Proposition 13: An Equilibrium Analysis

In 1978, California passed one of the most significant tax changes initiated by voters in the United States. Proposition 13, stipulated rolling back property assessments for tax purposes to 1975 market value levels, and restricted future property tax increases. In this paper, we study the implications of Proposition 13 on house prices, housing choices, turnover over the life cycle, and welfare of the households in an economy populated with overlapping generations of agents who derive utility from consumption of goods and housing. We find that Proposition 13 distorts housing choices by lowering turnover and smoothing housing consumption over the life cycle. We study the transition dynamics of moving from an economy featuring Proposition 13 to alternative revenue-neutral regimes with proportional real estate taxes. We find that different revenue-neutral regimes generate very different levels of support. While most middle-aged and older households prefer the status-quo with Proposition 13, younger agents may support the elimination of Propostion 13 as long as the reform does not lead to an increase in house prices.