THE LOCK-IN EFFECT OF CALIFORNIA'S PROP. 13
June 27, 2005
Passed in 1978, Proposition 13 lowered the tax burden of Californian homeowners by preventing large tax increases until the house is resold. A paper from the National Bureau of Economic Research finds that this delays people from reselling their homes and may delay new homebuyers from purchasing their first homes.
Proposition 13 requires that property assessments rise by no more than 2 percent per year until the next sale. Therefore, so long as property values increase by more than 2 percent per year, homeowners' taxes are lower than they would be on a new house of the same value. Consequently, there is a serious disincentive to sell the property, which leads people to stay in their homes longer than otherwise. The authors found:
- From 1970 to 2000, the average tenure of California homeowners was 1.04 years longer than that of homeowners in other states.
- During the same time, the average tenure of California renters averaged 0.79 years longer than comparable renters in other states.
- These figures represent increases in average tenure of 10 and 19 percent respectively.
Moreover, the effects varied by race, origin and location:
- Average tenure length was less than one year longer in inland California cities, but more than two years longer in the Los Angeles area and three years longer in the Bay area.
- African-American households' ownership tenure was 1.3 years longer than comparable white homeowners.
- The tenure length of migrant homeowners and renters is 1.5 years and 0.6 years longer respectively relative to that of native-born homeowners and renters.
The authors conclude that this longer tenure by owner-occupiers forces younger households to delay their own transition from renting to owning. Because fewer people sell their homes, there are far fewer homes to buy.
Source: Les Picker, "The Lock-in Effect of California's Proposition 13," NBER Digest, April 2005; based upon: Nada Wasi and Michelle White, "Property Tax Limitations and Mobility: The Lock-in Effect of California's Proposition 13," National Bureau of Economic Research, Working Paper No. 11108, February 2005.
Browse more articles on Tax and Spending Issues