to be true, it doesn’t hurt to understand why. 

Prior to the passage of Prop. 13 in 1978, the average property tax rate in California was about 2.6%. In addition to this high tax rate, California, like most states, imposed the tax annually on the market value of property. Because California’s real estate market was robust throughout the 70’s, market values grew rapidly, and property tax bills skyrocketed.

Prop. 13 cut property taxes in a very significant way. It reduced by more than half the property tax rate – capping it at 1% – but also limited increases in taxable value to 2% annually.

The fact that property taxes were cut so dramatically might explain why so many assume that California is a low property tax state. This assumption – more of a myth now – is perpetuated by tax-and-spend interests who argue incessantly for higher taxes.

But here are the facts: 

When it comes to total property tax collections, California ranks 19th out of the 50 states, according to the authoritative Tax Foundation. The “per capita” calculation is important because it refutes the argument advanced by progressives that California does not generate sufficient revenue for local government services. 

In response, tax-and-spend interests point to another Tax Foundation metric, which shows California ranking a relatively low 33rd in property taxes paid as a percentage of owner-occupied housing value. But this doesn’t prove that the state is tax-starved. It demonstrates that Prop. 13 achieves two seemingly conflicting policy outcomes: Generating above average revenue for local government services while protecting homeowners from being taxed out of their homes.

California’s “effective” property tax rate is less than one percent (.75%) because of Prop 13’s 2% limit on annual increases. (The longer one stays in a house, the more likely that the market value will exceed the assessed value). Contrast this with Texas where the “effective” property tax rate is 1.68%, almost double that of California. Taken in isolation, one would have to wonder why so many Californians are moving to Texas. The answer is simple: If property taxes were all that California collected, Texans would be moving here, not the other way around. (Texas has a top income tax rate of zero while California’s is the highest in the nation at 13.3%). More importantly, because housing is far more expensive in California, two identical houses, one in Houston and one in the Bay Area, could have wildly different property tax bills rendering meaningless the “effective” tax rate measurement. 

The Tax Foundation explains this: “Some states with high property taxes, like New Hampshire and Texas, rely heavily on them in lieu of other major tax categories. This often involves greater devolution of authority to local governments, which are responsible for more government services than they are in states with greater reliance on state-level revenues like income or sales taxes.” No sane Texan would trade that state’s total tax structure for California’s. 

Another major consideration in determining if California is a high or low property tax state is something missed by all the traditional comparisons. Those comparisons only measure the traditional ad valorem (based on value) property tax which, as mentioned above, is limited to one percent in California. But California imposes many more taxes and levies that appear on the property tax bill beyond the ad valorem tax. And those add up. Don’t believe us? Just look at your property tax bill. 

Parcel taxes and a myriad of bond levies appear on virtually every property tax bill issued in California. In many jurisdictions, the “below the line” taxes and fees exceed the ad valorem levy. In 2014, the California Taxpayers Foundation compiled data on the prevalence of parcel taxes revealing about $2 billion statewide. Since that report is a decade old it is likely that that figure has doubled. 

While California homeowners might not fully understand all the complexities of existing data related to property taxes and all the comparative metrics, the best test is to simply ask, do you want to pay higher property taxes?  How many Californians would answer that in the affirmative? 

Jon Coupal is president of the Howard Jarvis Taxpayers Association.