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As one of the most complicated measures on the November 2020 state ballot, Proposition 19 would make significant changes to California’s residential property tax system. The proposition would expand a property tax loophole for older, mostly wealthier homeowners, while covering the cost by narrowing another special tax rule for inherited properties – and would then require state and local governments to track how much their tax revenues change as a result, requiring new administrative infrastructure. Altogether Prop. 19 would likely result in increased state and local revenues on net – but not for all counties – while most of the newly available state dollars would be restricted to a new special fund limited to use for supporting fire response. Prop. 19 includes some elements that policymakers could consider as part of more comprehensive tax reform, but its central proposal to expand tax breaks for older, mostly white, mostly economically advantaged homeowners would make California’s tax system less equitable. The complicated proposal would also do little or nothing to help the Californians most severely affected by the state’s housing affordability crisis, including renters, families with low incomes, and most Black and Latinx residents. This proposition was initiated by the California Association of Realtors and modified in negotiations with the Legislature.

Prop. 19 Expands Tax Breaks for Older, Mostly White Homeowners Who Tend to Be Economically Secure Already, Reducing the Equity of California’s Tax System

California already has special rules that allow homeowners who are age 55 or older or who are severely disabled to avoid paying higher property taxes if they sell their home and move to a new home under certain circumstances – and Prop. 19 would expand the special tax breaks for these same homeowners. About 4 million homeowners age 55 or older would be eligible to benefit from these new property tax breaks under Prop. 19, as well as a much smaller number of younger homeowners with disabilities, according to Budget Center analysis. Similar existing special rules apply to individuals whose homes have been damaged or destroyed by fire or other natural disasters, and these tax breaks would also be expanded, though homeowners affected by disasters who are not also eligible due to age or disability make up a tiny share – well under 1% – of the total number of homeowners eligible to benefit from Prop. 19, according to Budget Center analysis.

Generally, the homeowners who would be eligible to benefit from these new special property tax breaks under Proposition 19:

  • have higher incomes and are more economically secure than California household heads overall; 
  • have much higher incomes and are much less likely to be living in poverty than similarly-aged older renter household heads;
  • are long-term homeowners, many with access to substantial home equity, with more than half owning homes worth a half-million dollars or more, according to Budget Center analysis.

By expanding tax breaks for this economically advantaged group, Prop. 19 would make California’s tax system less progressive and more inequitable.

California Proposition 19 Eligible Homeowners Are Much Less Likely to Live in Poverty Than Older Renters of Californians Overall

Prop. 19-eligible homeowners are also substantially more likely to be white and much less likely to be Latinx or Black than the heads of California households overall, according to Budget Center analyses. Housing policy and tax policy have historically benefited white households most, including through policies with explicitly racist design and implementation that have blocked Black and brown Californians from homeownership opportunities. By directing additional tax benefits largely to white homeowners, Prop. 19 reinforces racial inequity within California’s tax system.

More Than 6 in 10 Proposition 18 Eligible Homeowners Are White, Versus Less Than Half of California Household Heads Overall

Prop. 19 Would Attempt to Pay for Expanding One Property Tax Break By Limiting Another – California’s Property Tax Inheritance Loophole

Prop. 19 would narrow California’s property tax inheritance loophole, which offers Californians who inherit certain properties a significant tax break by allowing them to pay property taxes based on the property’s value when it was originally purchased rather than its value upon inheritance. As outlined in an analysis by the Legislative Analyst’s Office (LAO), this loophole is costly, inequitable, and may exacerbate the state’s housing crisis. And since wealthy, white individuals are more likely to receive inheritances, this loophole likely exacerbates the racial wealth gap.

Prop. 19 would narrow California’s inheritance loophole by 1) requiring the inherited property be used as the child’s primary residence or as a family farm to qualify for the tax break and 2) limiting the tax savings for properties where the market value is at least $1 million higher than the taxable value prior to the transfer. These changes would lessen the inequities in California’s current property tax system and raise property tax revenue to support local services, but a more sound and less complicated policy would be to limit the inheritance loophole without linking it to the expansion of another inequitable tax break.

Prop. 19 Would Result in a Net Increase in Local and State Tax Revenues, While Narrowly Restricting Most State Revenue Gains to Use for Fire Response

The property tax changes proposed in Prop. 19 would likely raise local property tax revenues to support community services, but these gains are limited by the expansion of the special rules for certain homeowners and would vary significantly by county and year. Some counties may lose revenue in some years, though the measure would require that local agencies be at least partially reimbursed for the losses. In some years, most school districts would see no net gains in funding, as state funding for education would decrease to offset the property tax revenue gains.

The measure is also expected to result in some increased income tax revenue to the state due to increased home sales, as well as state budget savings due to a reduction in the state’s share of education funding under the Proposition 98 minimum funding guarantee. The majority of this additional revenue and savings – 75% of the net gains – would be earmarked for state and local fire suppression activities. While the state clearly has an urgent need for fire response resources, restricting funds to specific purposes compromises the state’s flexibility and ability to respond to changing circumstances.

Prop. 19’s Complex Scheme of Tax Break Tradeoffs and Funding Restrictions Misses the Mark for Equitable and Effective Public Policy

As California seeks to make equitable policy choices and advance budget decisions for people and their communities, the state cannot achieve those goals with complex schemes that needlessly combine efforts to increase state and local revenues – to address critical community needs – with substantial tax breaks for mostly wealthier California homeowners. A more just approach to reforming California’s tax system would keep the elements of Prop. 19 that increase revenues equitably without linking this change to expanded benefits for individuals who mostly have little need for additional tax cuts. A more effective policy design would also allow more flexible use of increased revenues – which could allow the opportunity to use funds to address the needs of Californians most affected by the state’s housing affordability crisis, such as those who rent their homes, those with lower incomes, and Black and brown Californians who have been blocked from homeownership opportunities and hit hardest by unaffordable housing costs. Overall, Prop. 19’s tax break giveaways and complexity limit its potential to make the state’s tax system more equitable and to effectively address Californians’ most urgent needs.

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Local tax revenue reflects a community’s shared effort to support vital public services that all Californians need to live in our cities and counties, such as education for students in K-12 schools and community colleges, housing, health care, public parks, and libraries. When tax breaks provide advantages to some taxpayers over others, it not only creates inequities but can also lead to revenue losses that compromise the ability of schools and local communities to provide essential services for Californians. This is the case with commercial and industrial property taxes across California, and why voters will be asked in fall 2020 to vote on Proposition 15, an amendment to the state Constitution that would change how commercial and industrial properties are taxed to provide more revenue for schools and communities. 

Under Prop. 15, commercial and industrial properties would be taxed based on their market value rather than their purchase price. By moving from a property tax system based on purchase value to one based on market value, Prop. 15 would raise an estimated $6.5 billion to $11.5 billion annually in property tax revenues for K-12 schools and community colleges, counties, cities, and special districts, according to the Legislative Analyst’s Office.

Guide to Understanding Proposition 15


FAQ: Understanding Commercial Property Tax & Revenue in California

How Are Commercial and Industrial Properties Taxed Today? 
The general property tax rate for California commercial and industrial properties has been capped at 1% of assessed value since voters approved Prop. 13 in 1978. Counties determine the assessed value of commercial and industrial properties based on the property’s purchase price plus an annual adjustment for inflation not to exceed 2%. Counties collect property taxes and are generally only allowed to reassess properties to their market value when they undergo a change in ownership or new construction.

How Is Revenue From Commercial and Industrial Property Taxes Distributed Across California?
Revenue received from the taxes paid by commercial and industrial property owners is distributed to counties, cities, K-12 schools and community colleges, and special districts (such as public utility districts and fire protection districts) for services provided to Californians, based on complex state laws. The share of countywide property tax revenue going to each local entity is largely based on the distribution of these revenues dating back to the mid-1970s – before Prop. 13 was enacted and each local entity was able to set its own property tax rates. This means that there is wide variation among counties in the share of revenue going to – and the level of services provided by – each type of local government.

Why Are Commercial and Industrial Property Taxes Inequitable for Californians and in Need of Reform?
The property assessment limits set by Prop. 13 mean that an owner that purchased a commercial or industrial property several decades ago pays far lower taxes than an owner that recently purchased a similar property – leading to inequity among local businesses and a significant loss of revenue at the expense of schools and local community services. Schools and local communities are losing significant revenues every year as properties that have not changed ownership in many years are assessed at values much lower than their market values. Additionally, when a property changes hands, commercial and industrial property owners can more easily avoid reassessment than residential property owners due to the laws defining ownership changes and the complexity of business property ownership.


Report: Raising Revenue for Schools and Local Communities, Changing California’s Inequitable Taxing of Commercial Properties, and Understanding Proposition 15

Local tax revenue reflects a community’s shared effort to support vital public services that all Californians need to thrive in our cities and counties. This ranges from education for students in K-12 schools and community colleges to access to housing, health care, public parks, and libraries. These vital public services are supported by tax revenues from commercial and industrial properties – many of which are still taxed based on purchase prices that are more than four decades old. California voters will be asked in fall 2020 to vote on a measure known as Proposition 15, an amendment to the state Constitution that would change how commercial and industrial properties are taxed and provide more revenue for schools and local communities to support services Californians rely upon.

 

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Infographic: California’s Inequitable Tax System Hurts Schools & Local Communities

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Across California and the United States, the push for bail reform has gained momentum with increasing awareness and research showing the disproportionate impact the money bail system has on people of color and low-income households. In California, it’s estimated over two-thirds of people detained in jails – around 47,000 – have not been sentenced for a crime, a number that includes both those who cannot afford bail and those who are awaiting sentencing post-conviction. Los Angeles County alone is the largest jail system in the US and houses over 1 in 5 of adults who have not been sentenced for an alleged crime in California.

Enter Proposition 25 that will appear on the November 3, 2020 statewide ballot and asks California voters to decide whether a 2018 state law that effectively ends money bail should take effect. If voters approve Prop. 25, judges will be able to utilize risk-based assessment tools – examining population links between rearrest or reconviction and individual factors such as age, gender, or criminal record – to determine if individuals detained for certain crimes can be released before a court appearance rather than posting money bail.

Read the full report that discusses racial, economic, and gender disparities embedded in the money bail system and why efforts to reform California’s bail system also aim to address the wide racial disparities seen in the criminal justice system.

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Over many years, California lawmakers and voters adopted a series of harsh, one-size-fits-all sentencing laws that prioritized punishment over rehabilitation, led to severe overcrowding in state prisons, and disproportionately impacted Black and Latinx Californians – consequences that many families still feel today. California began reconsidering its “tough on crime” approach a little over a decade ago as prison overcrowding reached crisis proportions and the state faced lawsuits filed on behalf of incarcerated adults. Ultimately, a federal court in 2009 ordered California to reduce overcrowding to no more than 137.5% of the prison system’s capacity – an order that remains in effect today.1

State-level reforms – enacted into law through voter approval of ballot propositions as well as through legislative action – have focused on reducing incarceration, promoting more effective pathways to rehabilitation, and addressing the disparate impacts of criminal justice policies on people of color, particularly Black and Latinx communities.2 With these reforms, both the prison population and crime rates are down substantially, showing that California’s efforts to reduce mass incarceration, while far from complete, are working.

1. The Number of Adults Incarcerated by the State Has Declined Substantially

Adults who are incarcerated by the state fall under the jurisdiction of the California Department of Corrections and Rehabilitation (CDCR). Most of these adults – more than 9 in 10 – are held in 34 state-owned prisons. The remaining men and women are housed in other locations throughout California, including in public and private facilities under contract with CDCR. (Until recently, thousands of state prisoners were housed in out-of-state facilities.) The number of adults incarcerated by the state exceeded 173,000 in 2007, when state prisons were crowded to roughly double their capacity. By June 2020 – following years of criminal justice reforms and, more recently, new policies adopted in response to the COVID-19 pandemic – the number of adults incarcerated had dropped by more than one-third, to 113,403.3

2. With Declining Incarceration, California Ended the Use of Out-of-State Prisons and Has the Opportunity to Begin Closing State-Owned Prisons

In 2006, California began transferring incarcerated adults to facilities in other states to help reduce overcrowding in state prisons. State policymakers adopted this approach even though “out-of-state private prisons create significant barriers to rehabilitation and humane conditions of care.”4 The number of Californians moved out of state peaked at more than 10,000 in the early 2010s. However, as incarceration declined, California was able to gradually reduce its reliance on facilities in other states before finally terminating its last out-of-state contract in June 2019. Moreover, due to the ongoing decline in the prison population, California is on track to soon end the use of all in-state contract facilities for men, and the recently enacted 2020-21 budget package envisions closing two state-owned prisons in the coming years.5

3. California’s Incarceration Rate for Adults Has Fallen to a Level Last Seen in the Very Early 1990s

As California implemented criminal justice reforms, the incarceration rate – the number of adults incarcerated by the state for every 100,000 residents – has plummeted. California’s state-level incarceration rate dropped to 314 per 100,000 in June 2019, down by more than one-third (34%) from the recent peak of 476 per 100,000 in June 2006. Moreover, the June 2019 incarceration rate was slightly below the June 1990 level of 315. Still, incarceration of California men and women – disproportionately Black and Latinx Californians – remains high compared to earlier years. For example, in the late 1970s the state incarcerated fewer than 100 people for every 100,000 residents.

4. Meanwhile, California’s Property and Violent Crime Rates Remain at Historic Lows

California’s property crime rate – the number of property crimes per 100,000 residents – was 2,290 per 100,000 in 2019, far below the peak of 6,881 in 1980. The violent crime rate was 434 per 100,000 in 2019, less than half the peak of 1,104 in 1992. This latter rate is up modestly compared to the low of 393 per 100,000 in 2014, partly due to technical factors.6 Nonetheless, California’s violent crime rate resumed its decline after 2017 and is now below the 1969 rate (449 per 100,000).

5. California’s Incarceration Rate and Crime Rates Are All Down Substantially Since the Mid-2000s

Incarceration and crime rates are all down substantially compared to their levels in 2006 – shortly before state policymakers and the voters began enacting reforms to California’s criminal justice system. As noted above, the incarceration rate of adults dropped by more than one-third (34%) from June 2006 – the recent peak – to June 2019. During approximately the same period (2006 to 2019), California’s property crime rate fell by more than one-quarter (28%) and its violent crime rate declined by nearly one-fifth (19%). These statistics contradict the common, yet unsubstantiated, claim that reducing mass incarceration will cause crime rates to spike. In fact, California’s experience and a large body of research highlight the weak link between incarceration and crime.7

Conclusion

California’s experience with criminal justice reform provides further evidence that reducing mass incarceration of men and women can go hand-in-hand with lower crime rates. But California’s work is not done – policymakers can and should do more to decrease incarceration of Californians, particularly given the impact of the COVID-19 pandemic on incarcerated adults, prison staff, families, and surrounding communities. This is especially important for Black and Latinx men and women and their families, who are bearing the greatest burdens of COVID-19 in prisons and the broader community. In recent weeks, the state has been moving in the right direction: The prison population has fallen more rapidly than anticipated due to early releases and other policies advanced by Governor Newsom to slow the spread of the coronavirus behind prison walls. With these steps, the Governor has created an opportunity to plan for the closure of several state-owned prisons over the next several years – assuming, at a minimum, that current criminal justice reforms remain in place and that the state prison population does not again begin to rise. 

Downsizing California’s costly prison infrastructure would allow the state to reduce the size of the corrections footprint on the state budget. This, in turn, would free up resources that could be used for reentry assistance and other services that can help to promote rehabilitation, reduce poverty, and strengthen families and communities – particularly Black and Latinx communities, which have been disproportionately impacted by the pandemic and the deep recession that it triggered as well as by generations of discrimination at the hands of the criminal justice system.

1 The US Supreme Court upheld this order in 2011. California has been in compliance with this order since February 2015. See California Department of Corrections and Rehabilitation, Three-Judge Court Monthly Update (July 2020).

2 For an overview of key state-level reforms, see Scott Graves, State Corrections in the Wake of California’s Criminal Justice Reforms: Much Progress, More Work to Do (California Budget & Policy Center: October 2018), pp. 4-10.

3 CDCR’s in-custody population further declined to 103,169 as of August 12, 2020. This substantial ongoing decline reflects early releases and other policies adopted by the Newsom Administration that are intended to slow the spread of the coronavirus in state prisons. 

4 Randall G. Shelden and Selena Teji, Collateral Consequences of Interstate Transfer of Prisoners (Center on Criminal and Juvenile Justice: July 2012), p. 4.

5 Department of Finance, California State Budget 2020-21 (June 2020), p. 80.

6 Technical factors “related to crime classification and reporting” contributed to the slight yet temporary uptick in violent crime rates after 2014. Mia Bird, et al., The Impact of Proposition 47 on Crime and Recidivism (Public Policy Institute of California: June 2018).

7 Don Stemen, The Prison Paradox: More Incarceration Will Not Make Us Safer (Vera Institute of Justice: July 2017).

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