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California Commentary
How transfer taxes steal your home equity
By Jon Coupal
As a homeowner, you dutifully pay your property taxes every year, no matter how painful. Notwithstanding Proposition 13's tax limitations, California is not a low property tax state. According to the Tax Foundation, we rank 18th out of 50 states in per capita property tax collections.
But it could be worse. Much worse. Without Prop. 13, most homeowners would see their property taxed at least double or, in some cases, by a factor of five or six. (For those curious about how much they would pay without Prop. 13, try out HJTA's calculator at GuessingGame.org.)
Prop. 13 works by limiting the property tax rate to one percent and then limiting the increases in "taxable value" to two percent per year. It is the latter provision that allows homeowners in California to build up equity in their homes, year after year, without being forced to sell because of an annual tax bill based on current market value.
But there is another type of property tax that lies in wait for homeowners when they sell their property - transfer taxes. Technically, transfer taxes are not property taxes in the traditional sense because they are not imposed as an incident of property ownership. Rather, they are imposed on the sale or other transfer of real property.
When Howard Jarvis wrote Prop. 13, he knew that, if he just limited the ad valorem (based on value) property tax, governments would circumvent that limitation by quickly imposing other local taxes. That's why Prop. 13 expressly prohibited taxes on the sale of property. Here's the language: "Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district." (emphasis added).
To any normal, fair minded person, this constitutional language is crystal clear in prohibiting transfer taxes. But the judiciary in California is neither normal nor fair-minded. Over a strong dissent, the California Supreme Court defined "special taxes" as only those taxes that were for a "special purpose." This created a massive loophole and severely in a way that limited the reach of Prop. 13.
At the time of Proposition 13's passage in 1978, state law permitted the collection of a "documentary stamp tax" on transferring of interests in real property. The tax, still imposed in many jurisdictions, is relatively modest, with the standard rate being $1.10 per $1,000 of value.
But now many cities are imposing real estate transfer taxes in excess of $45 per $1,000 of value based on the Home Rule doctrine that grants charter cities more taxing authority. Moreover, under Home Rule, cities can impose higher rates for more valuable property rather than the flat rate of $1.10 per $1,000.
Even worse, because of the infamous Upland decision, local governments operating behind the front of "citizen groups" can propose "special taxes" by initiative, evading the requirement of a two-thirds vote of the electorate to pass. And while the courts originally said transfer tax revenue must go into a municipality's general fund, special taxes under Upland can be exclusively directed to whatever the local government, or special interest group, wants.
The worst abuse of Upland occurred in Los Angeles. Pursuant to Measure ULA, which became effective in 2023, high-value properties are now subject to very high transfer taxes. Although the ballot measure was sold to the voters as a "mansion tax," it applies to all properties, both commercial and residential, worth more than $5 million, including apartments.
As expected, the ULA tax is generating a lot less revenue for homeless programs than the proponents thought. Instead, it has thrown the real estate market in one of America's largest cities into chaos. It has gotten so bad that even Mayor Karen Bass said she thinks the whole issue of Measure ULA should be revisited.
For ordinary homeowners, be aware that transfer taxes are only increasing, both in terms of the amount of the tax and the purposes for which they are being collected. There are very powerful progressive interests which intend to impose transfer taxes at a level to completely "recover" all the taxes that were not owed by homeowners because of Prop. 13.
And that's how they plan to steal the equity in your home.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.
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Jon Coupal is the President of the Howard Jarvis Taxpayers Association. He is a recognized expert in California fiscal affairs and has argued numerous tax cases before the courts.
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