In an acquisition-value property tax system, property taxes are based on the purchase price plus a small, maximum yearly allowance for inflation. As long as actual inflation in property values exceeds this allowance, property taxes for newly purchased property will exceed taxes for identical property that has not been sold. These differences in taxation or disparities for identical properties will naturally depend on two key factors: the rate of property inflation and the turnover or sale of existing property.
The rate of inflation in property in any region will depend on many diverse factors. These include, among others, the average inflation rate for the country, the supply of housing and commercial structures, the availability of land, the rate of population growth, the age structure of the population, national tax policies toward housing and real estate, and regional income. None of these factors is directly related to property taxes. In Chapter 5 we discuss how property taxes affect the level of property prices. However, the rate of inflation in property will generally be determined by factors other than property taxation. For this reason, in this book we treat the rate of inflation for property as exogenous, that is, as external to the property tax system; as a result, we will not study its determinants in detail. In the course of our work documenting the disparities that have arisen since the passage of Proposition 13, we will, in the next chapter, provide measures of the rate of increase in property values for different types and sizes of property in California since the passage of Proposition 13.