To most, tax policy is boring—somewhere between the weather and cryptocurrencies. I study, teach, and write about taxes, mostly because I believe they are the price we pay for civilized society. But for decades, economists and analysts have ignored the racial effects of how the government raises revenue. And it looks as if the introduction of race into the tax equation seems to have blown things up just a bit. That’s a good thing.
This month marks the 45th anniversary of the most significant piece of tax policy in California history. Proposition 13, passed in 1978, did a number of things to keep all taxes, and especially property taxes, low across the state. It was the start of what would be called the Great Tax Revolt, which libertarians and conservatives would celebrate as a critical step to limiting the size of government. At last count, 45 states followed suit in some form—but California’s version, arguably, is the most restrictive.
Although the impact of Prop. 13 on the state’s public finance landscape is far-reaching and mostly negative, the capping of property tax assessments is its signature element. It essentially creates a property tax subsidy that increases the longer you own your home. I will spare you the math and just have you contemplate this idea: As long as the value of your home grows faster than 2% a year, you come out ahead. As a result, homeowners living in the same neighborhood, owning very similar properties, can pay vastly different amounts each year in property taxes.
Let me offer an example drawn from the real estate website Zillow. In San Rafael (Marin County), I can find a pair of three-bedroom/two-bath houses that were part of a 1960s development. They list at an identical 1,416 square feet and are about one block apart. One homeowner, who just moved into the neighborhood, paid $14,500 in taxes their first year (2021). The other owner—whose family bought the house in 1985— paid a whopping $9,000 less, with a property tax bill of $5,500. Both houses get the same level of public services—streets, roads, public safety—but one pays 2.5 times more in taxes.
That difference—the amount of tax a homeowner pays compared to the amount they would have paid if the property had been assessed at anything near market value—is what people like me call a subsidy. It is a benefit that one homeowner receives on a yearly basis simply because they have owned their home longer than their neighbor. Meanwhile, other Californians pay more in taxes to offset that difference.
Now, just comparing tax bills off the internet isn’t very comprehensive nor systematic. Which is why colleagues of mine at the Opportunity Institute and Pivot Learning collaborated on a report, “Unjust Legacy,” that examines Prop. 13 and its impact across racial and ethnic groups. They used data from the U.S. Census’ American Community Survey to compare property taxes and home values in an effort to estimate how the Prop. 13 subsidy is distributed. Their investigation found that the subsidy that Prop. 13 creates is larger for whiter, older, wealthier Californians.
The finding, when you think about it, isn’t very surprising. California is a very different place than it was in 1978. Its population is larger and much more diverse. And the Prop. 13 subsidy grows the longer you own a home–a benefit that you can pass on to your children.
Nonetheless, the reaction to the report has been swift and hot. Jon Coupal, longtime head of the Howard Jarvis Taxpayers Association—the multi-million organization that exists to defend Prop. 13—responded by offering up the argument that was the rationale for the ballot initiative in the first place: The cap on property taxes enables low-income homeowners to stay in their homes. His evidence? A woman in Texas who was forced out of her home because of high taxes. As evidence goes, it is pretty thin. In fact, in the 45 years since Prop. 13 passed, we still haven’t seen a systematic analysis to support this contention.
Dan Walters, a fixture of Sacramento politics who now writes for CalMatters, also rejected the findings of the report by arguing that income and wealth disparities among Californians “stem from multiple reasons that have nothing to do with Proposition 13.” He goes on: “White homeowners benefitted heavily from property tax limits because they were more likely to be homeowners in the first place.”
It is a position that feels a lot like the country club president who defends a lack of diversity among the membership by arguing that people of color don’t really like to play golf and tennis in the first place.
What is notable about the responses is the sense of attack embedded in their rush to defend the status quo. “The policy wasn’t designed to be racist” isn’t an acceptable rebuttal, particularly in a state such as California, where “colorblind” policies and analyses do not align with our laws and values and will continue to exacerbate inequities.
The findings of the “Unjust Legacy” report were one of a recent string of analyses on the intersection of race and taxes. A group at Stanford, working with IRS researchers, found that the IRS audited Black taxpayers at 2.9 to 4.7 times the rate of non-Black taxpayers. And, folks at the Tax Policy Center calculated that Black couples pay more in individual income taxes if they are married and white couples pay less—an annual advantage of $662 for white married couples relative to Black married couples.
We can argue all day about legislative intent, but the fact that a tax system systematically benefits one race or ethnic group over another is, at best, problematic. What could be done to change that in the case of Prop. 13? An obvious place to start is with commercial real estate. Assessing commercial properties at market rate is something that every other state does. Other options include limiting the subsidy created by Prop. 13 to a person’s first home or assessing vacant lots and homes owned by investment funds at the market rate. One more option would be to eliminate the assessment cap while expanding the state’s homeowners’ exemption—a tax break for first homes—but shielding the first, say, $250,000 in home value from taxes, making the whole property tax system much more progressive.
At any rate, I think many Californians can agree that reexamining how the government collects revenue through an equity lens is long overdue.