DECEMBER 2018
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CALIFORNIA PROPERTY TAX
1
THE BACKGROUND OF PROPERTY TAXES IN CALIFORNIA
Prior to 1912, the state derived up to 70 percent of its revenue from property taxes. The state no longer relies on
property taxes as its primary source of funds—since 1933, the only property tax directly levied, collected, and
retained by the state has been the tax on privately owned railroad cars. Currently, the state’s principal revenue
sources are personal income taxes, sales and use taxes, bank and corporation taxes, and a series of excise taxes.
Today, it is California’s counties, cities, schools, and special districts that depend on the property tax as a primary
source of revenue. The property tax raised more than $62.1 billion for local government during 2016-17. These
funds were allocated as follows: counties 15 percent, cities 12 percent, schools (school districts and community
colleges) 54 percent, and special districts 19 percent.
Proposition 13
On June 6, 1978, California voters overwhelmingly approved Proposition 13, a property tax limitation initiative. This
amendment to California’s Constitution was the taxpayers’ collective response to dramatic increases in property
taxes and a growing state revenue surplus of nearly $5 billion. Proposition 13 rolled back most local real property,
or real estate, assessments to 1975 market value levels, limited the property tax rate to 1 percent plus the rate
necessary to fund local voter-approved bonded indebtedness, and limited future property tax increases.
After Proposition 13, county property tax revenues dropped from $10.3 billion in 1977-78 to $5.04 billion in
1978-79. As a result, many local governments were in fiscal crisis. Keeping local governments in operation the first
two years following Proposition 13 required legislative “bailouts” to offset property tax revenue losses. A first-year
stopgap measure costing $4.17 billion in state surplus funds was necessary to directly aid local governments. A
second-year bailout, a long-term fiscal relief plan, cost the state $4.85 billion.
Prior to 1978, real property was appraised cyclically, with no more than a five-year interval between reassessments.
Since property values were systematically reviewed and updated, assessed values were usually kept at or near
current market value levels. In contrast, under Proposition 13, properties are reassessed to current market value
only upon a change in ownership or completion of new construction (called the base year value). In addition,
Proposition 13 generally limits annual increases in the base year value of real property to no more than 2 percent,
except when property changes ownership or undergoes new construction. Essentially, Proposition 13 converted
the market value-based property tax system to an acquisition value-based system.
Disparities in Assessed Value
Under Proposition 13, similar properties can have substantially different assessed values based solely on the
dates the properties were purchased. Disparities result wherever significant appreciation in property values has
occurred over time. Longtime property owners, whose assessed values generally may not be increased more than
2 percent per year, tend to have markedly lower tax liability than recent purchasers, whose assessed values tend to
approximate market levels.
Court Challenges to Proposition 13
Immediately after Proposition 13 passed, its constitutionality was challenged. The California Supreme Court upheld
the constitutionality of Proposition 13 in Amador Valley Joint Union High School District v. State Board of Equalization
on September 22, 1978. The decision rendered in this case remained the highest judicial ruling on Proposition 13
until 1992, when the United States Supreme Court ruled, in Nordlinger v. Hahn, that Proposition 13 did not violate
the equal protection clause of the United States Constitution. This ruling effectively ended speculation about
whether the judicial system would ever overturn or modify Proposition 13.