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Nov-16-2012 09:45printcomments

Time to Re-Examine California's Prop 13

Proposition 13 unfairly treats commercial property like residential property.

California broke

(SAN FRANCISCO) - In his November 11 "Willie's World" column in the San Francisco Chronicle (www.sfgate.com/default/article/Next-up-for-Jerry-Brown-Prop-13-4026611.php), former San Francisco Mayor Willie Brown suggested that Governor Jerry Brown's next "bold move be to enlist Warren Buffett for a joint effort to reform California's Proposition 13."

No matter what you think of Willie Brown, he is politically savvy.  The democrats now have a supermajority in the California Senate and when all the votes are counted, will likely have a supermajority in the Assembly.  Times have changed since the passage of Proposition 13 and now may be the time for the democrats to re-examine Proposition 13.

Proposition 13 added Article XIII to the California state Constitution (www.leginfo.ca.gov/.const/.article_13A).  It provides, among other things, that taxes on real property are limited to 1 percent of 1975 market value, no new property taxes may be imposed, and market value may be increased from its 1975 value up to 2 percent a year or when property is sold or is newly constructed.

Excluded from reassessment are transfers between spouses, between parents and children, and in some circumstances from grandparents to grandchildren.  Proposition 58, passed in 1986, lets parents give, sell or bequeath their primary residence plus as much as $1 million worth of other property to their children without a reassessment.  Proposition 193, passed in 1996, allows transfers from grandparents to grandchildren without reassessment, but only if the parents of the grandchildren are deceased at the time of the transfer.  In 2007, the State Board of Equalization extended to domestic partners the same property tax relief as married couples.  In 2007, Proposition 39 lowered Proposition 13's two-thirds requirement to 55 percent for local school bonds.

Proposition 13 unfairly treats commercial property like residential property.  In San Francisco (www.calitics.com/diary/8991/close-the-prop13-loophole), for example, prior to Proposition 13, commercial property owners paid 59 percent of property tax revenues and residential property owners paid 41 percent. In 2008, commercial property owners paid just 43 percent of property taxes, while residential property owners paid 57 percent.

In Los Angeles County, residential property owners paid slightly more than half the burden in 1975 and now they now pay nearly 70 percent.

In Contra Costa County, it was a ratio of 48 percent to 52 percent in 1970 and the ratio is now 73 percent to 27 percent.

In Santa Clara County, the proportions were roughly even in 1978, but the residential property owners now pay about 65 percent of property taxes while commercial property pays 35 percent.

I believe a majority would approve reversing current ratios.

Why have these ratios changed so dramatically? Because property taxes are assessed when there is a change of ownership and commercial property changes ownership a lot less than residential property. And many commercial properties are held by holding companies and oftentimes these properties are sold or merged but ownership remains with the holding company. Therefore, no property tax is due.

The major immediate effect of Proposition 13 was to excise $7 billion from local governments, or almost a quarter of their total anticipated 1978-79 revenue. Local governments lost the right to determine property tax rates by Proposition 13's 1 percent limitation and had to depend on the state legislature to determine both their share of remaining property taxes and state aid. Local governments were forced to add or expand taxes and fees such as development fees on new residential and commercial construction, hotel taxes, utility taxes, and taxes on the transfer of property, sales tax increases, and business license taxes. However, the drastic downturn in the economy made these new taxes and fees less palatable to the public. Do these new or increased fees make for better public policy today than if the same amount of money could be raised from property taxes?

According to the Howard Jarvis Taxpayers Association (www.hjta.org/faq), Proposition 13 has saved California taxpayers $528 billion so far.  But this taxpayer savings comes at a steep price for many see a direct link between the inherent inequities in the Proposition 13 tax scheme and state and local budget problems.  The obvious direct results have been to cut public services, raise other taxes, and lose credit rating.  In 1978 we had a surplus in Sacramento. Since then we have raised business taxes, income taxes, sales taxes and gas taxes, but seem to go broke every June.  For example, California public schools in the 1950s and 1960s were ranked nationally as among the best, but have now fallen to 46th (http://www.psk12.com/rating/USthreeRsphp/STATE_US_level_Elementary_CountyID_0.html).  

If there was no Proposition 13, would we have needed passage of Proposition 30, the sales and income tax increase initiative, in the past election to save our schools from planned spending reductions? Luckily for California it passed.

There are many factors favoring a re-examination of Proposition 13. In 1978, there were runaway housing prices, large increases in property taxes, and an unfair burden on the older generation. Today, we see a slow recovery from housing prices and construction; slow, steady tax increases that negate benefits of Proposition 13; higher profits for the older generation coupled with burdens on the younger generation; population growth; and the accumulated deficit of years of underfunded public services.

In addition, median home prices have fallen. Thus, the gain in assessed value and property taxes from new construction has plummeted. Some construction gains are expected in the coming years, but construction levels are unlikely to return to peak levels any time soon. The gain in assessed value and property taxes from changes in ownership of residential property have plummeted. A large share of the assessed value in most California counties is in properties with a recent base year valuation, including many bought at peak prices. As a result, we will see lower gains from change in ownership, for many years to come. There have been a number of ideas for changing Proposition 13. One, of course, is to repeal it. Another idea is to tax commercial property periodically on its resale value, not when there is a change in ownership. Another idea that has been floating around for years is the so-called "split roll" property tax, which applies higher tax rates to commercial property than for residential property. Another approach is to assess homeowner property at a lower rate than commercial property. Or if the objective is to provide tax relief to low- and middle-income property owners, then give a homestead exemption to these taxpayers only.

Perhaps the time is right to at least begin a serious re-examination of Proposition 13.

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Salem-News.com writer Ralph E. Stone was born in Massachusetts. He is a graduate of both Middlebury College and Suffolk Law School. We are very fortunate to have this writer's talents in this troubling world; Ralph has an eye for detail that others miss. As is the case with many Salem-News.com writers, Ralph is an American Veteran who served in war. Ralph served his nation after college as a U.S. Army officer during the Vietnam war. After Vietnam, he went on to have a career with the Federal Trade Commission as an Attorney specializing in Consumer and Antitrust Law. Over the years, Ralph has traveled extensively with his wife Judi, taking in data from all over the world, which today adds to his collective knowledge about extremely important subjects like the economy and taxation. You can send Ralph an email at this address stonere@earthlink.net

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Richard Matteoli November 16, 2012 10:18 am (Pacific time)

Good analysis. Never thought of this with regard to corporate holdings. I remember when it was passed. The intent given us then was to stop home foreclosures on the elderly with fixed incomes which was happening with rampant reassessments. The effect was the local enities began initiating increases in 'Fees' for public services. Fire, water, sewer, schools, etc. So with re-examining Proposition 13 maybe it would also be expedient to examine county fees. The main problem is unabated State government spending along with Federal mandates on States to fund Federal programs. The newest fee for rural California is an increase of $130 fee for rural fire. Never underestimate the power of a politician to find a new way to tax people. Even if it called a fee.

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