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Politics

Did Prop 13 cause LA's housing crisis?




A worker digs a trench in front of a home under construction at a new housing development on March 17, 2015 in Larkspur, California.
A worker digs a trench in front of a home under construction at a new housing development on March 17, 2015 in Larkspur, California.
Justin Sullivan/Getty Images

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Proposition 13 limits how fast property taxes can grow, and depending on who you talk to, people either love it or hate it.

"It’s without a doubt one of the stupidest tax rules in the history of taxes," says economist and hater Chris Thornberg, who says Prop 13 deserves most of the blame for the housing crisis. "Ultimately, I think it’s 90 percent."

Prop 13 was created to help beleaguered homeowners

California voters in 1978 passed Prop 13 by a wide margin, and the effort was the brainchild of the late Howard Jarvis.

At the time, he was a 74-year-old with slicked-back hair, eyes squinting through square-shaped glasses, frequently photographed as he was shaking his fist in the air.

"Some people thought he was irascible," remembers his right-hand man, Joel Fox.

But he was just an everyday guy who made tax reform his mission. In the years leading up to Prop 13, Jarvis launched several failed campaigns against higher taxes in California.

There was a perfect storm of events in 1978, though, that helped him sway voters. The energy crisis made things like gas expensive. The economy was shaky.

Then homeowners got socked with a big jump in their property taxes.

"Some of them had to move if they couldn’t afford it," says Fox. "I think the worst case scenario was that a home that you lived in and loved and built up, you might have lost."

He adds that, at the time, the state government was sitting on a big cash surplus, too.

Jarvis tapped taxpayers’ frustrations that they were getting poorer as California’s coffers were getting richer. That eventually led voters to approve his idea: Proposition 13.

Why Prop 13 gets the blame for the housing crisis

Proposition 13 locks in a property tax that's 1 percent the purchase price of a home. After the first year, the tax cannot increase more than 2 percent of that original bill.

Fox says it's been a great thing for Californians for 39 years because it helps people stay where they are. If it weren't around, he says, then there would be even more people on the streets.

"People on fixed incomes are the first ones you’d look at at potentially losing their home," he says.

However, Prop 13 does have its detractors, who think its problems have compounded over the years, culminating in the current housing crunch.

"People understand how ridiculous this rule is," says economist Chris Thornberg, "people who benefit from it – people like me!"

His argument rests on supply and demand. A community depends on taxes to pay for things like schools, firefighters and fax machines, and a city can't pay the bills if there's a limitation on a revenue stream like property taxes.

"It’s financially bad for cities to want residential units," he says, "and as a result of that, every city is biased against wanting housing."

Thornberg says Prop 13 has led cities to prefer commercial and industrial developments like offices and factories.

This is where Economics 101 comes in: If Prop 13 discourages cities from building a steady supply of homes, then demand for what’s already out there – and their prices – goes up and up and up. 

"You have to rebuild the tax system around incentivizing cities to want new population," he says.

But does 86ing Prop 13 really solve the problem?

For another opinion, we turned to USC housing expert Richard Green, who says Prop 13 has an effect on the cost of living in California.

"The lower property taxes are, house prices tend to be higher," he says, and he estimates it amounts to a 5 to 10 percent bump.

That can be modest or big depending on how you look at it.

But Joel Fox doesn't believe the housing crisis would disappear if Prop 13 went away.

"Prop 13 has been a scapegoat for everything," he says. "If property taxes go up, housing prices may drop some, but you’re still going to have not enough homes from too many people and it’s still going to be a problem."

He points the finger at something else for the crunch, though, that we should cover.

"That CEQA thing, you might want to jump it ahead," he says. 

Read more about the arguments for and against CEQA and its role in the housing crisis.