Prop 13 Is Not Passed On to Renters

California’s Proposition 13 is often advertised to renters as a way to keep rents low. The pitch is that landlords are nice and, when given tax cuts, will pass the savings on to their tenants. This promise was even made explicitly during the initial campaign in the 70s:

That was pretty obviously a lie. And of course shortly after Prop 13 passed rents didn’t go down and tenants lashed out with aggressive rent control laws in response. But, despite all that, people today still believe that Prop 13 is keeping rents lower than they would be without it.

Here is some data which suggests otherwise.

To investigate the relationship between property tax assessments and rent I collected ads from Padmapper, Craigslist and, recently, the Culver City Rental Registry. These ads include advertised rent, square footage, and exact addresses. I restricted my attention to single-family homes because we’re interested in taxes and public tax assessments for apartment buildings do not resolve to individual units.

With some help from a geocoding service advertised addresses can be resolved to precise Assessor IDs (AIN). Given an AIN highly detailed property tax information is publicly available from the LA County Assessor Portal.

Joining all this together results in a dataset that has advertised rent, square footage, and property tax assessment for each address. The LA County Assessor Portal also provides the “base year” which is the year the property last changed ownership. Since the passage of Prop 13 property assessments are made based on the value of the property during the “base year”.

The below plot shows rent per sqft against tax assessment per sqft:

To make the point a bit more clear let’s split the chart into two: one for recently-purchased properties and another for long-held ones. For recently-purchased properties there’s agreement between assessment and rent. This makes sense because the assessments are closer to current market value and rent is always priced at current market value. In the red chart, however, assessments are low but rent is just as high. Landlords aren’t passing on their tax savings.

To check this isn’t padmapper specific here’s the same study but using Craigslist rental ads:

And here’s the same study but using the Culver City Rental Registry:

Howard Jarvis promised that if assessment_per_sqft decreases then rent_per_sqft would also decrease. But it doesn’t.

Contrary to the claims of Proposition 13 supporters, there is no clear relation between lower tax assessments and lower rent prices. Yes the data shows that higher assessed properties may command higher rents, but this is only true for recent purchases (blue dots). Long-held homes (red dots) with low tax assessments charge comparable rents to recently-purchased homes with higher tax assessments.

To put it another way: Prop 13 is not incident on renters – a statement in line with mountains of academic research.

A map to look at data points individually

A concrete example

Here is a long-held 837 sqft house in Silverlake. Rent is $3500 per month. The owner pays $484 per year in property taxes on a $29,511 assessment. From the tax assessor’s point of view, if you rent this house in January you will have paid off more than it’s complete value before Halloween.

Now, just 3.5 miles away, is a more recently purchased house of the same size with the same number of bedrooms. It’s currently up for rent at $2,995 and the tax assessment is $579,693 (more than 10x the previous home). The rent, however, is about the same at roughly $4/sqft.

Discussion

Take a look at what’s going on over time in the Craigslist data (hint: rent goes up):

As rent and home prices soar, landlords enjoy a decline in their effective tax rates and a widening of their profit margins. Meanwhile, tenants are burdened with the necessity of spending more to maintain their residences, while also facing the need to save up for the ever-more-distant day when they might buy a home of their own. And if they do, they will be confronted with an onerous tax burden, often as much as ten times greater than that which the previous owner paid.

There is simply no reason to continue on this way. Rent is set by what the market will bear. It doesn’t matter whether a landlord is new to the scene or an entrenched member of the establishment. Both will charge as much as they can, regardless of their tax rate.

The notion that landlords would somehow be compelled to pass on their tax savings to their tenants is utter nonsense. The only thing preventing landlords from charging exorbitant rents is the simple fact that tenants do not have unlimited financial resources.