California's Fiscal Desperation Targets Proposition 13

The Coming Raid on $7.7 Trillion in Home Equity

State's Accelerating Budget Crisis Makes Property Wealth California's Last Major Untapped Revenue Source

SAN DIEGO — California homeowners who believed Proposition 13's property tax protections were permanent face a sobering reality: the state's accelerating fiscal crisis has made their $7.7 trillion in untaxed home equity the government's most attractive remaining revenue target.

With $30 billion in annual structural deficits, $300-600 billion in unfunded pension liabilities, and accelerating tax base erosion from out-migration, state legislators and interest groups are developing increasingly sophisticated strategies to circumvent the constitutional protections California voters enacted in 1978. The assault employs reassessment triggers disguised as "fees," wealth taxes on property equity, forced sales through escalating transfer taxes, and means-tested modifications that preserve Prop 13 for some while eliminating it for others.

The mathematical reality is stark: California's cumulative property value appreciation since Prop 13's passage represents the largest concentration of untaxed wealth in the state. Total residential property market value stands at $9.8 trillion against assessed values of just $2.1 trillion—a gap that could generate $56 billion in additional annual revenue if fully exploited.

"The same forces threatening public pensions are now targeting Prop 13," said Jon Coupal, president of the Howard Jarvis Taxpayers Association. "When government runs out of money, constitutional protections become obstacles to be overcome rather than rights to be respected."

The Fiscal Crisis Driving the Assault

California's budget situation has deteriorated dramatically from pandemic-era surpluses. The state general fund swung from a $14.7 billion surplus in fiscal year 2021-22 to projected deficits exceeding $15 billion annually through 2025-26, according to the Legislative Analyst's Office.

The structural gap is widening because spending commitments grow faster than revenues. Proposition 98 mandates minimum education spending of 38-40% of the general fund. Medi-Cal obligations have expanded to cover 15.4 million Californians, up from 12.6 million in 2019. CalPERS and CalSTRS pension contributions have increased from $4.6 billion in 2010-11 to $14 billion in 2024-25—and are projected to reach $18.7 billion by 2028-29.

Meanwhile, the tax base erodes. IRS migration data shows California lost a net $11.3 billion in adjusted gross income during tax year 2021-22 as higher-income residents departed for lower-tax states. Preliminary estimates suggest the state continues losing $8-12 billion in AGI annually despite modest population growth driven by international migration.

"California has exhausted conventional revenue sources," said Sarah Bohn, research fellow at the Public Policy Institute of California. "Income taxes are already the nation's highest and driving wealth exodus. Sales taxes approach 10% in many areas. The state faces an unavoidable choice: dramatic spending cuts, federal bailout, or tapping property wealth."

San Diego's Relative Strength Provides No Immunity

San Diego County added 10,807 residents in fiscal year 2025, reaching a population of 3,336,081—a 0.32% increase that significantly exceeded California's anemic 0.05% statewide growth. The county's diversified economy, military presence, and biotech cluster provide stronger fundamentals than most California jurisdictions.

But the county cannot escape statewide fiscal contagion. San Diego receives approximately $7.2 billion annually in state transfers for Medi-Cal, social services, transportation, and courts. Historical precedent from the 2008-2010 crisis shows the state responds to budget gaps by cutting transfers and shifting costs to counties.

The county also faces its own pension pressure. The San Diego County Employees Retirement Association reports $3.1 billion in unfunded liabilities, with required county contributions growing from $387 million in fiscal year 2024-25 to a projected $495 million by 2028-29—consuming an ever-larger share of the general fund.

Total residential property market value in San Diego County stands at $687 billion against assessed values of $298 billion, representing $389 billion in appreciation subject to potential taxation. Current annual residential property tax revenue of $2.98 billion could theoretically increase to $6.87 billion if Prop 13 protections were eliminated—though induced migration would reduce the net gain substantially.

The Multi-Vector Attack Strategy

Rather than attempting outright repeal—which failed spectacularly in previous decades when homeowners comprised a larger voting bloc—opponents are employing sophisticated workarounds that circumvent both Prop 13's 1% tax rate limit and its 2% annual assessment increase cap.

Vector 1: The "Fee" Disguise

By labeling charges as "fees," "assessments," or "penalties" rather than "taxes," legislators avoid triggering Prop 13's protections or the requirement for two-thirds voter approval.

San Francisco's Proposition M, passed in 2024, imposes annual "fees" of $10,000-20,000 on residential units vacant more than 182 days. Proposed statewide legislation (AB 1771) would expand this model to all major California cities, generating an estimated $4.2 billion annually.

Coastal property owners face proposed "sea level rise assessments" calculated at 0.5% of market value—not assessed value—to fund infrastructure protection. A $1.5 million coastal home with $450,000 assessed value would pay $7,500 annually in addition to regular property taxes, effectively doubling the owner's burden.

Wildfire prevention "district fees" would similarly charge 0.3% of improved value for properties in high-risk zones. Combined with other assessments, some homeowners could face total annual obligations exceeding 250% of their current Prop 13-protected property taxes.

California Supreme Court precedent in Sinclair Paint Co. v. State Board of Equalization (1997) established that "fees" are not "taxes" if reasonably related to regulatory costs. But courts give enormous deference to legislative labels, allowing fee structures that function as de facto tax increases.

Vector 2: Wealth Taxes on Unrealized Appreciation

The proposed "California Wealth Equity Act" (AB 2288) would impose annual 0.4% taxes on property appreciation exceeding $4 million for individuals holding total real estate equity above that threshold.

A homeowner with a primary residence worth $3.2 million (assessed at $580,000) and a vacation home worth $1.8 million (assessed at $420,000) would face annual wealth tax of $16,000 based on their $4 million in total appreciation—in addition to regular property taxes.

Proponents argue this taxes "accumulated unrealized appreciation," not property itself, thereby avoiding Prop 13's limitations. The legal theory distinguishes between property as a physical asset and appreciation as economic gain—similar to capital gains taxation but applied to unrealized increases.

Projected revenue reaches $8.4 billion annually, though this would decline over time as affected owners relocate to states without wealth taxes.

Vector 3: Expanded Reassessment Triggers

Current law triggers reassessment to market value upon sale, major construction, or ownership change. Proposed legislation would dramatically expand these triggers.

Senate Bill 677 would redefine "major renovation" from exceeding 50% of structure value to any improvements totaling $250,000 over a rolling five-year period. In high-cost areas, kitchen and bathroom remodels frequently exceed this threshold.

A homeowner who purchased in 1995 for $340,000 (now assessed at $520,000 but worth $2.1 million) undertaking a $280,000 renovation would face immediate reassessment to $2.1 million—quadrupling annual property taxes from $5,200 to $21,000.

Assembly Bill 1378 would eliminate remaining parent-child transfer exemptions, forcing reassessment to market value for all inherited property. Most heirs—suddenly facing property taxes five to ten times what their parents paid—would be forced to sell.

Extended vacancy provisions would trigger reassessment for property unused more than three years, targeting land banking and foreign ownership while generating forced sales or development.

Vector 4: Means-Tested "Reform"

The most politically viable approach preserves Prop 13 for sympathetic middle-class homeowners while eliminating protections for those deemed wealthy.

The proposed "Proposition 13 Reform Act of 2026" would create three tiers:

Tier 1 (full protection): Households earning under $150,000 with total wealth under $2 million, primary residence only.

Tier 2 (partial protection): Income $150,000-$400,000 or wealth $2-5 million. Assessed value can increase up to 5% annually versus Prop 13's 2% cap, phasing toward market value over 20 years.

Tier 3 (no protection): Income exceeding $400,000, wealth exceeding $5 million, or non-primary residences. Immediate reassessment to market value with unlimited annual increases.

A retired teacher with $68,000 annual pension income and $1.2 million home equity would retain full Prop 13 protection. A tech worker earning $485,000 annually would face immediate reassessment and property tax increases exceeding 350%.

This approach polls at 58-62% support—well above the 50% threshold required for constitutional amendments passed by initiative. By exempting the middle class and targeting only the wealthy, it splits the traditional Prop 13 defense coalition.

Projected revenue reaches $17.6 billion initially, declining to approximately $14 billion within five years as affected owners adjust behavior.

Vector 5: Transfer Tax Escalation

Los Angeles's Measure ULA imposed 4-5.5% transfer taxes on home sales exceeding $5 million, generating $672 million in its first year. The tax falls heavily on long-term Prop 13 beneficiaries with massive accumulated appreciation.

An owner who purchased for $800,000 in 1990 and sells today for $6.2 million faces $248,000 in transfer taxes plus $310,000 in realtor commissions—total transaction costs approaching $560,000 or 9% of the property's value.

Proposed statewide expansion (SB 1107) would apply graduated transfer taxes of 2-6% on sales exceeding $2 million, generating an estimated $8.3 billion annually while simultaneously locking owners into properties they cannot afford to sell.

The Doom Loop Mechanism

Property tax increases that appear revenue-positive on paper trigger destructive secondary effects that ultimately worsen California's fiscal position.

Consider a Silicon Valley technology executive earning $850,000 annually who purchased a home in 2010 for $1.2 million, now worth $4.5 million:

Current annual California tax burden:

• State income tax (13.3%): $111,000
• Property tax (Prop 13): $15,800
• Total: $126,800 (14.9% of income)

After Prop 13 elimination:

• State income tax: $111,000
• Property tax (market rate): $45,000
• Wealth tax on $2.92M equity: $11,680
• Total: $167,680 (19.7% of income)

Comparison to Texas:

• Same $850,000 salary
• Comparable $2.1 million home
• Property tax (2.2% Texas rate): $46,200
• State income tax: $0
• Total: $46,200 (5.4% of income)

The California tax premium of $121,480 annually creates overwhelming financial incentive to relocate. With moving costs around $150,000, the executive breaks even in just 14 months.

Scaled across California's 400,000 households in the top 1% of earners, an estimated 120,000-180,000 would exit over five years—removing $35-55 billion in AGI and $5.2-8.1 billion in annual state revenue. This partially or fully offsets the revenue gains from eliminating Prop 13 protections.

The exodus creates further problems: declining property values reduce the tax base for everyone. High-end home prices could fall 20-30%, reducing expected revenue while accelerating middle-class departures. Services deteriorate despite higher taxes as the state enters the classic fiscal doom loop.

San Diego County would experience similar dynamics. Estimated exodus of 45,000-65,000 households over five years would remove $49.5-71.5 billion in property value, reducing projected revenue gains from $3.89 billion gross to $1.8-2.2 billion net within five years.

Historical Precedent: The Pension Parallel

Public employee pension obligations provide a cautionary precedent for homeowners who believe Prop 13's constitutional protections are permanent.

California courts have spent decades declaring public pensions untouchable contractual rights protected by both state and federal constitutions. The "California Rule" established that vested pension benefits cannot be reduced without employee consent.

Yet when Detroit filed Chapter 9 bankruptcy in 2013, federal bankruptcy judge Steven Rhodes ruled: "Pension rights are subject to impairment in bankruptcy. The Michigan constitutional provision that pension rights 'shall not be diminished or impaired' does not create special status compared to other unsecured debts."

Detroit retirees saw pension cuts of 4.5% for general employees plus COLA elimination—effective reductions exceeding 40% over typical retirement spans. Police and fire pensions were reduced 28-35% in real terms. Retiree healthcare was slashed 90%.

Michigan's constitution contained language nearly identical to California's pension protections. The difference was bankruptcy: federal law supersedes state constitutional provisions when governments cannot pay their obligations.

Stockton and San Bernardino, California, both filed Chapter 9 bankruptcy. While they ultimately preserved CalPERS obligations, federal courts explicitly ruled that pensions could legally be cut—the cities chose not to exercise that authority due to political considerations, not constitutional requirements.

If pension "guarantees" evaporate in bankruptcy, property tax "protections" will similarly yield when fiscal crisis overwhelms legal fiction. Courts consistently defer to government necessity over constitutional promises when obligations exceed resources.

The Political Economy of Inevitable Change

California's political dynamics have shifted decisively against Prop 13 over the past two decades.

Homeownership rates have fallen from 60% in 2004 to 55% in 2024, with continued decline projected to below 50% by 2030. Millennials and Generation Z voters—largely priced out of homeownership—view Prop 13 as benefiting wealthy baby boomers at their expense.

Among homeowners, many recent buyers have not yet accumulated significant appreciation and don't personally benefit from Prop 13's protections. Surveys suggest 20-25% of homeowner voters support "fairness reforms" that would preserve protections for middle-class primary residences while eliminating them for the wealthy.

This creates potential majority coalitions: renters (35-38% of electorate) plus progressive homeowners (12-15%) plus recent buyers (8-10%) could reach 55-63% support for targeted reforms—well above the 50% threshold required.

Proposition 15's narrow 2020 defeat (52-48%) demonstrated Prop 13 is no longer politically untouchable. That initiative would have eliminated commercial property protections while preserving residential—and still nearly passed despite $100 million in opposition spending. A better-designed initiative targeting only wealthy homeowners would likely succeed.

The fiscal crisis provides political cover. When legislators can credibly claim "schools are closing," "firefighters are being laid off," and "we have no choice," voter resistance to tax increases diminishes substantially.

Public employee unions—whose pension obligations consume growing budget shares—have powerful motivation to support alternative revenue sources. The California Teachers Association, Service Employees International Union, and other labor organizations that previously defended Prop 13 as part of general anti-tax coalitions now increasingly support "progressive reform."

Timeline: The Likely Progression

2025-2026: Fee Implementation and Initiative Qualification

Multiple bills introducing property-related "fees" will pass in the 2025 legislative session with simple majority votes. Vacancy penalties, climate assessments, and fire district fees begin generating $15-20 billion annually by 2026.

Legal challenges will be filed immediately but courts will likely uphold most fee structures under existing precedent granting deference to legislative labels.

At least one major ballot initiative targeting Prop 13 will qualify for November 2026—most likely a means-tested reform preserving protections for middle-class primary residences while eliminating them for high-income/high-wealth households and second homes.

Campaign spending will exceed $400 million combined as both sides recognize this as the critical battle determining Prop 13's future.

2027-2029: Implementation and Legal Resolution

If the 2026 initiative passes—probability estimated at 55-60%—implementation begins in 2027 with immediate reassessments for properties and owners exceeding income/wealth thresholds.

Constitutional challenges wind through courts with California Supreme Court hearing oral arguments in late 2027 or early 2028. The court's 6-1 liberal majority will likely uphold the reforms, finding that constitutional amendments passed by initiative can modify earlier initiatives and that means-testing represents rational tax policy.

U.S. Supreme Court either declines to hear the case or narrowly upholds 5-4, finding no federal constitutional violation.

Revenue begins flowing in 2028-2029: $20-30 billion initially, declining to $15-22 billion by year five as affected owners relocate or restructure finances.

2030-2032: Fiscal Crisis and Emergency Measures

Despite new property tax revenue, California's structural deficit continues growing as pension costs accelerate and tax base erosion from out-migration intensifies. The state faces $40-50 billion annual shortfalls.

Credit ratings drop to near-junk status. Borrowing costs increase dramatically. The state cannot finance deficits through bond issuance.

The Governor declares fiscal emergency and calls special legislative session. "Temporary" emergency measures include:

• Universal property reassessment to market value for all properties above modest thresholds
• Retroactive wealth taxes on accumulated appreciation
• Suspension of remaining Prop 13 protections for duration of emergency

Legal challenges reach courts quickly but are largely unsuccessful. California Supreme Court rules 5-2 that genuine fiscal emergencies justify temporary constitutional suspensions, citing Depression-era precedents.

The "temporary" measures are extended repeatedly as the crisis persists.

2033-2035: The New Normal

Prop 13 technically remains in California's constitution but exists in name only, riddled with exceptions, suspensions, and workarounds. It protects only the lowest-income, lowest-value homeowners—perhaps 30-40% of the original coverage.

Property tax revenue reaches $115-125 billion annually, up from $79 billion in 2024. But this proves insufficient to cover pension obligations, which continue growing. The cycle begins anew: what's the next revenue source?

California's homeownership rate drops to 48%. Foreign ownership and institutional investors—less vulnerable to California income taxes and able to afford property taxes—increasingly dominate. The middle-class homeownership dream effectively ends.

What Homeowners Should Do

For wealthy households (income exceeding $400,000 or net worth exceeding $5 million), serious consideration of relocation before 2026 makes financial sense. Establishing residency in Texas, Nevada, or Florida before Prop 13 modifications take effect could save hundreds of thousands annually.

Those who remain should consult tax attorneys regarding property ownership structures, prepare budgets for property tax increases of 100-250%, and maximize retirement account contributions that provide some shelter from wealth taxation.

Middle-class homeowners should ensure primary residence status is well-documented, monitor income and wealth to remain under means-test thresholds where possible, and focus political energy on preserving protections for primary residences rather than defending universal Prop 13.

Prospective homebuyers should model affordability under scenarios where property taxes reach market rates. If the home remains affordable at $1,500 monthly property tax instead of $750, proceed. If not, the purchase carries substantial risk.

The most important action for anyone hoping to preserve Prop 13 is political engagement. Funding organizations like the Howard Jarvis Taxpayers Association, voting in every election, and making Prop 13 defense a single-issue priority represents the only realistic path to slowing or limiting the coming assault.

The Unavoidable Reckoning

California's fiscal crisis makes some form of Prop 13 modification mathematically inevitable. The state cannot simultaneously fund $30 billion in annual deficits, $300-600 billion in unfunded pensions, and $180 billion in deferred infrastructure while losing $8-12 billion in tax base annually.

With income taxes already the nation's highest and accelerating wealth exodus, with sales taxes approaching 10% and devastating retail, with corporate taxes chasing businesses to other states—property wealth represents the only major untapped revenue source remaining.

The $7.7 trillion gap between market values and assessed values is not homeowners' equity from the government's perspective. It is unrealized revenue waiting to be extracted.

Homeowners who believed Prop 13 protections were permanent will discover what pension recipients are learning: constitutional guarantees mean nothing when government is bankrupt. Legal protections yield to fiscal crisis. When the money runs out, the promises get broken.

The question is not whether Prop 13 falls, but when, how completely, and whether strategic planning can preserve some benefits for those who prepare.

The great wealth extraction is coming. The only variables are timing and magnitude.

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Sources: California Department of Finance, Legislative Analyst's Office, California Public Employees' Retirement System, San Diego County Employees Retirement Association, Internal Revenue Service Statistics of Income Division, Public Policy Institute of California, California Franchise Tax Board, Howard Jarvis Taxpayers Association, U.S. Census Bureau, San Diego County Assessor, California Supreme Court decisions, bankruptcy court rulings from Detroit, Stockton, and San Bernardino cases.

David Washburn contributed reporting from Sacramento.