For years, California’s housing crisis has been explained through a story that feels intuitively right. Proposition 13 capped property taxes, cities lost revenue, housing became a fiscal loser, and local governments responded rationally by blocking new homes. That story is not entirely false — but according to housing analyst M. Nolan Gray, it is wrong in exactly the way that matters most.
In an essay from May 2025, Gray argues that the dominant explanation for how Proposition 13 shaped California’s housing shortage suffers from what philosophers call a “Gettier problem.”
It is a belief that is widely held, factually true and seemingly justified — yet grounded in faulty reasoning.
“The trouble is,” Gray writes, “their justification is wrong.”
That error, he contends, has distorted the policy response for decades.
Proposition 13, passed by voters in 1978, capped property tax rates at 1 percent of assessed value and limited annual assessment increases to 2 percent unless a property is sold or redeveloped.
The standard narrative holds that this made housing fiscally unattractive to cities, particularly apartments assumed to generate more in services than they return in taxes.
Gray concedes elements of that account. In the immediate aftermath of Proposition 13, local revenues collapsed, and commercial uses that produced sales tax became more attractive.
But he argues that this fiscal zoning explanation no longer matches reality — and may never have fully explained California’s choices.
According to Gray, three structural shifts since the late 1970s have fundamentally changed the fiscal math.
First, Proposition 13’s reassessment rules mean redevelopment triggers massive increases in property tax revenue. The longer a parcel remains undeveloped or underutilized, the more it drains public coffers relative to its potential.
Second, the demographic profile of market-rate apartment residents has changed dramatically. Renters in new buildings are now far wealthier and far less likely to have school-aged children than the caricature that still dominates local debate.
Third, California has layered on some of the highest impact fees in the nation, requiring developers to pay tens — often hundreds — of thousands of dollars per unit before construction begins.
Taken together, Gray argues, these changes mean new market-rate housing is no longer a fiscal loser. In many cases, it is “free money” for cities.
Using a West Los Angeles apartment project as an example, Gray estimates that replacing a low-rise commercial property with a 60-unit apartment building increased annual property tax payments from roughly $7,400 to more than $93,000 — an $86,000 annual gain.
Over a decade, that translates into more than $860,000 in additional revenue, before accounting for sales taxes generated by high-income tenants or more than $2 million in impact fees paid up front.
“How catastrophically misgoverned would Los Angeles need to be for this development to be a fiscal net loser?” he asks.
If the classic fiscal zoning theory were correct, California’s cities would now be approving housing at scale.
The incentives line up. Reassessment windfalls are larger than ever. Impact fees are ubiquitous. Yet housing production remains anemic, rarely surpassing three units per 1,000 residents in recent years.
The data, Gray argues, simply do not support the claim that cities are blocking housing because it does not pay.
That mismatch leads to Gray’s central conclusion: Proposition 13’s most corrosive effect is not on city budgets but on homeowner behavior — and, by extension, local politics.
In most states, rising home values lead to rising property tax bills. That annual bill functions as a constant reminder of market conditions and creates what Gray calls an “empathy pump,” giving homeowners at least some incentive to care about affordability.
Higher prices mean higher taxes, which makes policies that increase housing supply appealing, even if begrudgingly so. New apartments generate revenue and can help moderate price growth, which stabilizes tax obligations.
California’s system severs that feedback loop. A homeowner who bought decades ago can sit on a multimillion-dollar property while paying taxes based on a long-outdated assessment.
“This person has no reason to pay attention to housing costs, let alone any incentive to bring them down,” Gray writes. Rising prices become “almost purely to their benefit,” even as renters and would-be buyers are pushed further to the margins.
Because homeowners are the most powerful constituency in local land-use politics, this incentive structure matters far more than any spreadsheet calculation by a city manager.
Fiscal zoning, Gray argues, does not primarily operate through municipal finance officers; it operates through voters. When scarcity enriches incumbents and imposes no ongoing cost, opposition to new housing becomes the default political position.
The consequences are visible across California. Longtime homeowners fight density while watching their children and grandchildren leave the state. Cities teeter on the edge of fiscal collapse while refusing the very development that would shore up their finances.
Encampments proliferate, commutes lengthen and greenhouse gas emissions climb — all while local electorates remain structurally insulated from the costs of inaction.
Gray does not claim that homes cannot be investments or that price appreciation is inherently bad. Housing, he notes, is a store of wealth almost everywhere in the United States.
Yet California stands out not because homes function as investments, but because the tax system rewards relentless appreciation without accountability.
The dynamic encourages speculative behavior by buyers and entrenches an “I got mine” politics among those already housed.
Misunderstanding this mechanism has led policymakers to pursue the wrong fixes. If housing were blocked because it drained city budgets, then revenue sharing, grants or growth incentives might work.
Gray doubts that such measures can meaningfully change outcomes as long as homeowners experience housing scarcity as an unalloyed good. Transferring more money to local governments, he argues, “will help on the margins,” but it will not alter the political economy of land use.
The only durable solution, in Gray’s view, is to move housing decisions to a level of government less susceptible to capture by incumbent homeowners. That means state preemption.
California has begun down that path with streamlining laws, ministerial approvals and enforcement actions against noncompliant cities. The resistance to those reforms, Gray suggests, is further evidence of how deeply Proposition 13 reshaped the politics of housing.
As other states consider imposing limits on property tax assessments, Gray offers California as a cautionary tale. You might not like higher taxes, he writes, but insulating homeowners from the consequences of rising prices comes at an enormous social cost.
The only sustainable way to bring down housing costs — and, over time, tax burdens — is to build far more housing than California has allowed for generations.
If we continue to misdiagnose the problem, we should not be surprised when the cure fails – or so Gray argues.
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A couple of omissions:
1. Lower property taxes mean more homebuyer income is available for lenders. Buyers can qualify for a bigger loan, as a consequence, and mortgage lenders love high home prices because bigger loans are more profitable.
The banks are one of the powerful interests opposing any repeal of prop 13, and one of the most powerful forces that keep home prices high. Texas is often mentioned as a low-regulation state, so their housing prices are lower, but prop 13 is what principally drives prices higher, not California’s environmental regulations.
Those high “impact fees” in California are necessary because, unless local governments collect **all** their costs for infrastructure, schools, police, fire, etc. up front, prop 13 ensures property tax revenue will never fund them. Sales tax revenue is really the only discretionary revenue local governments get–and another reason retailers get whatever they want.
Butte County nearly had to file bankruptcy a few decades ago because they fell for the builders’ appeal (“We’ll lower unemployment”) and lowered fees below their costs.
2. There’s a gigantic loophole for commercial property in Prop 13. In a typical purchase transaction, the assessed value of a home rises to the (new) purchase price. If less than 50% of a commercial property changes hands, however, no reassessment occurs. When Michael Dell (of Dell Computers) bought a Santa Monica hotel, he split title between himself, his wife and a corporation he controls. No reassessment occurred, and the hotel still pays taxes based on the 1978 assessment, not the decades-later, much-higher purchase price.
The campaign for prop 15 (Make it fair CA), which was to close this loophole, estimates this costs government $12 billion in tax revenue annually. Commercial properties in distress because of internet competition contributed to the defeat of prop 15, but the loophole remains.
It’s as if the author knows nothing about Proposition 19 (approved by voters about 4 years ago), which allows homeowners to “bring” their low property taxes with them throughout the state, if they choose to move. While also eliminating much of the benefit for their own children (thereby resulting in a massive tax increase overall, over time).
But perhaps the main reason that people don’t move as often as the real estate industry (and others) would prefer is because they have NO REASON to do so. Well, that – plus the enormous capital gains tax that some would be subject to, the cost of realtors and transactions, the cost and hassle of moving, etc.
Buying a house is a much more permanent decision than being employed at a particular location.
Selling and buying somewhere else is essentially the same thing as going to a casino – you’re not going to “win” doing this, other than for a few outliers. Engage in either of these activities enough times, and you’ll have NO equity left.
Property taxes provide the majority of funding for California’s school districts, even though there’s no direct relationship between cost vs. source of funding. I wonder when property taxes are going to be lowered as a result of the declining need for schools, statewide (e.g., at what point those increasingly without kids are going to get tired of paying for other families’ kids).
Maybe institutions and individuals should stop looking at homeowners as a piggy bank for unrelated costs.
There is no housing shortage, by the way.
Prop 19 has a trivial impact and only helps much older homeowners over 55. It only transfers the portion of the value from the original house. This creates a diminishing value as the house is owned for a longer period. The higher tax applies to the much bigger residual value.
As I’ve pointed out repeatedly, the only valid measure of the housing shortage is the price indicator. With adjusting for the interest rate, Davis house prices are now 30% higher than they were in 2021. That’s a strong indicator of a supply shortage in the face of strong demand.
Due to the Sierra v Priest (1976) decision, property taxes no longer provide a significant portion of school funding. (That shows how obsolete your knowledge is on this issue.) Parcel taxes are entirely independent of property value.
And I’ve posted several studies and articles on why people move less now. None of your reasons match with empirical research.
“With adjusting for the interest rate, Davis house prices are now 30% higher than they were in 2021.”
Ok, so what you’re saying is that for an average mortgage the monthly payment is higher, because housing prices themselves certainly are not. And rents are down due to the vacancy rate. 1-1-2-4-7 the last five falls I believe.
“Prop 19 has a trivial impact and only helps much older homeowners over 55.”
It could be that Proposition 19 isn’t having as much impact as the realtor association behind it had initially hoped. But isn’t the “55 an over crowd” the “target market” that some believe should be encouraged to move out of their current homes, in order to free them up for others?
“It only transfers the portion of the value from the original house. This creates a diminishing value as the house is owned for a longer period. The higher tax applies to the much bigger residual value.”
This comment makes no sense. I don’t believe there is an upper limit to the assessed value that can be transferred to a different property. So if someone’s house is worth $5 million (but is only assessed at $1 million), they take that $1 million assessment “with them” when they move to another $5 million dollar house. If the replacement house is more than $5 million, only the additional value ABOVE that amount is subject to market-rate tax.
But I don’t believe it works well in reverse; if someone moves to a “cheaper” house.
In any case, the ones who will pay for the massive tax increase are their own kids. (This isn’t my opinion – it was right in the voter guide as I recall, and is the reason that other groups besides realtors supported it.)
Look it up, if you think I’m wrong.
“As I’ve pointed out repeatedly, the only valid measure of the housing shortage is the price indicator. With adjusting for the interest rate, Davis house prices are now 30% higher than they were in 2021. That’s a strong indicator of a supply shortage in the face of strong demand.”
For the moment, I’ll take your word for that (even though housing prices are going DOWN, now). But given that the price of EVERYTHING has gone up by around that much, that’s an indicator of GENERAL INFLATION – impacting EVERYTHING.
In any case, housing prices are not an indicator of a “shortage”, unless you think they should cost “zero” as an equilibrium point. If they cost any more than one cent, then that’s apparently a “shortage” using your criteria. Or maybe when they reach two cents, that’s when it hits crisis levels.
“Due to the Sierra v Priest (1976) decision, property taxes no longer provide a significant portion of school funding. (That shows how obsolete your knowledge is on this issue.) Parcel taxes are entirely independent of property value.”
I looked it up before posting, and found that property taxes (countywide) provide more than half of school district funding. I understand that some property taxes are first filtered through the state, before being allocated to school districts.
But when did I say anything about parcel taxes being “dependent” upon property value? If anything, that’s an “equity” problem – especially since entire apartment complexes pay the same amount as a single-family dwelling.
“And I’ve posted several studies and articles on why people move less now. None of your reasons match with empirical research.”
I’ve posted articles and studies – don’t recall any that you’ve posted. One of the university studies I’ve posted states that there IS NO HOUSING SHORTAGE.
The reason that people move less these days is because the population is aging (and therefore have less reason to move for career and are less inclined to go through the hassle and expense of selling, buying, and moving), many have low, locked-in interest rates – if they still have a mortgage, and many would be subject to potential capital gains if they sold their houses. (The capital gains factor is likely a bigger factor in markets that cost more than Davis. I know someone who stupidly “cashed in” their house on the peninsula, paid a boatload of taxes – enough taxes to buy a house in most areas, and have regretted moving to this area – on the east side of the Sacramento valley, ever since.)
Perhaps an example of the worst decision that anyone (at least any middle-class person) can possibly make.
“but because the tax system rewards relentless appreciation without accountability.”
‘Accountability’ hear being paying high taxes? That’s quite a use of that word.
“The dynamic encourages speculative behavior by buyers and entrenches an “I got mine” politics among those already housed.”
Or maybe traffic and paving over cool stuff sucks.
“Gray doubts that such measures can meaningfully change outcomes as long as homeowners experience housing scarcity as an unalloyed good.”
As I’ve been pointing out for years –> why Measure JRD keeps passing overwhelmingly.
“The only durable solution, in Gray’s view, is to move housing decisions to a level of government less susceptible to capture by incumbent homeowners.”
Incumbent homeowners? What are they, freaking politicians?
“That means state preemption.”
And that means top-down control. And if California wasn’t so far left and had a Dem super-majority, you wouldn’t be saying that.
“California has begun down that path with streamlining laws, ministerial approvals and enforcement actions against noncompliant cities.”
Which will lead to a citizen backlash.
“The resistance to those reforms, Gray suggests, is further evidence of how deeply Proposition 13 reshaped the politics of housing.”
Or because traffic and paving over cool stuff sucks.
Two decades ago I calculated that Prop 13 had added 15% to California housing prices compared to other states. That increment represents the net present value of future cost of the added property tax from buying a new property. That was when people moved on average every 7 years and interest rates were higher (making the increment less expensive). Now its up to 13 years on average, which means that the amount required to buy out homeowners for their future property tax costs of moving has increased.