Property Tax Limitations and Mobility: Lock-in Effect

IN 2003 FINANCIER Warren Buffett announced that he paid property taxes of $14,410 (or 2.9 percent) on his $500,000 home in Omaha, Nebraska, but paid only $2,264 (or 0.056 percent) on his $4 million California home.1 Although Buffett is known as an astute investor, his low California property taxes were not due to his investment prowess, but rather to Proposition 13. Adopted by California voters in 1978, Proposition 13 mandates a property tax rate of 1 per-cent plus the cost of interest on locally approved bonds. It also requires that properties be assessed at their market value at the time of purchase and allows assessments to rise by no more than the inflation rate or 2 percent a year, whichever is lower. Reassessment to full market value occurs only when the property is sold again. This means that as long as property values increase by more than 2 percent a year, homeowners benefit from remaining in the same house because their taxes are lower than they would be on a different house o