Fourteen years after California voters approved the tax-slashing initiative Proposition 13, the biggest winners are property owners who have held onto their homes since that time and pay property taxes based on market values from 1975. The biggest losers are frequent movers and recent purchasers who pay taxes based on more recent market values. However, if Proposition 13 is overturned by the U.S. Supreme Court and California's property tax system switches to current market values, the roles of the winners and losers will be reversed. These are among the initial findings of a study being conducted to examine the inequities created by Proposition 13, the 1978 initiative that sharply reduced property taxes. The first results were published in a January article in "State Tax Notes," written by Terri A. Sexton, a professor of economics at California State University, Sacramento; Steven M. Sheffrin, a professor of economics at the University of California, Davis; and Arthur M. Sullivan, an associate professor of economics and management at UC Davis. "Our work quantifies, for the first time, the tax burden placed on new purchasers of homes compared to those who have stayed in their homes for a long time," Sheffrin said. "If the court overturns Proposition 13, more recent purchasers of homes would benefit substantially." Those who have been placed at the biggest disadvantage by Proposition 13 are households that move frequently, because they have higher effective tax rates than infrequent movers, the report states. Also, frequent movers, because they cannot compete with longtime owners, who pay lower effective tax rates, may be denied access to home ownership. These drawbacks may be borne disproportionately by younger households, if mobility is higher among them. The current tax system is being challenged in a case that the U.S. Supreme Court is expected to determine by July. If the court rules Proposition 13 unconstitutional, and a market value tax system is implemented and the tax rate remains at 1 percent, then revenue would increase for all counties. However, Sheffrin said, the state Legislature could adjust the rate to keep the total -more- 2-2-2 Proposition 13 Study amount of tax revenue collected on a par with the amount collected under Proposition 13. Proposition 13 mandated a property tax system based on "acquisition values," or when a property is purchased. The measure limits the increase in a property's assessed value and, consequently, its taxes, to 2 percent per year, even if the actual appreciation exceeds that level. In contrast, under a market-value tax system with a fixed tax rate, property taxes increase at the same rate as the fair market value. The 2 percent growth rate set by Proposition 13 is initially applied to the assessed value from a property's "base year," the year of its most recent sale. The assessed value of property in existence in 1978 was rolled back to its market value in 1975. Property is reassessed at its fair market value only when it is sold. Proposition 13 established a tax system that causes inequities in the sense that identical dwellings may have dramatically different property tax liabilities. Until now, the evidence concerning these inequities has been scant and mostly anecdotal, according to Sheffrin. To provide one measure of those inequities, he and his colleagues chose to illustrate some of their results using single-family homes in Alameda and San Bernardino counties. Alameda is a slow-growing county in Northern California with little land available for development, while San Bernardino in Southern California is growing rapidly and has much vacant land. Property tax rolls reviewed by the researchers show that, on the whole, property taxes in San Bernardino County are based much closer to current market values than they are in Alameda County. Of the properties examined in the study, 37 percent in Alameda have a 1975 base year, compared to 20 percent in San Bernardino. In contrast, 47 percent of the properties in San Bernardino have base years between 1985 and 1990, compared to 35 percent in Alameda. The variations arise from differences in the rate at which property changes ownership and new property is constructed in the two counties. Because San Bernardino has higher turnover and construction rates, a larger fraction of its tax base consists of more recent base years. Alameda County, besides having lower turnover and construction rates, has experienced a more rapid appreciation in property values. But because so much of the property is assessed at the -more- 3-3-3 Proposition 13 Study lower market values that prevailed in 1975 and other relatively early years, the county's current tax revenue is depressed to a larger extent by the acquisition value tax system. A switch to a market-value system with the tax rate lowered to keep the amount of revenue collected statewide the same would produce winners and losers among individual taxpayers and counties, Sheffrin said. Counties such as Alameda would experience large increases in tax revenue, while counties such as San Bernardino would lose money. Among individuals, the biggest losers would be taxpayers with earlier base years, Sheffrin said. The research team is collecting and analyzing information from 20 additional counties to produce a comprehensive picture of the effects of Proposition 13, and a switch to a market-value tax system, on the entire state, Sheffrin said. The researchers plan to complete their work by June, in the event that a U.S. Supreme Court ruling on Proposition 13 is imminent. If the challenge is successful, the Legislature will rely on the research team's study for discussing alternative tax policies. The study is supported by the California Policy Seminar, a program that links the resources of the University of California with the policy needs of the state, and the state Assembly Office of Research.