Property Tax Reductions to
Diminish as Housing Market Improves
MAC TAYLOR • LEGISLATIVE ANALYST • MAY 5, 2014
Executive Summary
Property Tax Reductions for Millions of Properties Due to Real Estate Crisis. e real estate crisis
that unfolded during 2007 and 2008 aected millions of California property owners and thousands of
local governments. Alongside its broader economic eects, which included widespread foreclosures,
reduced construction activity, and diminished household wealth, the decline in property values resulted
in temporary property tax reductions for 3.2million properties—about 2.6million homes and 600,000
other properties. ese property tax reductions were required by Proposition8 (1978), which modied
the provisions of Proposition13 to explicitly allow for such reductions when property values fall.
Local Revenues Reduced by Billions of Dollars. For homes that received property tax reductions
in 2013-14, the average homeowner received a $1,600 reduction in his or her property tax payment. For
other properties that received property tax reductions—mainly apartments, commercial buildings,
industrial facilities, and agricultural land—the average owner received a $7,500 property tax reduction.
In total, temporary property tax reductions depressed local government property tax revenues by an
estimated $7billion in 2013-14, amounting to a 15percent reduction statewide.
Real Estate Market Recovery Means Large Property Tax Increases for Many. e state’s real estate
markets are recovering. Home values increased 12percent during 2012, yet property taxes for most
property owners were largely unaected. is is because state law limits property tax increases for most
properties to 2percent each year. However, taxes on properties with temporary tax reductions under
Proposition8 can increase faster than 2percent each year. Property taxes for these properties increase
based on the property’s market value because these properties are assessed at market value each year
that they receive a reduced assessment. Real estate improvements during 2012 resulted in property tax
increases ranging from 5percent to 20percent for many of these properties in 2013-14. Looking ahead,
property tax payments for many owners that received temporary property tax reductions during the real
estate crisis could increase by more than 10percent annually for the next several years. ese increases
likely will cause local property tax revenues to grow swily over the next several years as well.
Introduction
For many California taxpayers, the property
tax is one of the largest tax payments they make
each year. For thousands of California local
governments—K-12 schools, community colleges,
cities, counties, and special districts—property tax
revenues form the foundation of their budgets each
year. Despite the major role that property taxes
play in California nance, many issues related to
this system are complex and not well understood.
e purpose of this report is to highlight one
such issue—reduced assessment properties
under Proposition8 (1978). is report describes
California’s property tax assessment system and
details how it responded to the recent real estate
crisis. It also reviews how temporary property tax
reductions aected taxpayers, local governments,
and the state. Lastly, it highlights how this system is
responding to the recent and widespread recovery in
real estate prices.
Property Taxes Are a Major Revenue Source for
Local Governments. e property tax is California’s
second largest source of tax
revenue. About $50billion
in property taxes each year is
collected and distributed to
local governments—including
counties, cities, school and
community college districts
(schools), and special
districts. Figure1 shows how
property tax revenues were
distributed statewide to these
governments in 2012-13.
Property taxes are collected
by the county and distributed
to local governments within
that county. e share of
countywide property taxes
each type of local government
receives varies in each county.
Property Taxes Also Aect the State Budget.
Under the state’s education nance system, schools
receive a certain level of general purpose funding, as
specied in the annual budget act. Schools receive
this funding from a combination of local property
tax revenue and state General Fund revenues. If
a school’s property tax revenue is insucient to
achieve the specied funding level, the state provides
General Fund revenue to meet this requirement.
Local property taxes therefore aect the state budget
because increases in local property tax revenue
allocated to schools typically oset state spending on
education.
How Does California’s Property
Tax System Work?
Most Property Taxed Based on Its Purchase
Price. In California, owners of real property (land
and buildings) pay an annual one percent tax based
on their property’s taxable value, or “assessed value.”
Proposition13 (1978) established the process county
ocials use to determine the assessed value of real
How Are Property Taxes
Allocated Among Local Governments?
a
2012-13
Figure 1
a
Amounts shown reflect the percentage of total revenue from the 1 percent basic rate and
voter-approved debt rates.
Schools and
Community Colleges
Cities
Special Districts
Former
Redevelopment
Obligations
Counties
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property. Under this system, when real property is
purchased, it gets an assessed value that is equal to
its purchase price, or “acquisition value.” Each year
thereaer, the property’s assessed value increases
by 2percent or the rate of ination, whichever is
lower. is process continues until the property is
sold, at which point it again is assessed to its most
recent acquisition value. In other words, a property’s
assessed value resets to market value each time it is
sold.
In most years under this assessment practice, a
property’s market value is greater than its assessed
value. is occurs because assessed values increase
by no more than 2percent per year, but market
values tend to increase faster. us, as long as the
property does not change ownership, its assessed
value increases predictably each year and is
unaected by faster increases in its market value.
For example, Figure2 shows how a hypothetical
property purchased in 1995 for $185,000 would be
assessed in 2012, aer having been sold in 2002
and reassessed at that time to its purchase price of
$300,000. In this example, the property is assessed at
its Proposition13 value each year.
What Happens When a Property’s Value Falls
Below its Proposition13 Value? When real estate
values decline, a property’s market value may fall
below its Proposition13 value, which is based on the
property’s most recent acquisition value. Without
an adjustment to its assessed value, the property
would be taxed based on an amount greater than
it is worth. In these events, county ocials reduce
the assessed value of a property by lowering it
from the property’s adjusted acquisition value
under Proposition13 to its current market value.
Properties that receive lower assessed values are
called Proposition8 “reduced assessment properties”
aer Proposition8, which explicitly allows for this
assessment reduction. Due to the recent downturn
in the state’s real estate markets, one-quarter of all
properties—about 3.2million—have assessment
reductions under Proposition8 in 2013-14.
Most Property Taxed Based on its Purchase Price
Figure 2
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100,000
200,000
300,000
400,000
500,000
$600,000
1995 1997 1999 2001 2003 2005 2007 2009 2011
Property Purchased in 1995
Assessed at acquisition value
Property Sold in 2002
Reassessed to acquisition value, then
increases by up to 2 percent annually
Market Value
Increases or decreases based
on local real estate conditions
1996 1998 2000 2002 20122004 2006 2008 2010
Assessed Value
Proposition 13 Value
Increases by a maximum
of 2 percent each year
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Figure3 illustrates the assessment of a
hypothetical Proposition8 reduced assessment
property over time. e market value of the
property purchased in 1995 stays above its
Proposition13 assessed value through 2007. en,
a signicant decline in its market value drops the
property’s market value below its Proposition13
assessed value. At this time, the property
receives a reduced assessment that is less than its
Proposition13 value. For three years, the property
is assessed at market value, which may increase or
decrease by any amount. By 2012, the property’s
market value has risen to what its assessed value
would have been under Proposition13. In later
years, the property’s assessed value is determined
by its original acquisition price adjusted upward
each year by as much as 2percent. In this example,
the property is assessed at its Proposition13 value
in some years and its market value in others.
Proposition8 During the Real Estate Crisis
Many Property Owners Purchased During
the Real Estate Boom. e recent real estate
crisis unfolded aer several years of pronounced
real estate activity during the mid-2000s.
Unprecedented new construction, home price
increases, and home sales levels characterized this
boom. Figure4 shows these trends for: (1)single-
family homes built, (2) existing single-family
homes sold, and (3) the median single-family home
sales price each year.
One important outcome of this housing
boom was that many Californians became recent
homeowners and most of them bought at or near
peak home prices. is interaction would have
signicant property tax consequences. As the
housing crisis hit in 2007, many homeowners,
especially recent buyers, had high acquisition
values for property tax purposes. Also, because
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Property is Taxed at the Lower of Market Value or Proposition 13 Value
Figure 3
100,000
150,000
200,000
250,000
300,000
$350,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Market Value
Increases or decreases based
on local real estate conditions
Property Purchased
Assessed at acquisition value
Proposition 8
Reduced Assessment
Property assessed
at market value
Proposition 13 Value
Increases by a maximum of
2 percent each year
Assessed Value
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Single-Family Homes Built
Existing Single-Family Homes Sold
Median Single-Family Home Sales Price
Unprecedented Housing Activity During Mid-2000s
Figure 4
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
100,000
200,000
300,000
400,000
500,000
$600,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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they purchased near the peak, market values
for these homes were similar to their assessed
values. Many of these newer owners would receive
Proposition8 reduced assessments as the real estate
crisis unfolded.
e Number of Proposition8 Properties
Increased Dramatically During the Crisis.
Figure5 shows the number of properties with
reduced assessments under Proposition8. During
the housing boom between 2002 and 2005, only
3percent of properties on average had reduced
assessment each year. As real estate values fell in
2007 and 2008, the share of properties with reduced
assessments increased tenfold. At its peak in
2012-13, about 3.7million properties, or one-third
of all properties, had reduced assessments.
Concentrated in Counties Hardest Hit
by Housing Crisis. Not surprisingly, reduced
assessment properties were concentrated in
counties hardest hit by the real estate crisis, where
price increases had been greatest during the
mid-2000s. Construction contractors, responding
to price signals at the time, built signicant new
commercial and residential developments in these
areas. Figure6 shows the relationship between
home price declines and the onset of reduced
assessments for counties with the highest shares
of reduced assessments. In particular, it shows (1)
the decline from peak to bottom for median single-
family home sales price and (2) the percentage of
properties in that county that received a reduced
assessment in 2013-14. Figure7 (see page 8), for
comparison, shows a statewide perspective of the
share of properties in each county that received a
reduced assessment in 2013-14.
Concentrated Among Single-Family Homes.
Most of the Proposition8 reduced assessment
properties are single-family homes. Homes and
condominiums make up about 80percent of
properties with reduced assessments. e rest
consists mainly of apartments, commercial
buildings, industrial facilities, and agricultural land.
Number of Proposition 8 Properties
Increased Dramatically During the Real Estate Crisis
Figure 5
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
(In Millions)
94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14
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Proposition 8 Properties Concentrated in Counties Hardest Hit by Housing Crisis
Figure 6
Median Single-Family Home Sales Price
Percentage of Properties With
Reduced Assessments in 2013-14
Stanislaus
Riverside
San Joaquin
Contra Costa
Placer
Fresno
El Dorado
$370K
$430K
$430K
$920K
$530K
$310K
$370K
Percentage Decline
(Peak to Bottom)
65%
60%
65%
48%
53%
58%
35%
51%
44%
43%
42%
40%
39%
38%
PEAK
$130K
$170K
$150K
$480K
$250K
$130K
$240K
BOTTOM
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Alameda
Stanislaus
San
Joaquin
Calaveras
Solano
Marin
San Francisco
San Mateo
Santa Cruz
Santa
Clara
Del
Norte
Siskiyou
Modoc
Trinity
Shasta
Lassen
Humboldt
Tehama
Plumas
Mendocino
Glenn
Butte
Sierra
Nevada
Yuba
Colusa
Lake
Placer
Yolo
Sonoma
Napa
El Dorado
Alpine
Tuolumne
Mariposa
Merced
Madera
Fresno
San
Benito
Monterey
Kings
Tulare
Inyo
San Luis
Obispo
Kern
Santa Barbara
Ventura
Los
Angeles
San Bernardino
Orange
Riverside
San Diego
Imperial
Contra
Costa
Mono
Sutter
Amador
Sacramento
Figure 7
Share of Properties With
Reduced Assessments
Reduced Assessments Are Widespread
Less Than 20%
20% to 30%
30% to 40%
More Than 40%
Trinity County data is unavailable.
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How Did Proposition8 Aect
Property Owners During the Crisis?
How Much Were Taxable Values Reduced?
When owners receive a Proposition8 assessment
reduction, their property’s taxable value is reduced
temporarily to its market value, which is some
amount below its Proposition13 value. e size of
this reduction varies for each property depending
on (1) its initial acquisition value, (2) how much
that had increased over time under Proposition13,
and (3) how far below that value its market value
had fallen. We estimate that the average reduced
assessment for a single-family home under
Proposition8 was $140,000. is means that the
current market value for the average homeowner
with a reduced assessment is $140,000 lower than
what its Proposition13 value would otherwise have
been. On average, single-family homeowners with
reduced assessments received a $1,600 property
tax reduction for 2013-14. (In addition to the
1percent statewide property tax rate, some local
governments levy additional rates to repay voter-
approved infrastructure projects. us, property
tax reductions are somewhat greater than 1percent
of reduced taxable value under Proposition8.)
Commercial properties—mainly apartments,
retail stores, industrial facilities, and agricultural
land—tend to be larger and more valuable than
single-family homes. us, commercial properties
with Proposition8 reduced assessments received a
$650,000 reduction, on average, equal to a $7,500
reduction in property taxes. (ese estimates rely
on property tax information from Los Angeles,
Orange, Santa Clara, San Mateo, San Francisco,
and Riverside counties.)
How Do Proposition8 Properties Return
to eir Proposition13 Assessments? A
property under reduced assessment returns to
its Proposition13 value in one of two ways. First,
its market value increases faster than 2percent
each year until it exceeds the amount that its
assessment would have been had its market
value never declined. Each year thereaer, the
property’s Proposition13 value cannot increase
by more than 2percent each year. e second way
a property under reduced assessment returns to
its acquisition-based value is when it is sold. is
occurs because properties are assessed at their
acquisition value (purchase price) when they
change ownership. Of the 500,000 properties that
returned to their Proposition13 value assessment
in 2013-14, about 60percent did so due to market
value increases and 40percent did so aer being
sold.
How Did Proposition8 Aect
Governments During the Crisis?
In reducing property taxes for millions of
owners, reduced assessments also aected local
government nances. For many of California’s
4,000 local governments, property tax revenues
are the foundation of their annual budgets. Not
surprisingly, Proposition8 reduced assessments
have aected the services these governments have
been able to provide.
Proposition8 Properties Reduced Local
Property Taxes by About $7Billion. Based on
limited data, we estimate that the 3.2million
Proposition8 reduced assessments in 2013-14
lowered local property tax revenue by about
$7billion statewide. is amount is equal to
a 15percent reduction in total property taxes
collected in California. (As noted before, this
estimate is an extrapolation of data from six large
counties.)
Reduced Assessments Also Increased State
Spending on Education. About 40percent of
local property tax revenues go to schools. In most
cases, property tax revenues that go to schools and
community colleges oset required state spending
on education. As a result, most reductions in
school property taxes are made up by increases in
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state resources for education. us, the 3.2million
Proposition8 reduced assessments, which lowered
total local property taxes by about $7billion,
likely increased state education spending by about
$3billion in 2013-14.
Proposition8 During the Real Estate Recovery
By ocial measures, the Great Recession ended
in 2009. California’s housing markets nevertheless
continued to struggle. In early 2012, however,
localized real estate improvements spread and
the housing recovery gained momentum. Home
values statewide climbed 12percent in 2012. Below,
we describe how this pronounced improvement
aected property owners with reduced assessments
and how it has aected local government revenues.
Number of Proposition8 Properties Declined
in 2013-14. For the rst time since 2006-07, the
number of Proposition8 reduced assessment
properties declined in 2013-14, from a peak of
3.7million in 2012-13 to 3.2million in 2013-14.
As mentioned earlier, about 60percent of this
decline resulted from price appreciation, where
the 2013-14 market value of reduced assessment
properties exceeded their original assessment
under Proposition13. Relatedly, because real estate
markets have been strengthening, it is unlikely that
many additional properties received Proposition8
reduced assessments in 2013-14.
Many Proposition8 Property Owners
Saw Increased Assessments in 2013-14. In
general, areas where real estate values have
increased recently have seen correspondingly
large assessment increases for properties under
Proposition8. In the near term, many of these
owners will experience increases in their property
taxes that are much larger in percentage terms
than increases for owners whose property did not
receive a reduced assessment. For example, single-
family homeowners with reduced assessments
in LosAngeles County saw average assessment
increases of 5percent in 2013-14. Commercial
properties with reduced assessments had their
assessments increased, on average, by 9percent.
In Santa Clara County, assessment increases in
2013-14 for single-family homeowners with reduced
assessments averaged 13percent. For condominium
owners, the average increase in assessed value was
much higher—20percent. In Sacramento County,
assessments for reduced assessment properties
increased on average by 6percent.
Proposition8 Properties Contributed to
Property Tax Growth in 2013-14. Proposition8
properties reduced local property tax revenues
during the real estate crises. As real estate markets
recover and these properties begin to see large
annual assessments increases, Proposition8 has
the opposite eect. is is because assessment
increases for these properties are not limited to
2percent; instead, they can increase or decrease by
any amount, based on local real estate conditions.
In particular, annual assessment increases above
2percent contribute to growth in local property
taxes because this growth exceeds what would
have occurred if the property’s assessment increase
remained limited under Proposition13. In many
counties, Proposition8 property assessments
increased in 2013-14 for the rst time since the
recession began.
In Los Angeles County, for example,
assessments for Proposition8 properties increased
by a total of $10billion in 2013-14, generating
additional property revenues of $120million for
local governments there.
Assessment Increases Expected to Continue
and Perhaps Accelerate. Real estate prices
improved in calendar year 2012. As a result,
2013-14 property tax assessments, based on
property values as of January 1, 2013, increased for
many reduced assessment properties. Most of the
recent home price gains, however, occurred aer
January 1, 2013, and therefore are not included
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in the 2013-14 assessment determinations. In
particular, California home values increased
12percent in 2012 (included in the 2013-14
assessment determinations), but went on to increase
almost 20percent in 2013. For 2014-15, mindful of
this timing, we expect large assessment increases—
as much as 10 percent or 20 percent in many
cases—for properties that currently have reduced
assessments. Going forward, property tax increases
for owners that received temporary reductions
during the real estate crisis could exceed 10 percent
annually for several years. ese increases will
boost local property tax growth rates over the
next several years. At the same time, the number
of reduced assessment properties will decline as
assessment increases climb above their original
Proposition13 assessment value and reduced
assessment properties change ownership.
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