A Note on the Impact of Prop 13 on Effective Tax Rates, Turnover, and Home Prices

Prop 13 has been around since 1978 and limits annual property tax increases to no more than 2% per year while property values have increased by several times this amount resulting in much lower property taxes on long held properties. Over time, as property tax burdens are restricted to a fraction of neighbor properties, owners are dis-incentivized from selling. Florida has a similar Prop 13 policy but it is 50% higher at 3% per year in a state with historically less appreciation. Other states are contemplating this policy as a way to not push homeowners out of their homes. The question addressed here is not one of equity, but rather how much does the reduction in supply of housing affect turnover and prices. We also examine actual property taxes paid, which suggests a large portion of the households are substantially benefitting from this policy. Further, we address how much does the lower property tax burden equal on a present value basis as a percentage of the total current home value. The answer is shockingly high.