Property Tax Limitations and Mobility: Lock-in Effect of California's Proposition 13

In 2003 financier warren Buffett announced that he paid property taxes of $14,410 (or 2.9 percent) on his $500,000 home in Omaha, Nebraska, but paid only $2,264 (or 0.056 percent) on his $4 million California home.¹ Although Buffett is known as an astute investor, his low California property taxes were not due to his investment prowess, but rather to Proposition 13. Adopted by California voters in 1978, Proposition 13 mandates a property tax rate of 1 percent plus the cost of interest on locally approved bonds. It also requires that properties be assessed at their market value at the time of purchase and allows assessments to rise by no more than the inflation rate or 2 percent a year, whichever is lower. Reassessment to full market value occurs only when the property is sold again. This means that as long as property values increase by more than 2 percent a year, homeowners benefit from remaining in the same house because their taxes are lower than they would be on a different house of the same value. Proposition 13 thus gives rise to a lock-in effect for owner-occupiers that becomes stronger over time. It also affects renters indirectly because it raises the price of owner-occupied homes and has caused many California cities to adopt rent control.²

In this paper we use a difference-in-difference (DD) approach to test the lock-in effect of Proposition 13 on owners and renters in California. We find that from 1970 to 2000, holding everything else constant, the average tenure length of owners in California increased by 0.66 years, or 6 percent, relative to that of owners in our comparison states. The tenure length of renters also increased over the same period, but the increase appears to be due to the widespread adoption of rent control in California cities after Proposition 13, rather than to the initiative directly. We also find that the lock-in effect of Proposition 13 varies substantially across migrant groups, with migrants to California responding more than native-born Californians. Finally, we find that the response to Proposition 13 increases sharply as the subsidy rises: owners with the lowest subsidies of $250 (typical of Fresno) increased their tenure length by less than one year, but owners with higher subsidies of $1,000 (typical of Los Angeles/Orange County) increased their tenure length by 1.2 years, and those with subsidies of $1,700–$2,600 (typical of San Francisco/San Jose) by two to three years.

In this paper we describe the property tax system in California and in our control states. We also discuss the prior literature and theory of how property tax limitations affect mobility, describe our data, and present regression results.

Property Tax Limitations

How do property taxes in California differ from those in Texas and Florida, which we use as our control states? We turn now to details about the property tax regulations in the three states.

California

Proposition 13, adopted in June 1978 as a ballot initiative, rolled back property assessments to the level that prevailed when the owner acquired the property or the level in 1975–76, whichever date was later, and cut the property tax rate to 1 percent plus the cost of locally approved bonds. Proposition 13 also limited assessment increases to the inflation rate or 2 percent a year, whichever is lower, until the next time the property is sold. At that point, the property is reassessed at market value. These provisions apply to all types of property. Several additional propositions have extended the reach of Proposition 13. Proposition 8, adopted in November 1978, requires that properties be assessed at market value if their Proposition 13...