Proposition 13, or the People’s Initiative to Limit Property Taxation, was passed in 1978 on a wave of popular support, stemming from concern over soaring property values and associated rising taxes. Proposition 13 ensures valuations of property may not grow by more than 2% annually, and market value reassessment may only occur with a change of ownership. Additionally, Proposition 13 created the requirement that all state and local tax rate increases be approved by a two-thirds vote of the legislature or voting public.
After 36 years, it has become abundantly clear that Prop. 13 has had some unforeseen and unintended consequences. In 1978, non-residential, commercial property owners contributed roughly 40% of the property taxes in the state of California while residential property owners contributed the other 60%. Today, those numbers are 72% residential and 28% commercial. Because property in California is now only reassessed when it is sold, the overall tax burden has shifted decisively towards residential property owners. In California, people move and sell their homes leading to reassessment, on average, every ten years. Many large commercial properties rarely, if ever, change hands, so they are reassessed much less often. This accounts for the shift.
A classic example is Disneyland. The last time Disneyland was reassessed was in 1975, so as a result, they are paying about 5 cents per square foot in property taxes on their property. The average California homeowner is now paying about 40 cents per square foot. Another pertinent example is Chevron. Their oil fields, refineries, and gas stations haven’t been reassessed since 1975. The California Tax Reform Association estimates that they are under-taxed by nearly 1 billion dollars per year. Providing multi-billion dollar corporations with massive tax breaks was clearly not the original intent of the law.
Large commercial property owners are also able to exploit loopholes in Prop.13 to further their advantage. If a buyer of a new commercial property may show that no more than 49% of the property has been transferred, he/she may avoid a property tax reassessment. In 2006, Michael Dell, one of the richest men in the world, purchased a multi-million dollar hotel in Santa Monica. By splitting up the purchase of the hotel between himself, his wife, and a business partner, he managed to avoid a reassessment of the property, and Santa Monica is now losing out on nearly 1 million dollars annually in property taxes. This is not an option which is available to residential property owners.
To make up for the billions in lost revenue that the state used to receive from large commercial properties, California has turned to more regressive, volatile forms of revenue. California taxpayers now fork over the highest income taxes and nearly the highest sales taxes in the country. Almost 2/3 of the expected revenue for the state of California for 2014 will be from unstable income tax revenue alone. Just to make ends meet, local governments must ask their residents to pass parcel taxes, bond measures, and increase fees year after year. Even with all these new taxes and fees, California’s per pupil education funding falls in the bottom ten out of fifty states in the country, and local governments struggle to provide essential services.
All of these taxes are bad for business too. Precipitously high sales taxes cut into consumer spending, and because funding for education has evaporated, those who can afford it now feel compelled to send their children to expensive private schools, which only erodes their purchasing power further. Moreover, the glaringly uneven distribution of property tax burden within the business community does not stimulate growth. Would-be entrepreneurs must think twice about paying significantly higher property taxes than their already established competitors.
Evolve, a member-funded community organization based in San Francisco, is spearheading a statewide grassroots campaign to make Prop.13 work for people, and not corporations. Their plan calls for regular reassessment of large commercial property while maintaining protections for homeowners and small business owners. This will bring California in line with the rest of the country, where in every other state, large commercial property is reassessed on a regular basis. The estimated revenue restored by this reform will be at least 6 billion dollars annually, and a new Public Policy Institute of California poll from January finds that now 59% of likely voters support this reform. More about the campaign, and about the growing movement of local elected leaders going on record supporting Prop. 13 reform may be found at http://www.evolve-ca.org.